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Tax Year 2006 - United States Tax Changes or Enhancements

By IRS US Tax Service

17 March, 2007

Tax Year 2006 - United States Tax Changes or Enhancements

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).

 

Charitable Contributions
The following paragraphs explain the changes to charitable contributions for 2006. For details, see Publication 526, Charitable Contributions.

Standard mileage rate related to Hurricane Katrina. If you used your car in giving services to a charitable organization to provide relief related to Hurricane Katrina, the standard mileage rate for 2006 is 32 cents a mile.

Clothing and household items.  You cannot take a deduction for clothing or household items you donate after August 17, 2006, unless the clothing or household items are in good used condition or better.

Limit on qualified conservation contributions increased. The limit on the deduction for a qualified conservation contribution has been increased from 30% of adjusted gross income (AGI) to 50% of AGI. The limit is 100% of AGI for certain farmers and ranchers.

Taxidermy property.  New rules limit deductions for contributions of certain taxidermy property after July 25, 2006. Generally, the deduction is limited to the property's basis or fair market value, whichever is less.

Recapture of deductions for contributions of property.  Part or all of the deduction for contributions of tangible personal property after September 1, 2006, will be recaptured, or the amount of the deduction limited, if the recipient organization sells the property within 3 years and does not certify its exempt use.

Fractional interest in property.  New rules apply to donations after August 17, 2006, of a fractional interest in tangible personal property. Recapture of the charitable contribution deduction is required in certain cases. If recapture is required, you also will have to pay interest and an additional tax that is 10% of the amount recaptured.

Easements on buildings in historic districts.  You cannot claim a deduction for a contribution of an easement on a building in a registered historic district made after July 25, 2006, unless the contributed interest includes restrictions preserving the entire exterior of the building (including front, sides, rear, and height) and prohibiting any change to the exterior of the building inconsistent with its historical character.

If you claim a deduction for this type of contribution in a tax year beginning after August 17, 2006, you must include with your return a qualified appraisal, photographs of the building's exterior, and a description of all restrictions on development of the building.

Penalty for overstatement valuation.  The penalty for overstating the value or adjusted basis of donated property is 20% of the amount by which you underpaid your tax because of the overstatement, if:

The value or adjusted basis claimed on your return is 200% (150% for returns filed after August 17, 2006) or more of the correct amount, and
You underpaid your tax by more than $5,000 because of the overstatement.
The penalty is 40%, rather than 20%, if the value or adjusted basis claimed on your return is 400% (200% for returns filed after August 17, 2006) or more of the correct amount.

Qualified charitable distributions.  If you were at least age 70 ½ when you had a qualified charitable distribution (QCD) from your individual retirement arrangement (IRA) made directly by the trustee to a charitable organization, the QCD may be nontaxable. However, you cannot claim a charitable contribution deduction for the QCD.

Food inventory.  The special rules that apply to contributions of food inventory were due to expire at the end of 2005 but have been extended to contributions made in 2006 and 2007.

Reduction of qualified conservation contribution for rehabilitation credit.  If you make a qualified conservation contribution after August 17, 2006, and claimed the rehabilitation credit for a building on the donated property for any of the 5 tax years before the year of the contribution, your deduction is reduced.

Temporary suspension of 50% limit expired.  For 2006, the temporary suspension of the 50% of adjusted gross income limit has expired. This means you can no longer elect to treat contributions by cash or check as "qualified contributions" on Form 1040 (Schedule A). Qualified contributions for which you made this election were not subject to the 50% limit or the overall limit on itemized deductions.

Conflict-of-Interest Sales
If you are a judicial officer and you sell property at a gain after December 20, 2006, according to a certificate of divestiture issued by the Judicial Conference of the United States (or its designee) and purchase replacement property (permitted property) within 60 days after the sale, you may elect to defer part or all of the realized gain.

This election also applies to sales by certain persons related to the judicial officer and to sales by trustees of certain trusts in which the judicial officer or related person has a beneficial interest.

Judicial officer. Judicial officers are the following.

Chief Justice of the United States.
Associate Justices of the Supreme Court.
Judges of the:

United States courts of appeals,
United States district courts, including the district courts in Guam, the Northern Mariana Islands, and the Virgin Islands,
Court of Appeals for the Federal Circuit,
Court of International Trade,
Tax Court,
Court of Federal Claims,
Court of Appeals for Veterans Claims,
Court of Appeals for the Armed Forces, and
Any court created by an Act of Congress, the judges of which are entitled to hold office during good behavior.
Permitted property. Permitted property is any obligation of the United States or any diversified investment fund approved by regulations issued by the Office of Government Ethics.

Reporting of sales. Report these sales on Part IV of Form 8824, Like-Kind Exchanges.

You can also see Form 8824 for additional information.

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.

 

District of Columbia Emancipation Day
Under a federal statute enacted decades ago, holidays observed in the District of Columbia have an impact nationwide, not just in D.C. Under recently enacted city legislation, April 16 is a holiday in the District of Columbia. The IRS became aware of the intersection of the national filing day and the local observance of the new Emancipation Day holiday after most forms and publications for the current tax filing season went to print.

Any IRS form, instruction or publication that currently shows an "April 16, 2007" due date should now be read as "April 17, 2007." The extended time to file and pay is because April 15 falls on a Sunday in 2007 and the following day, Monday, April 16, is Emancipation Day, a legal holiday in the District of Columbia.

Emancipation Day will not impact filing deadlines next year because April 15 is on Tuesday in 2008. The normal deadline will apply. The next year that Emancipation Day could affect filing deadlines is 2011.

The April 17, 2007 deadline will apply to any of the following:

2006 federal individual income tax returns, whether filed electronically or on paper.
Requests for an automatic six-month tax-filing extension, whether submitted electronically or on Form 4868.
Tax year 2006 balance due payments, whether made electronically (direct debit or credit card) or by check.
Individual estimated tax payments for the first quarter of 2007, whether made electronically or by check.
Individual refund claims for tax year 2003, where the regular three-year statute of limitations is expiring.
Calendar-year 2006 partnership returns (Form 1065 and Form 1065-B).
Annual information returns (Form 990) and unrelated business income tax returns (Form 990-T) for tax-exempt organizations with a fiscal year ending on Nov. 30, 2006.
Calendar-year Form 990-T for certain employee trusts, retirement plans, and education saving plans.
Extension requests for any return.
The March tax deposit for employers (generally, small businesses) required to deposit withholding taxes on a monthly basis.
Withholding-tax deposits for larger employers, subject to the next day deposit rule.
Other tax-filing and payment requirements affected by this change are described in IRS Publication 509, Tax Calendars for 2007.

 

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.

 

Earned Income Credit Amounts Increase
The following paragraphs explain the changes to the credit for 2006. For details, see Publication 596.

Amount of credit increased. The maximum amount of the credit has increased. The most you can get is:

$2,747 if you have one qualifying child,
$4,536 if you have more than one qualifying child, or
$412 if you do not have a qualifying child.
Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased. You may be able to take the credit if:

You have more than one qualifying child and you earned less than $36,348 ($38,348 if married filing jointly),
You have one qualifying child and you earned less than $32,001 ($34,001 if married filing jointly),
You do not have a qualifying child and you earned 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 also has 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 increased. The maximum amount of investment income you can have and still get the credit has increased to $2,800.

Advance payment of the credit. If you get advance payments of the credit from your employer with your pay, the total advance payments you get during 2006 can be as much as $1,648.

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 $121,850.

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.

Electric and Clean-Fuel Vehicles
The clean-fuel vehicle and refueling property deduction expired for vehicles placed in service in 2006.

The qualified electric vehicle credit is reduced by 75% for vehicles placed in service in 2006, and no credit will be allowed after 2006.

 

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 phase-out begins depends on your filing status. For 2006, the phase-out 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 and Housing Exclusions
The following changes to the foreign earned income and housing exclusions went into effect for 2006. For more information, see Form 2555, Foreign Earned Income, and its instructions.

Exclusion amount. The maximum foreign earned income exclusion has increased to $82,400.

Housing expenses - maximum amount. The amount of qualified housing expenses eligible for the housing exclusion and housing deduction is now limited. The amount of the limit depends on the location of your foreign tax home. For more information, see Form 2555, Foreign Earned Income, and its instructions.

Housing expenses - base amount. The base housing amount (Form 2555, line 32) has increased to $36.12 per day, or $13,184 for an entire calendar year.

Determination of tax on income not excluded. If you claim the foreign earned income exclusion, the housing exclusion, or both, you must determine the tax on your nonexcluded income using the tax rates that would have applied had you not claimed the exclusions. See the instructions for Form 1040 and complete the Foreign Earned Income Tax Worksheet to determine the amount of tax to enter on Form 1040, line 44. If you must attach Form 6251 to your return, use the Foreign Earned Income Tax Worksheet provided in the instructions for Form 6251.

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.

Investment Income of Child Under Age 18
A child's investment income may be subject to tax at the parent's tax rate if the child is under age 18 (previously under age 14) at the end of 2006 and had investment income of more than $1,700 (previously $1,600). For details, see Publication 929, Tax Rules for Children and Dependents.

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.

Sale of Main Home by Employees of the Intelligence Community
If you are an employee of the intelligence community, you may be able to exclude from income a gain from selling your main home, even if you did not live in it for the required 2 years during the 5-year period ending on the date of sale

You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty as an employee of the intelligence community at a duty station located outside of the United States. This choice applies to any sale of a main home after December 20, 2006, and is now included under a special rule that already provides similar benefits to members of the uniformed services and Foreign Service of the United States.

For more information, see Publication 523, Selling Your Home.

 

Social Security and Medicare Taxes
The maximum amount of wages subject to the social security tax for 2006 is $94,200. There is no limit on the amount of wages subject to the Medicare tax.

Standard Mileage Rates
Business-related mileage.  For 2006, the standard mileage rate for the cost of operating your car for business use is 44 ½ cents per mile.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Medical- and move-related mileage.  For 2006, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 18 cents per mile. See Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521.

Charitable-related mileage.  For 2006, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.

Hurricane Katrina.  The special standard mileage rate in effect for 2006 for the cost of operating your car for providing charitable services solely related to Hurricane Katrina is 32 cents per mile.

State and Local General Sales Taxes
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.

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.).

Notice - Waiver of estimated tax penalty for certain taxpayers living abroad
If you claim the foreign earned income exclusion or housing exclusion on Form 2555 or Form 2555-EZ, the Tax Increase Prevention and Reconciliation Act of 2005 made changes to the tax law that may affect your 2006 tax liability. The IRS will waive the 2006 estimated tax penalty to the extent the underpayment of any installment is attributable to changes made by the new law.

For more details, see Notice 2007-16 ( download version - PDF or online version - HTML).

To request a waiver, follow the instructions under Waiver of Penalty in the 2006 Instructions for Form 2210.

 

Tax Years 2007 and Later

2007 Tax Rate Schedules
The 2007 tax rate schedules are provided so that you can compute your estimated tax for 2007.

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 qualified 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).

Capital Asset Treatment for Self-Created Musical Works
Musical compositions and copyrights in musical works are generally not capital assets. However, you can elect to treat these types of property as capital assets if you sell or exchange them in tax years beginning after May 17, 2006, and:

Your personal efforts created the property, or
You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced.

Charitable Contributions
New recordkeeping requirements for cash contributions.  You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communication must include the name of the charity, date of the contribution, and amount of the contribution. For more information, see Publication 526, Charitable Contributions.

Contributions to donor advised funds.  You cannot deduct a contribution to a donor advised fund after February 13, 2007, if the sponsoring organization is a war veterans' organization, a fraternal society, or a nonprofit cemetery company. There are also other circumstances in which you cannot deduct your contribution to a donor advised fund. Generally, a donor advised fund is a fund or account in which a donor can, because of being a donor, advise the fund how to distribute or invest amounts held in the fund. For details, see Internal Revenue Code section 170(f)(18).

Filing fee for easements on buildings in historic districts.  A new $500 filing fee must be paid for each qualified conservation contribution after February 12, 2007, that is an easement on a building in a registered historic district, if the claimed deduction is more than $10,000. See Form 8283-V, Payment Voucher for Filing Fee Under Section 170(f)(13).

Credit for Prior Year Minimum Tax
If you have any unused minimum tax credit carryforward from 2003 or earlier years, your minimum tax credit allowable for 2007 is not less than the "AMT refundable credit amount." In addition, a portion of the credit may be refundable in 2007. That means, if the refundable part of the credit is more than your tax, you can get a refund of the difference.

To figure the refundable amount of your minimum tax credit, and the AMT refundable credit amount, apply the rules that follow under Long-term unused minimum tax credit, AMT refundable credit amount, and Credit refundable.

Long-term unused minimum tax credit. To figure the refundable amount of your minimum tax credit, you must first determine whether you have any "long-term unused minimum tax credit." Your long-term unused minimum tax credit is the amount of your minimum tax credit carryforward from 2003 (2003 Form 8801, line 26), reduced by the amount of any minimum tax credits you claimed for 2004, 2005, and 2006 (line 25 of your 2004, 2005, and 2006 Forms 8801).

AMT refundable credit amount.  After you figure your long-term unused minimum tax credit, you then must figure your "AMT refundable credit amount." Your AMT refundable credit amount is the greater of:

20% (.20) of your long-term unused minimum tax credit, or
The lesser of:
$5,000, or
Your long-term unused minimum tax credit.
The AMT refundable credit amount is reduced if your adjusted gross income (AGI) exceeds certain threshold amounts based on your filing status. The AGI threshold amounts for 2007 are in the table that follows.

Your AMT refundable credit amount is reduced by 2% (.02) for every $2,500 ($1,250 if your filing status is married filing separately) that your AGI exceeds the threshold amount. Use your 2006 tax return and AGI (2006 Forms 1040, line 38, and 1040NR, line 36) as a guide in estimating your 2007 AGI.

If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must refigure your AGI by adding back any foreign earned income and housing exclusion (2006 Form 2555, line 45, or 2006 Form 2555-EZ, line 18), foreign housing deduction (2006 Form 2555, line 50), income from American Samoa that you are excluding (2006 Form 4563, line 15), and income from Puerto Rico that you are excluding.

For 2007, the AMT refundable credit amount is reduced if your AGI is more than the applicable amount in the second column of the following table and is eliminated if your AGI is more than the applicable amount in the third column.

 Filing Status:
  AGI That Reduces Credit
  AGI That Eliminates Credit
 
 Single
  $156,400
  $278,900
 
 Married filing jointly or qualifying widow(er)
  $234,600
  $357,100
 
 Married filing separately
  $117,300
  $178,550
 
 Head of household
  $195,500
  $318,000
 

Credit refundable.  The refundable amount of your credit is the amount by which your minimum tax credit for the year exceeds the amount your minimum tax credit would be without regard to the above rules.
Form 8801.  To claim the refundable and nonrefundable parts of this credit, use the 2007 Form 8801, Credit for Prior Year Minimum Tax--Individuals, Estates, and Trusts.

District of Columbia First-Time Homebuyer Credit Extended
The credit for the first-time purchase of a home in the District of Columbia was extended through 2007. To claim this credit, use Form 8859.

 

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.

Earned Income Credit Amounts Increase
The following paragraphs explain the changes to the credit for 2007.

Amount of credit increased.  The maximum amount of the credit has increased. The most you can get is:

$2,853 if you have one qualifying child,
$4,716 if you have more than one qualifying child, or
$428 if you do not have a qualifying child.
Earned income amount increased.  The maximum amount of income you can earn and still get the credit has increased for 2007. You may be able to take the credit 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 also has 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 increased.  The maximum amount of investment income you can have and still get the credit has increased to $2,900 for 2007.

Advance payment of the credit. If you get advance payments of the credit from your employer with your pay, the total advance payments you get during 2007 can be as much as $1,712.

Nontaxable combat pay election extended.  You can elect to have your nontaxable combat pay included in earned income when you figure your earned income credit for 2007. This election was previously due to expire at the end of 2006 but has been extended through 2007. For more information about the election, see Publication 596.

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.

Expired Tax Benefits
The following tax benefits have expired and will not apply for 2007.

Relief granted for Hurricanes Katrina, Rita, and Wilma.

Tax-favored treatment of qualified hurricane distributions from eligible retirement plans.
Increased limits and delayed repayment on loans from qualified employer plans.
Special rules so a temporary relocation did not affect whether you provided more than half of an individual's support, whether you furnished more than half the cost of keeping up a household, and whether you could treat an individual as a student.
Increased limits and an expanded definition of qualified education expenses for the Hope and lifetime learning credits.
Additional exemption for housing individuals displaced by Hurricane Katrina.
Exclusion from income for discharge of nonbusiness debt by reason of Hurricane Katrina.
Qualified electric vehicle credit. You cannot claim this credit for any vehicle you placed in service after 2006.

Health Savings Accounts (HSAs)
High deductible health plan. (HDHP)  For HSA purposes, the minimum annual deductible of an HDHP increases to $1,100 ($2,200 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,500 ($11,000 for family coverage).

Deductible limitation on contributions.  The annual deductible limitation for contributions to your HSA based on the amount of your health insurance deductible is repealed. For 2007, the maximum HSA deduction increases to $2,850 ($5,650 for family coverage) regardless of the amount of your health insurance deductible. The maximum additional deduction for individuals age 55 or older increases to $800.

Deductible contributions for part-year coverage.  For HSA purposes, you can be treated as an eligible individual for each month in your tax year if you are an eligible individual during the last month of your tax year. This applies to each month for which you would not otherwise qualify as an eligible individual. For these months, you are treated as enrolled in the same HDHP that you were enrolled in for the last month of your tax year. However, if you are not an eligible individual, for any reason other than death or becoming disabled, for the 12 months following the end of your tax year, any contribution attributable to these months is included in your income and is subject to an additional 10% tax. The income and additional 10% tax are reported for the tax year in which you cease to be an eligible individual.

Transfers from a health reimbursement arrangement (HRA) or health flexible spending arrangement (FSA) to an HSA.  Your employer can make a one-time direct transfer of the balance in your HRA or health FSA to your HSA without violating the requirements for those arrangements. The maximum allowable transfer is the lesser of the HRA or health FSA balance on September 21, 2006, or on the date of transfer.

The amount transferred is not included in your gross income, is not taken into account in applying the HSA contribution limitation, and is not deductible. However, if you are not an eligible individual, for any reason other than death or becoming disabled, for the 12 months following the month of the transfer, the amount transferred is included in your income and is subject to an additional 10% tax. The income and additional 10% tax are reported for the tax year in which you cease to be an eligible individual.

If the employer makes a transfer available to any employee, all employees who are covered under an HDHP of the employer must be allowed to make a transfer. Otherwise, the employer is subject to an excise tax.

Generally, you are not an eligible individual for an HSA if you have health coverage other than an HDHP. For tax years beginning after 2006, coverage under a health FSA for the period immediately following the health FSA's plan year during which unused benefits or contributions remaining at the end of the year may be paid or reimbursed to you for qualified expenses incurred during that period does not disqualify you from being an eligible individual. The coverage does not disqualify you if the balance in the health FSA at the end of the plan year is zero or the entire remaining balance in the health FSA is transferred to your HSA as described above.

Comparable contributions by an employer.  An employer that makes contributions to the HSAs of employees must make comparable contributions to all comparable participating employees' HSAs. For tax years beginning after 2006, for purposes of making contributions to the HSA of an employee who is not highly compensated, a comparable participating employee does not include a highly compensated employee.

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.

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).
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.

Mortgage Insurance Premiums Treated as Home Mortgage Interest
Premiums that you pay or accrue for "qualified mortgage insurance" during 2007 in connection with home acquisition debt on your qualified home are deductible as home mortgage interest. The amount you can deduct is reduced by 10% (.10) for every $1,000 ($500 if your filing status is married filing separately) by which your adjusted gross income exceeds $100,000 ($50,000 if your filing status is married filing separately).

For the definitions of home acquisition debt and qualified home, see Publication 936, Home Mortgage Interest Deduction.

Qualified mortgage insurance.  Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006).

Special rules for prepaid mortgage insurance.  If you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the taxable year, such premiums are treated as paid in the period to which they are allocated. No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term (except in the case of qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Administration).

Schedule A (Form 1040).  You can deduct mortgage insurance premiums you paid or accrued during 2007 on Line 13 of the 2007 Schedule A (Form 1040).

Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as home mortgage interest.

Mortgage insurance premiums you paid or accrued after December 31, 2007, or that are properly allocable to any period after December 31, 2007, are not deductible as home mortgage interest.

Social Security and Medicare Taxes
The maximum amount of wages subject to the social security tax for 2007 is $97,500. There is no limit on the amount of wages subject to the Medicare tax.

 

Standard Mileage Rates
Business-related mileage.  For 2007, the standard mileage rate for the cost of operating your car for business use is 48 ½  cents per mile.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Medical- and move-related mileage.  For 2007, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 20 cents per mile. See Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521.

Charitable-related mileage.  For 2007, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.

Whistleblower Fees
If you receive an award from the IRS for information provided after December 19, 2006, that substantially contributes to the detection of violations of tax laws by the IRS, you may be able to deduct attorney fees and court costs paid by you in connection with the award, up to the amount of the award includible in your gross income on account of the award, as an adjustment to income.

http://www.irs.gov/formspubs/article/0,,id=109876,00.html

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