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The Center for Estate and Gift Planning

Tax Tips

Click Here for Tax Tips from 2004.

Tax Tips and Inflation Adjustments for 2006 Returns

Standard Deduction

· Joint filers -- $10,300; heads of household -- $7,550; singles or married filing separately -- $5,150.
· Dependent – For 2006, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of (i) $850, or (ii) the sum of $300 and the individual’s earned income.

Itemized Deductions

For 2006, the “applicable amount” of AGI above which the amount of otherwise allowable itemized deductions is reduced, is $150,500 (or $75,250 for a separate return filed by a married individual).

Personal Exemptions

For 2006, each person exemption claimed (including the exemption for the taxpayer, for his or her spouse and dependents) is now $3,300 (up from $3,200).  However, the personal exemption begins to “phase out” after the following AGI thresholds: joint filers--$225,750; heads of household--$188,150; singles--$150,500; married persons filing separately--$112,875.

Child Tax Credit

For 2006, the child tax credit remains at $1,000, and the credit continues to phase out when modified AGI reaches $110,000.

Estate Taxes

In 2006, the estate tax exemption is raised to $2 million and will be $3.5 million in 2009. In 2010, the tax is repealed. Unless a new law is passed, the estate tax will return in 2011 with a $1 million exemption. Congress will likely revisit this issue before 2011. Also, in 2006 the maximum tax rate is 46%.

Gift Taxes

The lifetime gift tax exemption remains at $1 million for 2006. The annual exclusion is raised so that the first $12,000 of gifts to any person (other than future interests in property) are not included in the total amount of taxable gifts made during that year. For the generation skipping transfer tax, in 2006 the applicable exclusion amount is raised to $2 million and the maximum GSTT rate is 46%.

Health Insurance Costs

Self-employed taxpayers who have profits in 2006 may deduct up to 100% of health insurance premiums.

Social Security Benefits

The maximum earnings amount subject to the social security tax increased to $94,200 (up from $90,000). Social security recipients aged 62-65 now may earn a maximum of $12,480 (up from $12,000) without reduction of benefits. In the year an individual reaches retirement age, $1 in benefits will be deducted from earnings for every $3 above $33,240 (up from $31,800) before the month the individual attains full retirement age. There is no limit on earnings beginning the month the individual reaches full retirement age.

Educational Benefits

Hope and Lifetime Learning Credits

· For 2006, 100% of qualified tuition and related expenses not in excess of $1,100 and 50% of such expenses in excess of $1,100 are taken into account in determining the amount of Hope Scholarship Credit.
· For 2006, a taxpayer’s modified AGI in excess of $45,000 ($90,000 for a joint return) is taken into account in determining the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits otherwise allowable.

Interest on Education Loans

For 2006, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified AGI exceeds $50,000 ($105,000 for joint returns), and is completely eliminated when modified AGI income is $65,000 ($135,000 for joint returns).

Income from US Savings Bonds

For 2006, the exclusion for income from United States savings bonds for taxpayers who pay qualified higher education expenses begins to phase out for modified AGI above $94,700 for joint returns and $63,100 for other returns. This exclusion completely phases out for modified AGI of $124,700 or more for joint returns and $78,100 or more for other returns.

Qualified Tuition Program (QTP) Exclusion

Taxpayers may exclude QTP distributions from gross income if the distributions are from a QTP established and maintained at an educational institution (or state or state agency) and the distribution is used only for qualified higher education expenses.

Education Expense Deduction

This deduction is terminated for expenses paid or incurred after December 31, 2005.

IRA/ Retirement Plans

IRAs

· The maximum allowable IRA contribution for 2006 remains at $4,000.
· For 2006, taxpayers aged 50 or older may make additional catch-up IRA contributions of $1,000 (up from $500).
· The $10,000 phase out range for IRA deductions for those covered by a pension plan begins at an income of $50,000 ($75,000 for joint filers). The phase-out range for joint filers separately still begins at zero.

Employer Plans

· The elective deferral limit increased to $15,000 (up from $14,000) for 401(k), 403(b), and 457 plans, as well as salary reduction SEPs. Taxpayers age 50 or over may make an additional catch-up contribution of $5,000 (up from $4,000) in 2006.
· Each employee participating in the SIMPLE 401(k) plan may make annual elective contributions expressed as a percentage of compensation, but not exceeding $10,000 for 2006. The maximum contribution is indexed for inflation for 2006. Taxpayers 50 years or older may make additional catch-up contributions of $2,500.

2004 TAX ADJUSTMENTS

Personal Exemptions

The exemption for the taxpayer, a spouse, and dependents is now $3,100 for each (up from $3,050 in 2004). However, the “phase out” begins after these thresholds: married, filing joint return--$214,050; heads of household--$178,350; singles--$142,700.

The Standard Deduction

Joint filers and surviving spouses--$9,700; heads of household--$7,150; singles--$4,850; additional amounts for the elderly and blind: $950 for married individuals and surviving spouses; $1,200 if unmarried.

Estate Taxes

The exemption to $1.5 million in 2004. It is scheduled to increase to $2 million in 2005, and $3.5 million in 2009. The estate tax is repealed in 2010, but returns in 2011 with a $1 million exemption. Congress, however, is most likely to revisit this.

Gift Taxes

The exemption remains at $1 million in 2004. It will remain at $1 million and won't increase along with the estate tax exemption.

Gifts of Present Interest – the annual gift tax exclusion for gifts of present interest remains at $11,000 per donee in 2003. Spouses can transfer $22,000 per donee each year by “gift-splitting.” Gifts to a non-citizen spouse qualify for an annual exclusion of $114,000 in 2004.

Generation-skipping Transfer Tax - the generation-skipping transfer tax exemption is equal to the estate tax exemption of $1.5 million for this year.

Health Insurance Costs

Self-employed taxpayers can deduct 100% of health insurance premiums for 2004.

Social Security Benefits

The maximum amount of earnings subject to the social security tax increased from $87,000 to $87,900 in 2004. The maximum amount Social Security recipients aged 62-65 may earn without reduction of benefits increased from $11,520 to $11,640 in 2004. If a recipient earns more than that, $1 in benefits is withheld for every $3 earned over $11,640. In the year an individual reaches retirement age, $1 in benefits will be deducted for every $3 above $31,080 (up from $30,720 in 2003) from earnings before the month the individual reaches full retirement age. There is no limit on earnings beginning the month the individual attains full retirement age.

Overall Limitation on Itemized Deductions

An individual whose adjusted gross income exceeds the Threshold Amount must reduce the amount of allowable itemized deductions by three percent of the excess over the Threshold Amount. The Threshold Amount for 2003 is $142,700 for married, filing joint and $71,350 for single.

Educational Benefits

Hope and Lifetime Learning Credits

The maximum Hope Credit is $1,500 for each eligible student (100% of the first $1,000 of qualified tuition and related expenses, plus 50% of the next $1,000 of such expenses).

The lifetime learning credit is equal to 20 percent of the amount of tuition paid by the taxpayer and is available for the first $10,000 of tuition for any tax year the Hope credit is not claimed.

The phase out of the credits begins for single taxpayers in 2004 when modified adjusted gross income reaches $42,000 ($85,000 in the case of a joint return). The credits are completely phased out when modified AGI reaches $52,000 ($105,000 in the case of a joint return).

Interest on Education Loans

Interest on student loans for higher education may now be deducted whenever paid and regardless of the age of the loan. This deduction is now available to most taxpayers with incomes up to $65,000, with the deduction amount phasing out as income increases above $50,000. For married couples filing jointly, the phase-out range is from $100,000 to $130,000.

Employer Education Assistance

An employer may provide up to $5,250 per year in tax-free educational benefits to an employee for qualified educational undergraduate or graduate programs.

Education Expense Deduction

Most taxpayers with adjusted gross incomes up to $65,000 ($130,000 on a joint return) may deduct up to $4,000 for tuition and fees paid to attend an accredited college, university or vocational school.

Education Savings Account

Couples with modified adjusted gross income up to $220,000 may fund Coverdell Education Savings Accounts (formerly known as an Education IRA). Contributions up to $2,000 per year, per beneficiary, are permitted, with the contribution amount phasing out as income increases above $190,000.

IRA’s / Retirement Plans

IRAs

For 2003 and 2004 the maximum allowable IRA contribution is $3,000.

Taxpayers at least 50 years old may make additional catch-up IRA contributions of $500.

Employer Plans

The deferral limit for 401(k) plans, 403(b) plans and salary reduction SEPs and 457 plans increased to $13,000. Taxpayers at least 50 years old may make additional catch-up contributions of $3,000.

The annual elective deferrals that may be made to a SIMPLE plan increased to $9,000. Taxpayers at least 50 years old may make additional catch-up contributions of $1,500.