Taxes had a busy 2006. Three major tax acts passed in the last few months, with some of the provisions affecting your 2006 taxes and some on hold until the beginning of 2007.
Since the Congress cares not a whit about "tax simplification," I'll try to separate the provisions you need to be concerned about today (since they affect your 2006 taxes) from those taking effect after Jan. 1.
Just remember that I can only comment on laws that have been passed and enacted. I'll make no predictions regarding what might happen in the year to come. With Congress under different management, it's quite possible that a new tax wind could be blowing.
Provisions for 2006
"Kiddie tax" age limit increased: Kids are older than they used to be. Just a few months ago, the "kiddie" age was 14 or less. Effective Jan. 1, 2006, "kiddies" are now age 18 or younger, and those older "kiddies" are subject to the new "kiddie tax" rules for 2006.
Credits for alternative fuel vehicles: A new credit for various "alternative fuel vehicles" is available in 2006. The rules are fairly complex, but you also need to be aware that there are limits based upon units of production. For example, Toyota reached its quota in mid-2006, which means the credits for all of Toyota's new advanced lean-burn technology vehicles began to phase out in October. Before you buy, if you're angling for a 2006 credit, make sure that the dealer is giving you accurate information about whether the vehicle you're considering has met its production quota or not.
Residential energy credits and deductions: Various credits and/or deductions are available for purchases of certain energy-efficient improvements, such as solar water heating, more efficient air conditioning units, or better-insulated windows or doors.
Direct IRA charitable contributions: In 2006, you can now make a charitable contribution directly from your IRA (either traditional or Roth) to a qualified charitable organization. You must be age 70 1/2 or older, and the amount of the contribution is limited to $100,000 per tax year. But if you do meet the qualifications, and you have a charitable intent, it's generally much more tax-efficient to make the charitable contribution directly from your IRA account. Don't overlook this new provision.
Tougher record-keeping requirements for charity items: Effective for contributions beginning after Aug. 17, 2006, you must have either a bank record (such as a cancelled check) or a written statement from the charitable organization in order to claim a deduction. Also, after this date, no deduction is allowed for contributions of clothing or household items unless they are in "good used condition or better." These new restrictions, in effect right now, might affect your year-end charitable giving.
Relief from early distribution penalty: Effective after Aug. 17, 2006, new legislation eliminates the 10% early withdrawal tax on distributions from a governmental defined-benefit pension plan to qualified public safety employees (including, but not limited to, police, fire, and EMT employees) who separate from service after age 50.
Provisions for 2007
Saver's credit made permanent: This credit is allowed for taxpayers who make qualified retirement contributions and fall within certain income limits. It was scheduled to expire after the 2006 tax year, but it's now been made permanent.
Investment advice: New laws permit plan fiduciaries to be compensated for giving participants investment advice, effective after Dec. 31, 2006. A registered investment company, bank, insurance company, or registered broker-dealer will be allowed to give investment advice, provided that either its fee does not vary based on the investment choices that participants make, or that its recommendations are based on a computer model certified by an independent third party. In other words, the qualified investment advisor can be paid out of the taxpayer's retirement account (such as a 401(k), IRA, or other plan) without incurring a penalty or tax for distribution from the plan.
Direct deposit of tax refunds into an IRA account: You can now deposit your tax refund not only into a checking or savings account, but also directly into an IRA. While effective in 2007, these new rules apply to any refunds received for the 2006 tax filing season. Now, all or a portion of your 2006 refund may be deposited directly into an IRA held by the taxpayer, or the taxpayer's spouse in the case of a joint return.
Maximum capital gains and dividend tax extended: Neither was set to expire until 2008, but the new law pushed these provisions out another two years apiece. The 15% maximum taxes on long-term gains and dividends are now set until the end of 2010.
Expensing of equipment / Section 179 expenses: The law allowing small businesses to deduct as much as $100,000 of business equipment purchased during the year has also been extended. This amount has been adjusted for inflation since 2003, and has also been extended until the end of 2009. For 2006, businesses can expense as much as $108,000 worth of equipment. For 2007, the maximum amount increases to $112,000.
Non-spouse beneficiaries: Generally, a deceased person's spousal beneficiary is allowed to "roll over" any IRA distribution into his or her individual IRA account, eliminating current taxes on such distributions. Non-spouse beneficiaries were not allowed such latitude. Instead, they were generally required to remove the funds almost immediately in a lump sum, incurring substantial additional taxes. However, effective for distributions after Jan. 1, 2007, the new law allows non-spouse beneficiaries to treat the IRA of a deceased taxpayer more like distributions under a qualified pension plan. The distribution can be made over a five-year period, or over the life expectancy of the non-spouse beneficiary.
These are just a few of the many tax provisions recently signed into law. You still have time to take maximum advantage of those provisions put in place for 2006, and more than enough time to plan your taxes for 2007. Plan wisely.
When he's not dealing with tax issues, Fool contributor Roy Lewis is a motivational speaker who lives in a trailer down by the 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.