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Changes to your 2006 Tax Return

The maximum 401(k) or 403(b) contribution eligible for tax deferral in 2005 is $14,000 plus an extra $4,000 “catch-up” contribution for those who are 50 years or older. For 2006, the maximum contribution eligible for tax deferral is $15,000. The catch-up contribution amount is $5,000. In addition you may see a new option for your 401(k) or 403(b) contributions next year. Starting in 2006 employers can offer Roth 401(k) or 403(b) plans. Similar to Roth IRAs, contributions to such plans will be taxable, but earnings and post-retirement withdrawals from these accounts will be tax-free. If offered, you can invest in the Roth, traditional or both plans. However the combined Roth and deferred amount is limited to the maximum deferred contribution amount.

High-income taxpayers may be able to take a larger amount of itemized deductions in 2006. That is because the reduction in itemized deductions for high-income taxpayers starts to phase out beginning next year.

Repairs to your house may save you taxes next year. Two new residential energy credits are available under the Energy Policy Act of 2005 – the non-business energy property credit and the residential energy efficient property credit. These credits are available for the following types of energy-efficient property that meet eligibility requirements: (1) exterior doors; 2) heat pumps; 3) water heaters; 4) central air conditioners; 5) furnace or hot water boilers; 6) fans used in natural gas, propane, or oil furnaces; 7) insulation material or an insulation system specifically and primarily designed to reduce the heat gain of a dwelling unit; 8) exterior windows (including skylights); 10) qualified property for producing solar electricity; 11) qualified solar water heating property; and 12) qualified fuel cell property. These credits are also available for those who own condominiums or cooperatives. For repairs made by a condominium association or cooperative corporation, they may be available on a pro-rated basis.

If you live in a state with no income tax or otherwise paid more state and local sales tax than state and local income tax in 2005, there may be a tax advantage to deducting sales tax instead of income tax paid to the state, subject to Alternative Minimum Tax impact analysis. After 2005, the ability for taxpayers to deduct state and local sales taxes in lieu of state and local income taxes is scheduled to expire.

Purchase of a new energy-efficient car may entitle you to a tax credit next year. The Energy Policy Act provides credits for certain energy-efficient motor vehicles placed in service starting in 2006, including qualified fuel cell vehicles, advanced lean burn technology vehicles, hybrid motor vehicles, and qualified alternative fuel motor vehicles. However, the electric motor vehicle credit is reduced from $4,000 to $1,000 beginning in 2006 and the clean-fuel vehicles deduction expires next year.

The deduction for qualified higher education tuition and related expenses is scheduled to terminate for tax years beginning after December 31, 2005. Also next year, educators will no longer be able to deduct up to $250 of certain classroom material in computing adjusted gross income. Also non-refundable tax credits, with a few exceptions, can no longer be used to offset alternative minimum tax liability for tax years after 2005. Note that in certain circumstances one may be entitled to a charitable deduction in lieu of a limited miscellaneous deduction.

The Domestic Production Deduction will result in tax benefits for S-Corporations, LLC’s and partnerships. The new law contains a number of transition rules and limitations, however, so the full benefit of the deduction may not be immediately realized. This deduction is intended to preserve jobs and production activities in the United States.

Repairs to your house may save you taxes next year. Two new residential energy credits are available under the Energy Policy Act of 2005 – the non-business energy property credit and the residential energy efficient property credit. These credits are available for the following types of energy-efficient property that meet eligibility requirements: (1) exterior doors; 2) heat pumps; 3) water heaters; 4) central air conditioners; 5) furnace or hot water boilers; 6) fans used in natural gas, propane, or oil furnaces; 7) insulation material or an insulation system specifically and primarily designed to reduce the heat gain of a dwelling unit; 8) exterior windows (including skylights); 10) qualified property for producing solar electricity; 11) qualified solar water heating property; and 12) qualified fuel cell property. These credits are also available for those who own condominiums or cooperatives. For repairs made by a condominium association or cooperative corporation, they may be available on a pro-rated basis.

If you live in a state with no income tax or otherwise paid more state and local sales tax than state and local income tax in 2005, there may be a tax advantage to deducting sales tax instead of income tax paid to the state, subject to Alternative Minimum Tax impact analysis. After 2005, the ability for taxpayers to deduct state and local sales taxes in lieu of state and local income taxes is scheduled to expire.

Purchase of a new energy-efficient car may entitle you to a tax credit next year. The Energy Policy Act provides credits for certain energy-efficient motor vehicles placed in service starting in 2006, including qualified fuel cell vehicles, advanced lean burn technology vehicles, hybrid motor vehicles, and qualified alternative fuel motor vehicles. However, the electric motor vehicle credit is reduced from $4,000 to $1,000 beginning in 2006 and the clean-fuel vehicles deduction expires next year.

The deduction for qualified higher education tuition and related expenses is scheduled to terminate for tax years beginning after December 31, 2005. Also next year, educators will no longer be able to deduct up to $250 of certain classroom material in computing adjusted gross income. Also non-refundable tax credits, with a few exceptions, can no longer be used to offset alternative minimum tax liability for tax years after 2005. Note that in certain circumstances one may be entitled to a charitable deduction in lieu of a limited miscellaneous deduction.

The Domestic Production Deduction will result in tax benefits for S-Corporations, LLC’s and partnerships. The new law contains a number of transition rules and limitations, however, so the full benefit of the deduction may not be immediately realized. This deduction is intended to preserve jobs and production activities in the United States.