Tax changes may affect your '06 return filing
Key IRS provisions include revised "kiddie" rules and a change on Roth IRA conversions.
By TIMES WIRES
Published February 5, 2007
Now is a great time to review the latest tax legislation and how its provisions may impact filing a 2006 return.
The Tax Increase Prevention and Reconciliation Act of 2005 has created a few significant tax changes for 2006 filing. The Internal Revenue Service has implemented key provisions that affect the "kiddie tax," Alternative Minimum Tax, capital gains rates, Section 179 expensing and Roth IRAs.
"KIDDIE TAX" CHANGE: This legislation raises the age limit of children whose income is subject to the "kiddie tax" to 18 starting in tax year 2006. Previously, the kiddie tax applied if the child was under 14, the child had net unearned income over $1,700 (for tax year 2006), and the parent could claim the child as a dependent.
The revised kiddie tax rules require a child's unearned income, such as dividends and interest, to be taxed at the parents' tax rate, which is usually a higher rate.
ALTERNATIVE MINIMUM TAX: The exemption amount has increased.
The AMT exemption amount for married taxpayers filing jointly is increased from $58,000 to $62,550 and for single taxpayers from $40,250 to $42,500. These amounts were slated to return to $49,000 for married filing joint and $35,750 for single for tax year 2006.
CAPITAL GAINS RATES: The lower qualified dividend and capital gain rate of 15 percent (5 percent if in the 10 percent or 15 percent tax bracket) will be extended through Dec. 31, 2010. The rates were scheduled to expire at the end of 2008.
The extension means that the dividend and capital gains tax rate cuts will expire at the same time as the other tax cuts enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, including the lower individual marginal income tax rates, marriage penalty relief and temporary repeal of the federal estate tax.
All of the tax cuts in the act will expire after Dec. 31, 2010, unless legislation is passed to extend or make permanent any or all of the tax cuts.
SECTION 179 EXPENSING: The act also extends the increased amounts for Section 179 expensing.
Since 2003, the maximum amount a taxpayer may expense is $100,000 of the cost of qualifying property, reduced by the amount by which the cost of qualifying property exceeds $400,000. Both amounts were indexed for inflation for tax years beginning after 2003 and before 2010.
For 2006, the amounts are $108,000 and $430,000, respectively. Without the extension, the expensing limit would have reverted to $25,000 with a $200,000 cap after 2007.
ROTH IRAS: The $100,000 adjusted gross income limit for converting a traditional IRA to a Roth IRA has been eliminated for tax years after 2009. As a result of this change, taxpayers with an adjusted gross income or AGI of over $100,000 will be able to convert their traditional IRA to a Roth IRA.
The conversion requires that tax be paid on the amount converted, but the 10 percent additional tax does not apply. When funds are withdrawn from the Roth IRA after retirement, they will not be subject to taxation.
Editor's note: This public service information was provided by Linda Long, owner of Liberty Tax Service. Call 344-8042.
[Last modified February 4, 2007, 21:02:41]
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