AMT Exemption Goes Up

The dreaded Alternative Minimum Tax catches many middle-class taxpayers in its grasp. Fortunately, the exemption amount for AMT in 2006 is being increased:

• Single - $42,500

• Married filing jointly or surviving spouse - $62,550

• Head of household - $42,500

• Married filing separately - $31,275

The Kiddie Tax Is Going Up

Upper income families may be in for a shock as the kiddie tax changes for 2006.

In previous years, the tax impacted mainly children ages 14 to 18. The first $850 of unearned income in the child's name is tax-free. Every dollar after the first $850 would then be taxed at roughly 15 percent.

For 2006, the gloves are coming off. The new law raises the age to 18 years old, and places new limits on how much can be taxed at the lower rate. The first $850 is still tax-free, and the next $850 is taxed at the preferable 15 percent. However, any amounts over that then get dinged at the parents' income tax rate.

For more information on the kiddie tax, please click here

Mileage Rates Increased

Energy costs have been on the rise, and the IRS has adjusted mileage rates to reflect that. The IRS increased the mileage rate for 2006 to 44.5 cents per mile for the business use of your car. This is an increase over the standard 40.5 cents per mile that applied for most of 2005.

If you used your car to get medical care or to move, you can deduct 18 cents per mile. This rate also was increased over last year's 15 cents per mile.

Taxpayers who used their car to provide charitable services to a qualified charitable organization can still receive credit for their mileage. That rate is 14 cents per mile. A rare exception is made for taxpayers providing Hurricane Katrina relief services. If the organization you were working for was providing relief related to Katrina, the standard mileage rate of 32 cents per mile will apply.

It's important to keep proper documentation to support your deductions. Ensure that you record begin and end odometer readings, the date that you made the travel, and the specific reason for claiming the mileage rate deduction.

On the horizon, mileage rates in continue increasing. In 2007, the standard business mileage rate deduction will increase to 48.5 cents per mile, while the deduction for miles driving for medical or moving will increase to 20 cents per mile.

Charitable Contributions

In an attempt to clamp down on abusive charitable deductions, the IRS has introduced new restrictions on charitable contributions.

All cash contributions made after August 17, 2006 to a qualified charity must now be supported by a dated receipt or a dated bank record. If you donate clothing or household items instead of cash, no deduction will be allowed for most contributions unless the donated property is in "good" condition or better.

These new restrictions require even greater documentation than ever before. When making a contribution to a non-profit group or charity, be sure to note specifically what items are being donated. If possible, you may also want to take photos of the items to document their condition, and ensure your deduction will be allowed by the IRS come tax time.

Standard Deduction Increased

For most people who don't itemize deductions, the basic standard deduction increased in 2006 to:

• $7,550 for head of household (up from $7,300 in 2005)

• $10,300 for Married taxpayers filing jointly and qualifying widows or widowers (up from $10,000 in 2005)

• $5,150 for married taxpayers filing separately (up from $5,000 in 2005)

• $5,150 for single people (up from $5,000 in 2005)

These deductions will not apply if someone can claim you as a dependant. In those cases, the standard deduction amount for an individual may not exceed the greater of 1) $850, or 2) the sum of $300 and the individual's earned income.

Split the Refund Between More Than One Account

Starting in 2007, the IRS is making it easier for taxpayers to split their refund between different accounts.

Filers of 2006 tax forms can automatically have their refund divied up between two or three different bank, credit union or brokerage accounts. The IRS has introduced Form 8888 to help taxpayers determine the appropriate amounts that should be sent to their different accounts.

Download Form 8888 for more details.

Exemptions Increase

The amount you can deduct for each exemption has increased $100 to $3,300 in 2006.

You lose all or part of the exemptions if your Adjusted Gross Income is above a certain amount. For tax year 2006, the phase-out begins at:

• $112,875 - Married persons filing separately (up from $109,475 in 2005).

• $150,500 - Single individuals (up from $145,950 in 2005).

• $188,150 - Heads of households (up from $182,450 in 2005).

• $225,750 - Married persons filing jointly, or qualifying widows and widowers (up from $218,950 in 2005).

Download Form 1040 for more details.

Social Security and Medicare Taxes

The IRS has raised the amount of income subject to social security tax. In 2006, the amount of wages subject to the tax increased to $94,200 from $90,000. For Medicare tax, all covered 2006 wages are subject to the tax.

Alternative Motor (Hybrid) and Electric Vehicles

In 2006, the number of cars coming to market that dramatically reduce emissions has been multiplying. To keep pace, the IRS has expanded the list of vehicles it considers "qualified" to receive the Alternative Motor Vehicle Credit.

For vehicles purchased after January 1, 2006, the tax credit could be as much as $3,400 for taxpayers that purchase the most fuel-efficient vehicles.

See IR-2006-86 for more details.