Tax Year 2006
State and Local General Sales Taxes
The right Attorney is essential to your day in court. If you have trouble with the Law using an online an Attorney Search can help you find the lawyer. Whether it's an Employment Law issue, or a criminal matter, the right Attorney is crucial for your case.
The Tax Relief and Health Care Act of 2006 extended the election to deduct state and local general sales taxes through 2007. The act was enacted after Schedule A (Form 1040), Itemized Deductions, and its instructions were printed. Because we were not able to include the instructions for figuring the deduction in the Schedule A instructions, we developed Publication 600 to help you figure the deduction for 2006.
Earned Income for Additional Child Tax Credit
For 2006, the minimum earned income amount used to figure the additional child tax credit has increased to $11,300.
Alternative Minimum Tax
The following changes to the AMT went into effect for 2006. For more information, see Form 6251, Alternative Minimum Tax – Individuals, and its instructions.
AMT exemption amount increased. The AMT exemption amount has increased to $42,500 ($62,550 if married filing jointly or qualifying widow(er); $31,275 if married filing separately).
Exemption amount for a child. The minimum exemption amount for a child under age 18 has increased to $6,050. (Before 2006, the limit applied to a child under age 14.)
Foreign Earned Income Tax Worksheet. Taxpayers claiming the foreign earned income exclusion or the housing exclusion must determine the tax on their nonexcluded income using the tax rates that would have applied had they not claimed the exclusion(s). If you filed Form 2555 or 2555-EZ, you must use the Foreign Earned Income Tax Worksheet in the Form 6251 instructions to figure the amount to enter on Form 6251, line 31.
Qualified cellulosic biomass ethanol plant property. No AMT adjustment is required for depreciation of qualified cellulosic biomass ethanol plant property that is eligible for the special depreciation allowance under section 168(l).
Alternative Motor Vehicle Credit
You may be able to claim this credit if you place an alternative motor vehicle in service for business or personal use after 2005. An alternative motor vehicle must meet certain requirements and be a new:
- Advanced lean burn technology vehicle,
- Qualified alternative fuel vehicle,
- Qualified fuel cell vehicle, or
- Qualified hybrid vehicle.
For more information, see Form 8910, Alternative Motor Vehicle Credit.
Archer MSA Limits Increased
For Archer MSA purposes for 2006, the minimum annual deductible of a high deductible health plan increased to $1,800 ($3,650 for family coverage). The maximum annual deductible of a high deductible health plan increased to $2,700 ($5,450 for family coverage). The maximum out-of-pocket expenses limit increased to $3,650 ($6,650 for family coverage).
Restrictions on Charitable Contributions
Cash contributions. All cash contributions made in tax years beginning after August 17, 2006, to any qualified charity must be supported by a dated bank record or a dated receipt. The tax year for most individual taxpayers begins on January 1.
Clothing and household items. Beginning with contributions made after August 17, 2006, no deduction is allowed for most contributions of clothing and household items unless the donated property is in good used condition or better.
Direct Deposit of Refund
If you choose to receive your refund by direct deposit, you can now have your refund split among up to three different accounts. You can have your refund deposited into savings accounts, checking accounts, and other accounts, including individual retirement arrangements (IRAs), that have valid routing and account numbers. You cannot request a deposit to an account that is not in your name.
To have your refund split among two or three accounts, you must file Form 8888, Direct Deposit of Refund to More Than One Account. You cannot split your refund to more than one account if you file Form 1040EZ-T, Request for Refund of Federal Telephone Excise Tax, or Form 8379, Injured Spouse Allocation.
To have your refund deposited to only one account, do not file Form 8888. You can designate the account directly on your tax return.
Earned Income Credit Amounts Increase
Earned income amount. The maximum amount of income you can earn and still get the credit is higher for 2006 than it is for 2005. You may be able to take the credit for 2006 if:
- You have more than one qualifying child and you earn less than $36,348 ($38,348 if married filing jointly),
- You have one qualifying child and you earn less than $32,001 ($34,001 if married filing jointly), or
- You do not have a qualifying child and you earn less than $12,120 ($14,120 if married filing jointly).
The maximum amount of adjusted gross income (AGI) you can have and still get the credit has also increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.
Investment income amount. The maximum amount of investment income you can have in 2006 and still get the credit increases to $2,800.
Income Limits Increased for Reduction of Education Savings Bond Exclusion
For 2006, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $94,700 and $124,700. You cannot take the deduction if your MAGI is $124,700 or more. For 2005, the exclusion phased out between $91,850 and $121,8500.
For all other filing statuses, your interest exclusion is phased out if your MAGI is between $63,100 and $78,100. You cannot take a deduction if your MAGI is $78,100 or more. For 2005, the exclusion phased out between $61,200 and $76,200. For more information, see chapter 9 in Publication 970, Tax Benefits for Education.
Educator Expenses Deduction
If you were an eligible educator in 2006, you can deduct up to $250 of qualified expenses you paid in 2006 as an adjustment to gross income, rather than as a miscellaneous itemized deduction. This provision, which had expired for tax years after 2005, has been extended through tax year 2007. If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses.
Eligible educator. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year.
Qualified expenses. Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. An ordinary expense is one that is common and accepted in your educational field. A necessary expense is one that is helpful and appropriate for your profession as an educator. An expense does not have to be required to be considered necessary.
Qualified expenses do not include expenses for home schooling or nonathletic supplies for courses in health or physical education.
You must reduce your qualified expenses by the following amounts.
- Excludable U.S. series EE and I savings bond interest from Form 8815.
- Nontaxable qualified tuition program earnings.
- Nontaxable earnings from Coverdell education savings accounts.
- Any reimbursements you received for these expenses that were not reported to you in box 1 of your Form W-2.
How the deduction is claimed. You must file Form 1040 (or Form 1040NR) to take this deduction. The deduction is claimed on Form 1040, line 23 (or Form 1040NR, line 24), “Archer MSA Deduction.” Enter "E" on the dotted line to the left of that line entry if claiming educator expenses, or "B" if claiming both an Archer MSA deduction and the deduction for educator expenses. If entering "B," you must attach a statement with a breakdown of the amount claimed for each deduction.
Electric and Alternative Motor Vehicles
For 2006, the list of vehicles that are qualified hybrid vehicles for the Alternative Motor Vehicle Credit has been expanded. The tax credit for hybrid vehicles applies for vehicles purchased on or after January 1, 2006, and could be as much as $3,400 for those who purchase the most fuel-efficient vehicles.
See IR-2006-86, dated June 1, 2006, and the news article, Summary of the Credit for Qualified Hybrid Vehicles, for more information.
Exemption Amount Increased
The amount you can deduct for each exemption has increased from $3,200 in 2005 to $3,300 in 2006.
You may lose part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2006, the phaseout begins at:
- $112,875 for married persons filing separately,
- $150,500 for single individuals,
- $188,150 for heads of household, and
- $225,750 for married persons filing jointly or qualifying widow(er)s.
If your adjusted gross income is above the amount for your filing status, use the Deduction for Exemptions Worksheet in the Form 1040 instructions to figure the amount you can deduct for exemptions.
Foreign Earned Income Tax Worksheet
If you claim the foreign earned income exclusion or the foreign housing exclusion on Form 2555 or Form 2555-EZ, your must figure your tax using the Foreign Earned Income Tax Worksheet found in the Instructions for Form 1040.
Health Savings Account (HSA) Deduction Limits Increased
For 2006, the maximum HSA deduction increased to $2,700 ($5,450 for family coverage). The maximum additional deduction for individuals age 55 or older increased to $700. For HSA purposes, the minimum annual deductible of a high deductible health plan increased to $1,050 ($2,100 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increased to $5,250 ($10,500 for family coverage). For more information, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
Income Limits Increased for Hope and Lifetime Learning Credits
For 2006, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $45,000 and $55,000 ($90,000 and $110,000 if you file a joint return). You cannot claim an education credit if your MAGI is $55,000 or more ($110,000 or more if you file a joint return). This is an increase from the 2005 limits of $43,000 and $53,000 ($87,000 and $107,000 if filing a joint return). For more information, see chapters 2 and 3 in Publication 970, Tax Benefits for Education.
Limit on Itemized Deductions Increases
If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2006, this amount is increased to $150,500 ($75,250 if married filing separately). In 2005, the amount was $145,950 ($72,975 if married filing separately). Beginning in 2006, the amount by which these itemized deductions are reduced is only 2/3 of the amount of the reduction that otherwise would have applied. See the Instructions for Schedule A (Form 1040), line 28, for more information on figuring the amount you can deduct.
Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion
The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increased for 2006 to $250 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.
Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.
- The cost of qualified long-term care services during the period.
- The dollar amount for the period ($250 per day for any period in 2006).
See Section C of Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, and its instructions for more information.
Publication 1212, Guide to Original Issue Discount (OID) Instruments
Publication 1212 will no longer be revised annually and therefore does not contain the original issue discount (OID) tables, Sections I-A through III-G. The tables are only available on the IRS website at: www.irs.gov/formspubs/article/0,,id+109875.html. They are posted to the website in late November or early December of each year.
Residential Energy Credits
You may be eligible for two new credits, the nonbusiness energy property credit and the residential energy efficient property credit, for making energy saving improvements to your home in 2006. To take the credit, you must file Form 5695, Residential Energy Credits. For credit purposes, costs are treated as being paid when the original installation of the item is completed, or in the case of costs connected with the construction or reconstruction of a building, when your original use of the constructed or reconstructed building begins. If less than 80% of the use of an item is for nonbusiness purposes, only that portion of the costs that are allocable to the nonbusiness use can be used to determine the credit.
A home includes a house, houseboat, mobile home, cooperative apartment, condominium, and certain manufactured homes. You must reduce the basis of your home by the amount of credit allowed.
If you are a member of a qualified condominium management association for a condominium you own or a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any costs of such association or corporation.
Nonbusiness energy property credit. You may be able to take a credit equal to the sum of:
- 10% of the amount paid or incurred for qualified energy efficiency improvements installed during 2006, and
- Any residential energy property costs paid or incurred in 2006.
However, this credit is limited as follows.
- A total combined credit limit of $500 for all tax years after 2005.
- A combined credit limit of $200 for windows for all tax years after 2005.
- A credit limit for residential energy property costs for all tax years after 2005 of $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy efficient building property.
Qualified energy efficiency improvements. Qualified energy efficiency improvements are the following building envelope components installed on or in your main home located in the United States if these components are new and can be expected to remain in use for at least 5 years.
- Any insulation material or system that is specifically and primarily designed to reduce the heat loss or gain of a home when installed in or on such home.
- Exterior windows (including certain storm windows and skylights).
- Exterior doors (including certain storm doors).
- Any metal roof installed on a home, but only if this roof has appropriate pigmented coatings which are specifically and primarily designed to reduce the heat gain of the home.
For information on determining if a home is your main home, see Form 5695.
Caution - To qualify for the credit, qualified energy efficiency improvements must meet certain energy efficiency requirements.
Residential energy property costs. Residential energy property costs are costs of new qualified energy property that is installed on or in connection with your main home that you owned during 2006 located in the United States. This includes labor costs properly allocable to the onsite preparation, assembly, or original installation of the property. Qualified energy property is any of the following.
- Certain electric heat pump water heaters; electric heat pumps; geothermal heat pumps; central air conditioners; and natural gas, propane, or oil water heaters.
- Qualified natural gas, propane, or oil furnaces or hot water boilers.
- Certain advanced main air circulating fans used in natural gas, propane, or oil furnaces.
Caution - To qualify for the credit, qualified energy property must meet certain performance and quality standards.
Residential energy efficient property credit. You may be able to take a credit of 30% of your costs of qualified solar electric property, solar water heating property, and fuel cell property. This includes labor costs properly allocable to the onsite preparation, assembly, or original installation of the property and for piping or wiring to interconnect such property to the home. This credit is limited to:
- $2,000 for qualified solar electric property costs,
- $2,000 for qualified solar water heating property costs, and
- $500 for each half kilowatt of capacity of qualified fuel cell property for which qualified fuel cell property costs are paid.
Qualified solar electric property costs. Qualified solar electric property costs are costs for property that uses solar energy to generate electricity for use in a home located in the United States and used as your home. This includes costs relating to a solar panel or other property installed as a roof or a portion of a roof. The home does not have to be your main home.
Qualified solar water heating property costs. Qualified solar water heating property costs are costs for property to heat water for use in a home located in the United States and used as your home if at least half of the energy used by the property for such purpose is derived from the sun. This includes costs relating to a solar panel or other property installed as a roof or a portion of a roof. To qualify for the credit, the property must be certified for performance by the nonprofit Solar Rating Certification Corporation or a comparable entity endorsed by the government of the state in which the property is installed. The home does not have to be your main home.
Qualified fuel cell property costs. Qualified fuel cell property costs are costs for qualified fuel cell property installed on or in connection with your main home located in the United States. Qualified fuel cell property is an integrated system comprised of a fuel cell stack assembly and associated balance of plant components that converts a fuel into electricity using electrochemical means. To qualify for the credit, the fuel cell property must have a nameplate capacity of at least one-half kilowatt of electricity using an electrochemical process and an electricity-only generation efficiency greater than 30%.
Caution - Costs allocable to a swimming pool, hot tub, or any other energy storage medium that has a function other than the function of such storage do not qualify for the residential energy efficiency credit.
For more information, see Form 5695.
Social Security and Medicare Taxes
For 2006, the employer and employee will continue to pay:
- 6.2% each for social security tax (old-age, survivors, and disability insurance), and
- 1.45% each for Medicare tax (hospital insurance).
Wage limits. For social security tax, the maximum amount of 2006 wages subject to the tax has increased from $90,000 to $94,200. For Medicare tax, all covered 2006 wages are subject to the tax.
Standard Deduction Amount Increased
The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2006 than it was for 2005. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer.
The basic standard deduction amounts for 2006 are:
- Head of household — $7,550
- Married taxpayers filing jointly and qualifying widow(er)s — $10,300
- Married taxpayers filing separately — $5,150
- Single — $5,150
The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $850 or the sum of $300 and the individual's earned income.
Standard Mileage Rates
For tax years beginning in 2006, the allowable deductions for the standard mileage rate are as follows:
- Business miles. The standard mileage rate for the cost of operating your car changes to 44.5 cents a mile for all business miles driven.
- Charitable services. The standard mileage rate allowed for use of your car when you use your car to provide charitable services to a charitable organization is 14 cents a mile.
- Charitable services — Hurricane Katrina relief services. If you used your vehicle in giving services to a charitable organization to provide relief related to Hurricane Katrina, the standard mileage rate allowed for use of your car is 32 cents a mile.
- Medical reasons. The standard mileage rate allowed for use of your car for medical reasons is 18 cents a mile.
- Moving. The standard mileage rate for determining moving expenses is 18 cents a mile.
Tax-Exempt Interest Reporting
Beginning in 2006, state and local governments are required to report interest paid on tax-exempt state and local bonds on Form 1099-INT, Interest Income. This amount must be shown on your tax return and is for information only.
2006 Federal Income Tax Rate Schedules
The 2006 tax rate schedules are provided so that you can compute your estimated tax for 2006.
Tuition and Fees Deduction
You may be able to deduct qualified tuition and fees paid during the year for yourself, your spouse, or your dependent. This provision, which had expired for tax years after 2005, has been extended through tax year 2007.
Who can claim the deduction. You can take this deduction only if all of the following apply.
- You paid qualified tuition and fees in 2006 for yourself, your spouse, or your dependent(s).
- Your filing status is any status except married filing separately.
- Your modified adjusted gross income (AGI) is not more than: $80,000 if single, head of household, or qualifying widow(er); $160,000 if married filing jointly. Use lines 1 through 3 of the Tuition and Fees Deduction Worksheet to figure your modified AGI. You, or your spouse if filing jointly, cannot be claimed as a dependent on someone's (such as your parent's) 2006 tax return.
- You are not claiming an education credit for the same student. See the instructions for Form 8863.
- You were a U.S. citizen or resident alien for all of 2005 or you were a nonresident alien for any part of 2006 and you are filing a joint return.
How the deduction is figured. Use the Tuition and Fees Deduction Worksheet to figure your deduction.
Exception. Use Worksheet 6-1 in Publication 970 instead of the worksheet below to figure your tuition and fees deduction if you file Form 2555, 2555-EZ, or 4563, or you exclude income from sources within Puerto Rico.
Qualified tuition and fees. Qualified tuition and fees are amounts paid in 2006 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution during 2006. Tuition and fees paid in 2006 for an academic period that begins in the first 3 months of 2007 can also be used in figuring your deduction. Amounts paid include those paid by credit card or with borrowed funds. An eligible educational institution includes most colleges, universities, and certain vocational schools.
Qualified tuition and fees do not include amounts paid for the following items.
- Room and board, insurance, medical expenses (including student health fees), transportation, or other similar personal, living, or family expenses.
- Course-related books, supplies, equipment, and nonacademic activities, except for fees required to be paid to the institution as a condition of enrollment or attendance.
- Any course involving sports, games, or hobbies, unless such course is part of the student's degree program.
Qualified tuition and fees must be reduced by the following benefits.
- Excludable U.S. series EE and I savings bond interest from Form 8815.
- Nontaxable qualified tuition program earnings.
- Nontaxable earnings from Coverdell education savings accounts.
- Any scholarship, educational assistance allowance, or other payment (but not gifts, inheritances, etc.) excluded from income.
How the deduction is claimed. You must file Form 1040 to take this deduction. The deduction is claimed on Form 1040, line 35, “Domestic production activities deduction.” Enter "T" on the line to the left of that line entry if claiming the deduction for tuition and fees, or "B" if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering "B," you must attach a statement with a breakdown of the amount claimed for each deduction.
More information. See chapter 6 of Publication 970 for more information about this deduction.
Tuition and Fees Deduction Worksheet
Before you begin:
- Figure any write-in adjustments to be entered on the dotted line next to Form 1040, line 36.
- Be sure you read the Exception under How the deduction is figured to see if you can use this worksheet instead of Worksheet 6-1 in chapter 6 of Publication 970.
1. Enter the amount from Form 1040, line 22.
1._______________
2. Enter the total from Form 1040, lines 23 through 33, jury duty pay included on line 34, plus any write-in adjustments you entered on the dotted line next to line 36.
2._______________
3. Subtract the amount on line 2 from the amount on line 1. If the result is more than $80,000 ($160,000 if married filing jointly), you cannot take the deduction for tuition and fees.
3._______________
4. Tuition and fees deduction . Is the amount on line 3 more than $65,000 ($130,000 if married filing jointly)?
- If yes , enter the total qualified tuition and fees you paid in 2006. Do not enter more than $2,000. Also, include this amount on Form 1040, line 35 (see, How the deduction is claimed).
- If no, enter the total qualified tuition and fees you paid in 2006. Do not enter more than $4,000. Also, include this amount on Form 1040, line 35 (see, How the deduction is claimed)
4._______________
Note. Do not include this amount in figuring any other deduction on your return (such as on Schedule A, C, E, etc.).
Tax Years 2007 and Later
Earned Income Amount for Additional Child Tax Credit
For 2007, the minimum earned income amount used to figure the additional child tax credit has increased to $11,750.
Adoption
Adoption credit. Beginning in 2007, the credit allowed for an adoption of a child with special needs is $11,390 and the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $11,390. The credit begins to phase out if you have modified adjusted gross income of $170,820 or more and is completely phased out if you have modified adjusted gross income of $210,820 or more.
Adoption assistance program. Beginning in 2007, you may be able to exclude up to $11,390 from your gross income for qualifed adoption expenses paid or incurred by your employer under a qualified adoption assistance program in connection with your adoption of an eligible child. This income exclusion starts to phase out if your modified adjusted gross income is $170,820 or more and is completely phased out if your modified adjusted gross income is $210,820 or more.
Alternative minimum tax
The following changes to the AMT went into effect for 2007.
AMT exemption amount decreased. The AMT exemption amount has decreased to $33,750 ($45,000 if married filing jointly or qualifying widow(er); $22,500 if married filing separately).
Exemption amount for a child. The minimum exemption amount for a child under age 18 has increased to $6,300.
Hurricane Katrina additional exemption expired. The additional exemption for taxpayers who provide housing for a person displaced by Hurricane Katrina has expired. Therefore, the additional exemption amount (formerly line 6 of Form 8914) is no longer allowable for the AMT.
Certain credits no longer allowed against the AMT. The credit for child and dependent care expenses, credit for the elderly or the disabled, education credits, residential energy credits, mortgage interest credit, and the District of Columbia first-time homebuyer credit are no longer allowed against the AMT, and a new tax liability limit applies. This limit is your regular tax minus any tentative minimum tax (figured without any AMT foreign tax credit).
Archer MSA Limits Increased
For Archer MSA purposes for 2007, the minimum annual deductible of a high deductible health plan increases to $1,900 ($3,750 for family coverage). The maximum annual deductible of a high deductible health plan increases to $2,850 ($5,650 for family coverage). The maximum out-of-pocket expenses limit increases to $3,750 ($6,900 for family coverage).
Restrictions on Charitable Contributions
All cash contributions made in tax years beginning after August 17, 2006, to any qualified charity must be supported by a dated bank record or a dated receipt.
Earned Income Credit Amounts Increase
Earned income amount. The maximum amount of income you can earn and still get the credit is higher for 2006 than it is for 2005. You may be able to take the credit for 2007 if:
- You have more than one qualifying child and you earn less than $37,783 ($39,783 if married filing jointly),
- You have one qualifying child and you earn less than $33,241 ($35,241 if married filing jointly), or
- You do not have a qualifying child and you earn less than $12,590 ($14,590 if married filing jointly).
The maximum amount of adjusted gross income (AGI) you can have and still get the credit has also increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.
Investment income amount. The maximum amount of investment income you can have in 2007 and still get the credit increases to $2,900.
Income Limits Increased for Reduction of Education Savings Bond Exclusion
For 2007, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $98,400 and $128,400. You cannot take the deduction if your MAGI is $128,400 or more. For 2006, the exclusion phased out between $94,700 and $124,700.
For all other filing statuses, your interest exclusion is phased out if your MAGI is between $65,600 and $80,600. You cannot take a deduction if your MAGI is $80,600 or more. For 2006, the exclusion phased out between $63,100 and $78,100. For more information, see chapter 9 in Publication 970, Tax Benefits for Education.
Exemption Amount Increased
The amount you can deduct for each exemption has increased from $3,300 in 2006 to $3,400 in 2007.
You may lose part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2007, the beginning and ending phaseout amounts are:
| Filing Status | Adjusted Gross Income -- Beginning of Phaseout | Adjusted Gross Income -- Maximum Phaseout |
|---|---|---|
| Single | $156,400 | $278,900 |
| Married filing jointly and Surviving spouse | $234,600 | $357,100 |
| Married filing separately | $117,300 | $178,550 |
| Head of household | $195,500 | $318,000 |
If your adjusted gross income is within the range of the phaseout amounts for your filing status, use the Deduction for Exemptions Worksheet in the Form 1040 instructions to figure the amount you can deduct for exemptions. The exemption amount for taxpayers with adjusted gross income in excess of the maximum phaseout amount is $1,133 for 2007.
Income Limits Increased for Hope and Lifetime Learning Credits
For 2007, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $47,000 and $57,000 ($94,000 and $114,000 if you file a joint return). You cannot claim an education credit if your MAGI is $57,000 or more ($114,000 or more if you file a joint return). This is an increase from the 2006 limits of $45,000 and $55,000 ($90,000 and $110,000 if filing a joint return). For more information, see chapters 2 and 3 in Publication 970, Tax Benefits for Education.
Limit on Itemized Deductions Increases
If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2007, this amount is increased to $156,400 ($78,200 if married filing separately). See Publication 505 for more information on figuring the amount you can deduct.
Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion
The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2007 to $260 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.
Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.
- The cost of qualified long-term care services during the period.
- The dollar amount for the period ($260 per day for any period in 2007).
For 2006, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums, up to the amounts shown below, as medical expenses on Schedule A (Form 1040).
- Age 40 or under - $280.
- Age 41 to 50 - $530.
- Age 51 to 60 - $1,060.
- Age 61 to 70 - $2,830.
Note. The limit is for each person.
Medicare Part D Premiums Deductible as Medical Expenses
Medicare Part D is a voluntary prescription drug insurance program for persons with Medicare A or B. You can include as a medical expense premiums you pay for Medicare D.
Social Security and Medicare Taxes
For 2007, the employer and employee will continue to pay:
- 6.2% each for social security tax (old-age, survivors, and disability insurance), and
- 1.45% each for Medicare tax (hospital insurance).
Wage limits. For social security tax, the maximum amount of 2007 wages subject to the tax is $97,500. For Medicare tax, all covered 2007 wages are subject to the tax.
Standard Deduction Amount Increased
The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2007 than it was for 2006. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer.
The basic standard deduction amounts for 2007 are:
- Head of household $7,850
- Married taxpayers filing jointly and qualifying widow(er)s $10,700
- Married taxpayers filing separately $5,350
- Single $5,350
The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $850 or the sum of $300 and the individual's earned income.
For 2007, the additional standard deduction amount for a person who is age 65 or older or blind is $1,050. If you are single and not a surviving spouse, the additional standard deduction amount is $1,300.
Standard Mileage Rates
Beginning January 1, 2007, the allowable deductions for the standard mileage rate are as follows:
- Business miles. The standard mileage rate for the cost of operating your car increases to 48.5 cents a mile for all business miles driven.
- Charitable services. The standard mileage rate allowed for use of your car when you use your car to provide charitable services to a charitable organization remains at 14 cents a mile.
- Medical reasons. The standard mileage rate allowed for use of your car for medical reasons increases to 20 cents a mile.
- Moving. The standard mileage rate for determining moving expenses increases to 20 cents a mile.
2007 Tax Rate Schedules
The 2007 tax rate schedules are provided so that you can compute your estimated tax for 2007.
Page last updated -- 05-FEB-2007
