January 23, 2006

Happy New Year!

The following tax rates and amounts are effective for 2006:

1. OASDI rate remains at 6.2% but wage base rises to $ 94,200 from $90,000.
2. Medicare rate remains at 1.45% and there is no wage limit.
3. The maximum earnings one can earn before social security benefits will start to be withheld is $33,240 for those under age 65     and eight months. Those between age 62 and age 65 and eight months can earn $12,480. For each $2 earned above that, $1 of benefits is lost. There is no limit on earnings for those older than 65 and eight months. The retirement age for social security continues to rise this year. Those turning 62 this year are affected. They will get reduced benefits if they start receiving payments before they attain age 66. Ultimately, anyone born after 1959 will not get full benefits before age 67. Social Security benefits will rise 4.1%.
4. Personal exemptions rise to $3,300 from $3,200 and exemptions will begin to phase out at $218,950 of AGI for couples. For singles, $150,500. Taxpayers in the phaseout zones face higher marginal income tax rates. The effect is to add .86% per exemption for taxpayers in the 33% tax bracket. Filers in the 35% bracket effectively pay an extra .91% per exemption. This adds 3.64% to the effective marginal rate for a top bracket family of four. 
5. Standard deduction will increase to $10,300 plus $1,000 for each spouse 65 or older, up from $10,000. For children age 14 who must file returns, it rises to $850.  Can be as high as $4,750 if they have earned income.
6. Income tax rates are remain at 10%, 15%, 25%, 28%, 33% and 35%. Those in the 15% or lower brackets receive a reduced rate on gains. 15% bracket is doubled for marrieds over singles for 2005-2007.
7. Alternative Minimum Tax rate remains at 26% on first $175,000 of income for marrieds for 2005-2009 and 28% over that. More people will pay this since brackets and exemptions are not indexed and there are fewer deductions allowed. Exemptions remain constant.
8. Back up withholding rate remains at 30%.
9. 401(k), 403(b) and 457 contribution pay-in limitation rises to $15,000, up from $14,000, with $5,000 more for employees 50 and older.
10. Maximum level of pay on which pay-ins to plans can be based upon rises to $220,000 from $210,000, with the maximum pay-in for defined contribution plans rising to $44,000 from $42,000. Percentage of compensation that can be put in remains at 100%. Profit Sharing percentage remains at 25%.  Benefit limit rises to $175,000.
11. Business meal and entertainment deductibility remains at 50%. Standard business mileage allowance is lowered to 44.5¢ per mile, down from 48.5¢.  Medical travel rate is lowered  to 18¢, down from 22¢ per mile. Charitable driving rate is still 14¢ a mile, 32¢ if related to Katrina relief.
12. Federal estate tax exemption jumps to $2,000,000. Maximum Estate and Gift rate drops to 46% from 47%. Lifetime gift tax excemption remains at $1,000,000.
13. Maximum amount of equipment eligible for expense election for small businesses rises to $108,000, from $105,000.
14. Simplified per diem allowances are up slightly for ‘06.
15. Phaseout for IRA deductions start at $75,000 and ends at $85,000 for couples. Phaseout for singles is from $50,000 to $60,000. Contribution limit rises to $4,000. If 50 or older, can contribute up to $4,500.
16. The interest exclusion on U.S. Savings Bonds redeemed to pay qualified higher education expenses starts to phase out at AGI above $94,700 for marrieds.
17. Eligible portion of long term care premium rises to $3,530 for those age 70 and older, $2,830 between ages 60 and 70, $1,060 between ages 50 and 60, $530 from 40 to 50 and $280 for age 40 and under, deductible as medical expenses.
18. Medicare Part B premium rises to $88.50, up from $78.20.
19. The nanny tax threshold rises to $1,500, up from $1,400. No social security tax is due for domestics paid $1,500 or less this year. It is not indexed for inflation. FUTA is due whenever a domestic employee is paid $1,000 or more in a calendar quarter in the current or prior year.
20. The exemption from the Kiddie Tax for 2006 increases to $1,700 from $1,600. A parent will be able to elect to include a child’s income on the parent’s return for 2005 if the child’s income is more than $850 and less than $8,500.
21. Low and middle income savers can still get a tax credit of up to $1,000 for contributions made to IRAs and qualified plans. Credit disappears for MFJ when AGI hits $50,000, $25,000 for singles.
22. Adoption tax credit rises to 100% of up to $10,960 of expenses. Phaseout starts at $164,410AGI.
23. Hope and Lifetime Learning credit phaseout for MFJ starts at $90,000, $45,000 for singles.  The maximum Hope credit rises to $1,650 from $1,500 and the credits are doubled for those attending college in the Hurricane Katrina area.
24. Gift tax exclusion rises to $12,000 from $11,000 per donee for gifts made in 2006..
25. The limit on deducting payins to Health Savings Accounts goes up to $5,450 for family coverage and $2,700 for individual coverage. Account owners born before 1952 can put in an additional $700. Ceiling on out of pocket cost rises to $10,500 for family coverage and $5,250 for individual coverage.
26. There is a 10% credit for energy saving improvements up to a maximum credit of $500.  See our August Newsletter for details.
27. The up to $250 above the line deduction for teachers' out of pocket classroom related expenses is extended through 2006.
    
    As always, if you have any questions about these or any other matters, do not hesitate to call me. 
    
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