Additional 2006 Tax Tips and Insights

 [Editor's note: The following excerpts provide useful additional information on the Tax Increase Prevention and Reconciliation Act of 2005, signed into law on May 17, 2006. These tips nicely complement the coverage in this edition's tax update article by Ron Seigneur.]

More About the AMT

The Alternative Minimum Tax (AMT) system does not allow several of the itemized tax deductions allowable under the regular tax system ' such as state, local and property tax or most miscellaneous deductions. In addition, some deductions, such as medical expenses, are subject to different income limitations based on an individual's adjusted gross income. The AMT also taxes various tax preference items, such as tax-exempt municipal bond interest associated with 'private activity' bonds that are not taxed under the regular tax system. Finally, there are timing differences that are includable at different times under each tax system. An example of a timing difference is depreciation taken on business property.

The Tax Increase Prevention and Reconciliation Act of 2005 provides a 1-year temporary fix to the problem of having an estimated 15 million additional taxpayers subject to the AMT in 2006. For 2006 only, the AMT exemption amounts are increased to $62,550 for married couples filing a joint return and surviving spouses, $42,500 for single taxpayers and $31,275 for married individuals filing separately. The 2005 exemption amounts were $58,000, $40,250 and $29,000 respectively. The increase in the 2006 exemption amounts is even more dramatic in that before passage of the new law for 2006, they were scheduled to be rolled back to the 2000 amounts ($45,000 for married couples filing a joint return and surviving spouses, $33,750 for single taxpayers and $22,500 for married individuals filing separately).

The increased exemption amounts should benefit those middle-income taxpayers whose financial situation remained the same in 2006 as in 2005 and were slightly into AMT in 2005. However, since the phase-out rules relating to the AMT exemption amounts have not been changed by the new legislation, most wealthy taxpayers will not be affected by the tax law change. For 2006, the AMT exemption amount is completely phased out when an individual's alternative minimum taxable income is $382,500 for married couples filing a joint return (or qualifying widowers), $191,000 for married individuals filing separately, and $273,500 for single taxpayers.

The Act also extends, through 2006, the provision allowing individual taxpayers to offset non-refundable personal tax credits against their AMT liability as well as their regular tax liability. Nonrefundable personal tax credits include the dependent care credit, child tax credit and education credits such as the Hope and Lifetime Learning credits.

More About the 'Kiddie Tax'

The 'Kiddie tax' begins to apply when the child has more than $1700 in unearned income, such as interest and dividends, with the excess amount taxed at the parents' highest marginal tax rate. However, a child's earned income, such as wages, is taxed at the child's own rate. The new law does not apply to children who are married and file a joint tax return. (See the sidebar for tips on how to reduce a child's tax liability.)

Information Reporting for Tax-Exempt Interest

Beginning in 2006, interest paid on tax-exempt bonds will be subject to information reporting in the same manner as taxable interest.

Repeal of Federal Excise Tax On Long-Distance Calls

The U.S. Treasury abolished the excise tax on long-distance phone calls effective July 31, 2006. Refunds will be issued for the past 3 years for telephone excise tax that was billed after Feb. 28, 2003, and before Aug. 1, 2006.

This decision, which applies to cell phones and Internet phone service as well as some land lines, will generate approximately $15 billion in refunds for individuals and businesses on their 2006 tax returns.

Internal Revenue Service Notice 2006-50 provides guidance on how to request the refunds. Individual taxpayers will be given the option of getting a safe harbor refund, presumably around $20, on their 2006 income tax returns without providing documentation of the actual amount of taxes paid. However, law firms doing business as P.C.s, Partnerships or LLCs must apply for a refund of the actual taxes paid on their 2006 tax returns irrespective of the fact that refund claims may have been filed previously. The refund will be taxable, as presumably it was deducted as an ordinary and necessary expense in prior years.

Sidebar:
Planning Idea to Reduce Child's Tax Liability

Taxpayers may be entitled to a child tax credit of up to $1000 per qualifying child or grandchild. This credit applies to children under age 17 at the end of the taxable year. Since the credit starts phasing out for married-filing-joint taxpayers with modified adjusted gross income over $110,000, it is not beneficial for most high-income earners.

However, Congress enacted legislation in 2004 streamlining the definition of 'child' for five different tax breaks, including the child tax credit. The new definition of 'child' includes brothers and sisters, thereby allowing one sibling to claim another as a qualifying child for purposes of the child tax credit, beginning with the 2005 tax year.

' Richard H. Stieglitz and Barry J. Lieberman

 [Editor's note: The following excerpts provide useful additional information on the Tax Increase Prevention and Reconciliation Act of 2005, signed into law on May 17, 2006. These tips nicely complement the coverage in this edition's tax update article by Ron Seigneur.]

More About the AMT

The Alternative Minimum Tax (AMT) system does not allow several of the itemized tax deductions allowable under the regular tax system ' such as state, local and property tax or most miscellaneous deductions. In addition, some deductions, such as medical expenses, are subject to different income limitations based on an individual's adjusted gross income. The AMT also taxes various tax preference items, such as tax-exempt municipal bond interest associated with 'private activity' bonds that are not taxed under the regular tax system. Finally, there are timing differences that are includable at different times under each tax system. An example of a timing difference is depreciation taken on business property.

The Tax Increase Prevention and Reconciliation Act of 2005 provides a 1-year temporary fix to the problem of having an estimated 15 million additional taxpayers subject to the AMT in 2006. For 2006 only, the AMT exemption amounts are increased to $62,550 for married couples filing a joint return and surviving spouses, $42,500 for single taxpayers and $31,275 for married individuals filing separately. The 2005 exemption amounts were $58,000, $40,250 and $29,000 respectively. The increase in the 2006 exemption amounts is even more dramatic in that before passage of the new law for 2006, they were scheduled to be rolled back to the 2000 amounts ($45,000 for married couples filing a joint return and surviving spouses, $33,750 for single taxpayers and $22,500 for married individuals filing separately).

The increased exemption amounts should benefit those middle-income taxpayers whose financial situation remained the same in 2006 as in 2005 and were slightly into AMT in 2005. However, since the phase-out rules relating to the AMT exemption amounts have not been changed by the new legislation, most wealthy taxpayers will not be affected by the tax law change. For 2006, the AMT exemption amount is completely phased out when an individual's alternative minimum taxable income is $382,500 for married couples filing a joint return (or qualifying widowers), $191,000 for married individuals filing separately, and $273,500 for single taxpayers.

The Act also extends, through 2006, the provision allowing individual taxpayers to offset non-refundable personal tax credits against their AMT liability as well as their regular tax liability. Nonrefundable personal tax credits include the dependent care credit, child tax credit and education credits such as the Hope and Lifetime Learning credits.

More About the 'Kiddie Tax'

The 'Kiddie tax' begins to apply when the child has more than $1700 in unearned income, such as interest and dividends, with the excess amount taxed at the parents' highest marginal tax rate. However, a child's earned income, such as wages, is taxed at the child's own rate. The new law does not apply to children who are married and file a joint tax return. (See the sidebar for tips on how to reduce a child's tax liability.)

Information Reporting for Tax-Exempt Interest

Beginning in 2006, interest paid on tax-exempt bonds will be subject to information reporting in the same manner as taxable interest.

Repeal of Federal Excise Tax On Long-Distance Calls

The U.S. Treasury abolished the excise tax on long-distance phone calls effective July 31, 2006. Refunds will be issued for the past 3 years for telephone excise tax that was billed after Feb. 28, 2003, and before Aug. 1, 2006.

This decision, which applies to cell phones and Internet phone service as well as some land lines, will generate approximately $15 billion in refunds for individuals and businesses on their 2006 tax returns.

Internal Revenue Service Notice 2006-50 provides guidance on how to request the refunds. Individual taxpayers will be given the option of getting a safe harbor refund, presumably around $20, on their 2006 income tax returns without providing documentation of the actual amount of taxes paid. However, law firms doing business as P.C.s, Partnerships or LLCs must apply for a refund of the actual taxes paid on their 2006 tax returns irrespective of the fact that refund claims may have been filed previously. The refund will be taxable, as presumably it was deducted as an ordinary and necessary expense in prior years.

Sidebar:
Planning Idea to Reduce Child's Tax Liability

Taxpayers may be entitled to a child tax credit of up to $1000 per qualifying child or grandchild. This credit applies to children under age 17 at the end of the taxable year. Since the credit starts phasing out for married-filing-joint taxpayers with modified adjusted gross income over $110,000, it is not beneficial for most high-income earners.

However, Congress enacted legislation in 2004 streamlining the definition of 'child' for five different tax breaks, including the child tax credit. The new definition of 'child' includes brothers and sisters, thereby allowing one sibling to claim another as a qualifying child for purposes of the child tax credit, beginning with the 2005 tax year.

' Richard H. Stieglitz and Barry J. Lieberman