|Taxes 2006: Year of the tax credit
|By Kay Bell Bankrate.com
2006 was the
year of tax credit. That's definitely
a good thing for taxpayers,
since credits are a more valuable
tax-cutting tool than deductions.
A deduction will
reduce your taxable income amount,
which usually means a lower
tax bill, but a credit is taken
after you figure what you owe
the IRS and it reduces that
bill dollar for dollar.
The year began
with a batch of tax credits
for those homeowners who choose
to make energy-efficient improvements
to their residences.
Another energy-saving tax break was created in 2006 for motorists. Purchasers of IRS-approved hybrid vehicles found that this year the old deduction was converted to a tax credit.
The only problem here is that the credit varies by auto make and model and, depending upon your timing, a purchase of particularly popular hybrid could mean a reduced tax credit.
Retirement account enhancements
In August, Congress finally
approved, and the president
signed into law, the Pension
Protection Act of 2005. This
comprehensive pension reform
measure focuses primarily on
company pensions, but it also
contains some welcome tax news
for retirement savings that
are controlled by individual
Allowable contributions to IRAs, both Roth and traditional, had been increasing for the last few years. But they, too, are set to expire in 2010. Now those higher limits will continue and be indexed for inflation.
The Pension Protection
Act also allows older IRA holders
transfer money from such
accounts to a charity. For individuals
with traditional IRAs, this
option will allow them to avoid
paying taxes on the distribution.
The change allows eligible taxpayers
(those age 70½ and up)
to meet existing requirement
minimum distribution requirements,
says Donna LeValley, tax attorney
and editor of the annual "J.K.
Lasser" guide to taxes,
as well as let these taxpayers
avoid counting the charitable
transfer as taxable income.
Even better, says LeValley, this is a "positive midyear change" for taxpayers who might have found their wish to make a large donation curbed because it accounted for more than tax law allows. In most cases, a donor cannot give amounts that come to more than 50 percent of his or her adjusted gross income. That limit does not apply to the new direct IRA charitable transfer option.
trend to reward taxpayers with
credits, the pension law continues
the Saver's Tax Credit,
which provides more tax savings
for lower-income workers who
put some of their earnings into
retirement accounts, including
IRAs and 401(k)s.
The credit was scheduled to
expire this Dec. 31 but now
is a permanent part of the tax
Investment tax give and take
Tax action in 2006 for investors, however, was a bit mixed.
In general, those who rely on investment income are happy that Washington extended until the end of 2010 the 15 percent rate (10 percent for lower-income taxpayers) on qualified dividends and capital gains.
But young investors lost a tax break. Previously, when an account holder turned 14, earnings from an investment in the child's name were taxed at the youth's tax rate. Now, however, the kiddie tax, which requires a child's investment income be taxed at the parents' usually higher tax rate, applies to accounts held in the names of investors until the youngster turns 18.