Individual Income Tax2006 Update

Branda Alewine, CPA

Vee Tierney, CPA

Agenda

• 2006 Federal Tax Changes

• 2006 Virginia Tax Changes

• Looking ahead - 2007

2006 Federal Update

• Election to Have Excluded Combat Pay Included in Earned Income– Extended through 2007– Used in the calculation of the Earned Income Credit– Earned Income Credit – refundable credit for certain

low-income individuals with earned income– Also – Counts as “compensation” for IRA

contributions

• Tax-Exempt Income Reporting– Now required to be reported on a 1099 to IRS

2006 Federal Update

• Deduction for Higher Education Expenses Restored– Deduct up to $4,000 instead of claiming Hope or

Lifetime Learning tax credits– Claim on Form 1040, line 35 by entering “T” on the

dotted line to the left of the entry

• Deduction for Out of Pocket Costs for Educators Restored– Deduct up to $250 for Supplies, Books, etc.– Claim on Form 1040, line 23 by entering “E” on the

dotted line to the left of the entry

2006 Federal Update

• IRA Contributions– Maximum to a traditional or Roth is $4,000– “Catch up” contributions are additional $1,000

for taxpayers at least age 50 by end of tax year

– Have until due date of return (not including extensions)

2006 Federal Update

• Charitable Contributions:– Clothing & Household Items Donated After 8/17/06

Must Be in Good Used Condition or Better– Can Claim a Deduction of More than $500

(Regardless of Condition) if Taxpayer includes a Qualified Appraisal

– IRA Holders, Aged 70 ½ or Over, Can Directly Transfer Tax-Free, up to $100,000 per year to an Eligible Charity (Effective for 2006 and 2007)

2006 Federal Update

• Sales Tax Deduction Restored for 2006– You may deduct either state income tax or

sales tax– Useful for taxpayers who live in states with no

income tax (e.g., FL, TX)– Two methods: Receipts or Sales Tax Tables– Claim on Schedule A, line 5 by entering “ST”

on the dotted line to the left of the entry

2006 Federal Update

• Residential Energy Credits– Nonbusiness Energy Property Credit

• Residential exterior doors, windows, heat pumps, furnaces, central air and water heaters for principal residences only

• Placed into service in 2006 and 2007• Lifetime maximum of $500 and:

– No more than $200 based on windows

– No more than $50 on any advanced main air circulating fans

– No more than $150 on any qualified natural gas, propane, or oil furnace or hot water boiler

– No more than $300 on any item of energy-efficient building property

2006 Federal Update

• Residential Energy Credits, cont.– Residential Energy Efficient Property Credit

• 30% of the cost of eligible solar water heaters, solar electricity equipment and fuel cell plants placed in service in 2006 and 2007

• Maximum credit is $2,000 per tax year for each category of solar equipment and $500 for each half kilowatt of capacity of fuel cell plants installed per year

• Cannot be used to heat swimming pools and hot tubs

2006 Federal Update

• Higher Kiddie Tax Age Coverage– New cutoff age is 18 (was 14)– Affects Children with Greater than $1,700 of

Unearned Income– Retroactive to 1/1/2006

• One time Refund for Telephone Excise Taxes Charged– For amounts charged after 2/28/03 and before 8/1/06– Actual vs. Standard Amount Refund

2006 Federal Update

• Capital Gains & Qualified Dividends Tax Rate Extended Until the End of 2010

• Direct Deposit of Tax Refunds into Three Accounts (Maximum)

2006 Virginia Update

• Credit for Purchase of Long-Term Care Insurance– Limited to 15% of the smaller amount paid

during the year for LTCI premiums, or the cost of the first 12 months of coverage

– Cannot get extra credit for prepaying a multi-year policy

2006 Virginia Update

• Credit for Purchase of LTCI cont.– Not available for premiums that were

deducted on the federal return or used the #36 subtraction code on the 2005 VA return

– Only available to taxpayers who entered into a policy on or after January 1, 2006

– What about premiums paid during the year on preexisting policies? No guidance just yet

Looking Ahead - 2007

• Cash Donations to Charity – Cancelled check or written note from the charity now required!

• 2007 Only - New Itemized Deduction for the Cost of Premiums for Mortgage Insurance– Phased-Out for Taxpayers whose AGI

exceeds $100,000– Qualified Mortgages

Looking Ahead - 2007

• Elective Deferrals to 401(k) plans increases to $15,500– “Catch up” contributions are additional $5,000

for taxpayers at least age 50 by end of tax year

• IRA Contributions– Maximum to a traditional or Roth is $4,000– “Catch up” contribution is $1,000

Looking Ahead - 2007

• VA – Estate Tax Repeal effective July 1, 2007• VA – Subtraction for Certain Death Benefits

effective January 1, 2007– Applies to death benefit payments received from an

annuity contract that are subject to federal income tax

• VA – Deduction related to purchase of certain energy-efficient items of tangible personal property effective January 1, 2007– Deduction equal to 20% of the retail sales and use tax

paid in connection with the purchase

Questions?