Tax planning should be a year-round process. The earlier you begin to plan for your 2006 taxes, the better off you'll be. But in order to complete your planning, you'll need to know which provisions are no longer in the tax code for 2006 -- I wrote about those last week -- and which new ones are phasing in. Here's some good news about provisions that will actually save you tax dollars in 2006.
Increased retirement contribution limits
In 2006, the maximum 401(k) and 403(b) employee contribution increases to $15,000. In addition, taxpayers who are at least age 50 before the end of 2006 can increase their catch-up contribution limits by the following amounts for the following plans:
- An additional $5,000 for 401(k), 403(b), salary-reduction SEP plans, and 457 plans.
- An additional $2,500 for SIMPLE plans.
- An additional $1,000 for both traditional and Roth IRAs.
Higher income limits for deductible IRAs
If you are covered by a retirement plan at work, you can take an IRA deduction if your modified adjusted gross income is less than $85,000 (married filing jointly) or $60,000 (single or head of household).
New credit for non-business energy property
From 2006 to 2008, taxpayers may claim a lifetime credit of up to $500 for making qualifying energy-saving improvements to their residences. Qualifying expenditures include installation of certain energy-efficient insulation materials, exterior windows and doors, electric heat pumps, and central air conditioning. The credit is 10% of the cost of qualifying materials; for window installations alone, it's limited to $200 total.
New credit for residential energy-efficient property
From 2006 to 2008, a taxpayer may claim a credit for 30% of the cost of installing solar water-heating, photovoltaic, or fuel-cell equipment in his or her residence, up to $2,000 total. No credit is allowed for equipment used to heat a swimming pool or hot tub.
New credit for purchase of new energy-efficient vehicles
Beginning in 2006, the purchase of qualifying vehicles will allow you to claim a tax credit, replacing the Clean Fuel Deduction that expired at the end of 2005. A credit is available for a variety of alternative-fuel vehicles. New hybrid vehicles are eligible for a tax credit up to $3,400, depending on the vehicle's fuel-efficiency. However, this credit is limited to the first 60,000 vehicles sold per auto manufacturer after Jan. 1, 2006.
Increased Section 179 expense deduction
The maximum amount increases from $105,000 to $108,000 in 2006.
Reduced itemized deduction limits for high-income taxpayers
Currently, itemized deductions are phased out (reduced) as your income rises. Starting in 2006, the deduction phase-out will be reduced by one-third. In 2008, it will be reduced by two-thirds, and in 2010, the phase-out will disappear entirely.
Gift tax annual exclusion increased
In 2006, the annual amount of cash that you can give to someone else without filing a gift tax return increases from $11,000 to $12,000.
Additionally, as I'm writing this, new legislation has been approved and sent on to the President for his expected signature. The new law should extend some of the expiring provisions that we discussed last week. For more information, click here.
When he's not dealing with tax issues, Roy Lewis is a motivational speaker who lives in a trailer down the by river. He understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns, as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.