| Taxes 2006: Year of the tax credit |
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Thanks to this
tax change, the IRS can now
collect taxes on more youth-held
investment earnings based on
their parents' tax rates. Government
accountants estimate the age
change will raise more than
$2 billion throughout the next
decade, primarily from upper-income
families.
Even more distressing for affected taxpayers, when the law making the change was enacted in May, the new kiddie tax rules were made retroactive to the beginning of 2006. That means families who had savings, typically to pay for higher education costs, in a child's name so that the earnings would be taxed as the child's lower rate now are facing taxes on the money at the parents' higher tax bracket.
"A lot of
good planning for college has
come undone," says Lasser
spokeswoman LeValley. "When
people settle up their portfolio
at the end of the year, they'll
need to recheck how much they
will owe in kiddie tax. They
might have to sell more in the
portfolio to cover additional
taxes they thought they wouldn't
have to pay."
Some good education savings news surfaced, however, in the new pension law when lawmakers used that bill to remove a tax concern that had been worrying folks who had been putting money into 529 college savings plans. Earlier legislation allowed money in this account to be withdrawn tax-free to pay for continued schooling, but that was set to expire in a few years. Now, thanks to the Pension Protection Act of 2005, distributions from these tax-free college savings plans are permanently tax-free.
A more demanding tax collector
The tougher kiddie tax is just one part of increased enforcement efforts authorized in 2006.
The Pension Protection Act included several tax provisions designed to make taxpayers more accountable, especially in the area of charitable giving. Of immediate concern is the new requirement that any clothing or household goods donated to a nonprofit be in good shape. This condition applies to items donated on Aug. 17 and later.
Not only will
this help charities, who no
longer will have to sort through
"gifts" that, in effect,
are worthless, but lawmakers
hope the requirement, and potential
that an IRS examiner will question
some donation claims, will ensure
that taxpayers are not inflating
the items' values in order to
claim exaggerated deductions.
And even more
enhanced enforcement efforts
will take effect next year.
You'll find details in Bankrate's
2007 tax trends and best
moves.
Unfinished business
While 2006 was an active year for tax legislation, election year politics also proved to be a roadblock for some measures.
Multiple attempts to permanently repeal the estate tax fell short, doomed in part by partisan debates over the fairness of the tax. Advocates of repeal argue that the tax is an unfair burden on small businesses and amounts to double taxation of assets. Lawmakers who want to keep the levy contend that it affects only the most wealthy taxpayers and even then, that segment represents only a very small percentage (less than 2 percent) of taxpayers who can afford to pay or restructure their estates to minimize its costs.
Whether the contentious
estate tax topic is addressed
later this year depends to some
extent upon the post-election
partisan makeup of Capitol Hill.
Other still-pending tax measures, however, are likely to receive a warmer Washington reception, regardless of the election results.
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| They
include 3 popular tax breaks: |
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Each of these
expired last Dec. 31. But Washington
and tax watchers expect them
to be resurrected and made applicable
to allowable expenses incurred
in all of 2006 before the end
of the year. Stay tuned to tax
news sources such as Bankrate.com
for the latest on these 2006,
and other, tax proposals.
Freelance writer Kay Bell writes Bankrate's tax stories. She blogs daily at Don't Mess with Taxes from her home in Austin, Texas
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