IRS fact sheet highlights 2006 tax law changes
 

Fact Sheet 2007-2
IRS has kicked off the 2007 filing season with a series of fact sheets highlighting 2006 tax law changes, recently extended tax breaks, new administrative practices and other items. Fact Sheet 2007-2 provides highlights of many 2006 tax law changes. It also directs taxpayers to other fact sheets covering law changes affecting 2006 returns and new administrative practices.

New energy-saving tax credits. Fact Sheet 2007-2 highlights these new energy-saving tax credits which are claimed on Form 5695

• A 10% credit for various energy-saving improvements made to a taxpayer's main home. The credit is based on the cost of new energy-efficient improvements including insulation, exterior windows, exterior doors, water heaters, heat pumps, central air conditioners, furnaces and hot water boilers. The overall credit is limited to $500 and further dollar limits apply to specific components (for example, $200 for windows).
• A 30% credit for the cost of photovoltaic property, solar water heating property and fuel cell property.  

Contribution limits raised for IRAs and other retirement plans: special rules for military. Fact Sheet 2007-2 points out these enhanced retirement saving opportunities:

• For 2006, the contribution limit for Roth and traditional IRAs rises to $5,000, up from $4,500 in 2005, for those age 50 or over. For those under 50, the limit remains unchanged at $4,000.
• The $10,000 phase-out range for IRA deductions for those covered by a retirement plan begins at income of $75,000 if married filing jointly or a qualifying widow(er), up from $70,000 in 2005. It still begins at $50,000 for a single person or head of household and at $0 for a married person filing a separate return.
• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b) and most 457 plans rises to $15,000. For SIMPLE plans, the limit remains at $10,000. The catch-up contribution limit for persons age 50 or older rises to $5,000 for 401(k), 403(b) and 457 plans and to $2,500 for SIMPLE plans.
• Beginning in 2006, 401(k) and 403(b) plans can create a qualified Roth contribution program so that participants may choose to have part or all of their elective deferrals to the plan designated as after-tax contributions  
• Military members serving in Iraq, Afghanistan and other combat zone localities can count tax-free combat pay as earned income when figuring how much to contribute to a Roth or traditional IRA .
• Military reservists, including members of the National Guard, called to active duty can receive payments from their individual retirement accounts, 401(k) plans and 403(b) tax-sheltered annuities, without being subject to the additional 10% early-distribution tax.

New rules for giving to charity. Fact Sheet 2007-2 points out these new rules affecting charitable giving:

• To be deductible, clothing and household items donated to charity after Aug. 17, 2006, must be in good used condition or better. However, a taxpayer may claim a deduction of more than $500 for any single item, regardless of its condition, if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens .
• To deduct any charitable donation of money, taxpayers must have a bank record or a written communication from the recipient showing the name of the organization and the date and amount of the contribution. This applies to contributions made in tax years beginning after Aug. 17, 2006. For taxpayers that file returns on a calendar-year basis, including most individuals, the new provision applies to contributions made beginning in 200
• An IRA holder, age 70 1/2 or over, can directly transfer tax-free, up to $100,000 per year to an eligible charity. This option is available in tax years 2006 and 2007. Eligible IRA holders can take advantage of this provision, regardless of whether they itemize their deductions. Funds must be contributed directly by the IRA trustee to the eligible charity. Transferred amounts are counted in determining whether the holder has met the IRA's required minimum distribution rules. For a more detailed discussion of the new IRA break and the tax-saving opportunity it offers.

Kiddie tax changes. Fact Sheet 2007-2 notes that children under 18 (increased from 14) who receive taxable investment income may need to figure tax using their parents' higher marginal rates. The tax does not apply to a married child who files a joint return.

AMT exemption increased for one year. Fact Sheet 2007-2 notes that for 2006, the alternative minimum tax (AMT) exemption rises to $62,500 for a married couple filing a joint return, up from $58,000 in 2005, and to $42,500 for singles and heads of household, up from $40,250.

Standard mileage rates adjusted for 2006. Fact Sheet 2007-2 notes that:

• the standard mileage rate for business use of a car, van, pick-up or panel truck is 44.5¢ a mile for 2006;
• the standard mileage rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 18¢ a mile; and
• the standard mileage rate for using a car to provide charitable services solely related to Hurricane Katrina is 32¢ per mile. Otherwise, the rate for providing services to charitable organizations is 14¢ a mile.

Inflation adjustments for 2006. Fact Sheet 2007-2 notes that for 2006 personal exemptions and standard deductions rise, tax brackets are widened and more than three dozen individual and business tax provisions are adjusted to keep pace with inflation. It also notes the following changes:

• The value of each personal and dependency exemption is $3,300, up $100 from 2005.
• The standard deduction is $10,300 for married couples filing a joint return and qualifying widow(er)s, a $300 increase over 2005; $5,150 for singles and married individuals filing separate returns, up $150; and $7,550 for heads of household, up $250. Higher amounts apply to blind people and senior citizens. The standard deduction is often reduced for a taxpayer who qualifies as someone else's dependent.
• The maximum earned income tax credit (EITC) is $4,536 for taxpayers with two or more qualifying children, $2,747 for those with one child and $412 for people with no children. Available to low and moderate income workers and working families, the EITC helps taxpayers whose incomes are below certain income thresholds, which in 2006, rise to $38,348 for those with two or more children, $34,001 for people with one child and $14,120 for those with no children.
• The maximum Hope credit for higher education expenses rises to $1,650 (100% of the first $1,100 of eligible expenses and 50% of the next $1,100 of expenses). These dollar amounts are doubled for students attending an eligible educational institution in the Gulf Opportunity Zone. The Hope and lifetime learning credits are phased out if a taxpayer's modified adjusted gross income (MAGI) is between $45,000 and $55,000 ($90,000 and $110,000 if filing a joint return).