Income Tax Changes 2006

For those of you preparing for the tax year 2006, we thought it would be helpful to summarize all of the income tax changes in 2006.   We're going to start off with good news again because as was the case in 2005, April 15th falls on a weekend.  That means the official filing date should be April 16, 2006.  But that's just for starters.

Social Security and Medicare

As was the case in 2005, there really aren't many changes to Social Security and Medicare other than the fact the wages subject to tax keeps increasing.  In 2006 the Medicare tax stays at 1.45% and Social Security remains at 6.20%.

The bad news is that it's getting increasingly harder to "beat" the wage limit.  In 2006, the limit or maximum has been raised $4,200 to $94,200.  That's an increase of nearly 4.7% - much higher than inflation or the cost of living increase you might get from your employer.

Standard Deduction Amounts

If you don't itemize your tax deductions, we've got more good news from the IRS.  In most cases, the standard deduction for those taxpayers is higher for 2006 than it was for 2005.  The exact amount depends on your filing status, if you are 65 or older, blind, or if an exemption can be claimed for you by another taxpayer.

That being said, the standard deduction amounts for 2006 include:

• Single - $5,150
• Married filing separately - $5,150
• Head of household - $7,550
• Married taxpayers filing jointly / qualifying widow(er)s  - $10,300
• Married taxpayers filing separately - $5,150

Exemptions Increase Again

The amount you can deduct for each exemption has increased again in 2006.  The 2005 value of $3,200 has increased to $3,300 in 2006.  This deduction has a phase-out which depends on your filing status.  The phase-out schedule begins at the following levels in 2006:

• For married persons filing separately - $112,875
• For single individuals - $150,500
• For heads of households - $188,150
• For married persons filing jointly or qualifying widow(er)s - $225,750

Mileage Deduction Rates

In 2006, the IRS is telling us that the mileage deduction rates are decreasing.  That's because the cost of gasoline at the pump has decreased.  On the positive side, there remains a higher mileage rate for those of you supporting the charities providing service to Hurricane Katrina.  The following table outlines the mileage deduction rates for the tax year 2006:

Mileage Rates 2006

We've got more detail on this topic in our article entitle - Mileage Reimbursement Rate.

Increase to Earned Income Credit

In 2006, the maximum amount of income you can earn and still qualify for the earned income credit has increased.  That means you will be eligible to claim this tax credit in 2006 if you can meet the following requirements:

• You do not have a qualifying child and earn less than $12,120 or $14,120 and are married and filing jointly.
• You have one qualifying child and you earn less than $32,001 or $34,001 if filing jointly.
• If you have two or more qualifying children and earn less than $36,348 or $38,348 if married filing jointly.

In addition, the maximum investment income you can have in 2006 and still take this credit has been increased to $2,800.

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