Fun With The Tax Code: Changes Abound in 2006 Tax Year

I. Introduction

They
say that death and taxes are the two sure things in life. That may very
well be the case, but taxes and tax law are ever changing. Rates are
regularly moved up or down new taxes are added and certain taxes are
eliminated. For the 2006 tax year, Congress made several changes that
will have an impact on people as they get their financial records
together and start preparing their taxes for the April deadline. Some
of the changes that Congress made include; The Pension Protection Act,
The Energy Tax Incentives Act and The Tax Increase Prevention and
Reconciliation Act.[1]. The article focuses on whether changes to tax
law will actually be beneficial to individual taxpayers.

II. Analysis

The
Pension Protection Act was signed into law for the purpose of revising
tax rules related to pension plans and individual retirement accounts
(IRAs).[2]. ne provision of the act allows for charitable contributions
from a taxpayers IRA account to be tax free.[3]. This is a new
provision in the tax laws, and allows for a maximum, tax free,
contribution up to $100,000.[4]. One of the big benefits of this Act is
for older generations. Starting on December 31, 2006 taxpayers who are
62 or older are allowed to withdraw money from their pension plans
without having to retire.[5] These provisions make-up only two aspects
of the Act. However they are two provisions that should benefit
taxpayers. Allowing for tax-free contributions to charity will promote
charitable contributions and the provision for pension plan withdrawal
will allow older workers to use their pension distributions to reduce
their workload. For a more detailed analysis of the Pension Protection
Act, see Ericka Roberson, Get Receipts for Every Donation: New Tax Laws
Require Them, The Journal of the Business Law Society, at
http://iblsjournal.typepad.com/illinois_business_law_soc/tax/index.html.

The Energy Tax Incentives Act will also have an impact on taxpayers
as they prepare their returns. This particular provision provides
incentives through various tax deductions and credits for the efficient
use of energy.[6]. Tax credits can be received for residential as well
as vehicle credits.[7]. Individuals qualify for small credits for home
improvements that make their homes more energy efficient.[8]. For
example the use of electric and geothermal heat pumps qualifies a
taxpayer for $300 of credits.[9]. For those homeowners who make use of
solar panels for some or all of their energy qualify for a 30% of the
qualified investment in the panels up to a maximum of $2,000.[10].
Taxpayers can receive additional for credits for driving certain energy
efficient vehicles.[11]. For example, a 2005 or 2006 Toyota Prius
provides a taxpayer with a $3,150 tax credit.[12]. A Chevy Silverado
Hybrid pick-up provides a $650 tax credit.[13]. Providing for tax
credits in this area will provide for a better and more efficient use
of energy sources.

In addition to the above changes, The Tax Increase Prevention and
Reconciliation Act has important implications for taxpayers.[14]. One
of the provisions included in this Act is the raising of the kiddie tax
age limit from; under 14 to under 18.[15]. The purpose of the kiddie
tax is to prevent parents from reducing their tax liability via
transfers to their children.[16]. Under the new law, a child under 18
(as opposed to under 14, in the previous tax law) pays taxes at his or
her parents highest marginal tax rate for all investment income over
$1,700.[17]. This provision of the act will likely lead to higher tax
burdens for families whose teenage children have investment income.
Previously, the kiddie tax ignored children above 14, children between
15-17 can now be subject to the kiddie tax. Another provision of this
Act is to extend investor tax breaks to at least 2010.[18]. This
provision works to reduce the tax rate on long-term capital gain.[19].
In addition, it applies the same favorable tax rate to dividends from
domestic corporations as it does to long-term capital gain.[20].

III. Conclusion

The tax changes discussed above are merely the tip of iceberg.
Congress, as in most years, has enacted numerous changes to tax policy
that will effect many individual taxpayers. Some individuals will find
that they are paying more in taxes than last year, and others will find
that they are able to tax advantage of various deductions and credits
to reduce their tax burden. However, in the end, most everyone ends up
paying something.

[1] See Jackson Hewitt Tax Resource Center at http://www.jacksonhewitt.com/resources_changes_federal4.asp?urlSection=resource

[2] Id at http://www.jacksonhewitt.com/resources_changes_federal4.asp?urlSection=resource#pension_protection

[3] Id.

[4] Id.

[5] Id.

[6] Id. at http://www.jacksonhewitt.com/resources_changes_federal4.asp?urlSection=resource#reconciliation_act

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] See Bassman, Laserow, & Company, PC at http://www.bassman.com/5-06-newtaxact.html

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.