NEW ON 1040 FORMS

What’s new on the 2006 Form 1040 and related forms and schedules

Form 1040—U.S. Individual Income Tax Return

Wages, salaries, tips (Line 7). The maximum amount of elective salary deferrals that a taxpayer can defer under all plans generally is limited to $15,000 ($10,000 if the taxpayer only has SIMPLE plans; $18,000 for Code Sec. 403(b) plans if the taxpayer qualifies for the 15-year rule).

Tax-exempt interest (Line 8b). Payors of tax-exempt interest must report it to IRS and the recipients.

IRA distributions (Line 15a); Pensions and annuities (Line 16a). Qualified Hurricane Katrina distributions may be recontributed to eligible retirement plans or IRAs tax-free; taxable portion may be reported using three-year income averaging. Certain hurricane victims get a larger qualified plan loan limit, plus a one-year postponement of repayment of existing plan loans. Use Form 8915. There is a new exclusion from gross income, not to exceed $100,000, for otherwise taxable distributions from a traditional or Roth IRA that are qualified charitable distributions.

Other income (Line 21). Discharge of personal debt as a result of Hurricane Katrina is excluded from income. The rules for computing the foreign earned income exclusion have changed. As a result, a taxpayer claiming the foreign earned income exclusion or housing exclusion on Form 2555 or Form 2555-EZ must use the Foreign Earned Income Tax Worksheet to figure his tax.

Health Savings Account deduction (Line 25). Maximum monthly HSA contributions are higher for eligible individuals.

Moving expenses (Line 26). The deduction for moving expenses is 18¢ per mile.

IRA deduction (Line 32). The IRA contribution limit is $4,000 ($5,000 if over 50 at the end of 2006). For 2006, the AGI phaseout ranges for making deductible contributions to regular IRAs by taxpayers that are active participants in an employer-sponsored retirement plan are higher (e.g., $75,000 to $85,000 for joint return filers). IRA contributions can be based on excludable combat pay.

Itemized or standard deduction (Line 40). For 2006, the standard deduction is $5,150 for single filers and for married persons filing separately, $10,300 for joint filers and qualifying widow(er)s, and $7,550 for heads of household.

Personal exemptions (Line 42). The exemption for 2006 is $3,300, and starts to phase out if adjusted gross income exceeds: $150,500 for single filers, $112,875 for married persons filing separately, $225,750 for joint filers and qualifying widow(er)s, and $188,150 for heads of household. For 2006, a taxpayer loses only 2/3 of the amount he would otherwise lose under the regular phaseout computation. For taxpayers who house Hurricane Katrina victims, there's a new limited exemption that reduces taxable income. Use Form 8914.

Tax (Line 44). The age at which the kiddie tax applies has been raised from under age 14 for 2005 to under age 18 for 2006.

Alternative minimum tax (Line 45). For 2006, the AMT exemption amounts increased. See the entry under Form 6251, below.

Education credits (Line 50). For 2006, the Hope and Lifetime credits phase out ratably for taxpayers with modified AGI of $45,000 to $55,000 ($90,000 to $110,000 for joint filers). Use Form 8863. For 2006, the Hope credit for students attending an eligible education institution located in the GO Zone, is 100% of up to $2,200 (as adjusted for inflation) of qualified tuition and related expenses plus 50% of the next $2,200 (as adjusted for inflation) of these expenses, for a maximum credit of $3,300 per student.

Residential energy credits (Line 52). Eligible taxpayers may claim a nonbusiness energy property credit and/or residential energy efficient property credit. Use Form 5695.

Credits from certain forms (Line 54). This line is used to report the adoption credit from Form 8839. The maximum adoption credit for 2006 is $10,960, and phases out when modified AGI exceeds $164,410.

Other credits (Line 55). There's a new alternative vehicle credit that's claimed on Form 8910. A taxpayer may be able to take a credit based on the face amount of any clean renewable energy bond or any Gulf tax credit bond he held during 2006.

Self-employment tax (Line 58). The maximum amount of self-employment income subject to FICA tax is $94,200; no ceiling on Medicare wage base.

Additional tax on IRAs, other qualified retirement plans, etc. (Line 60). Up to $100,000 in “qualified Hurricane Katrina distributions” is exempt from the 10% penalty tax for early withdrawals. Qualified reservists distributions are exempt from the early withdrawal tax, as are post Aug. 17, 2006, early pension plan distributions to public safety employees separating from service after age 50.

Earned income credit (EIC) (Line 66a). The maximum credit is higher and the AGI-based phaseout figures are revised.

Excess social security and RRTA tax withheld (Line 67). The maximum Social Security (OASDI) tax for 2006 is $5,840.40 (computed on the first $94,200 of wages) for purposes of credit for excess tax withheld.

Credit for federal telephone excise tax paid (Line 71). Taxpayers may claim a credit for certain telephone excise taxes that should not have been paid. Use Form 8913 if required.

Refund (Line 74). A taxpayer can have his refund directly deposited in up to three accounts including IRAs. Use Form 8888 for deposits into 2 or 3 accounts and Line 74 for a deposit into a single account.

Schedule A—Itemized Deductions

Medical and dental expenses (Line 1). The standard mileage rate for medically-related use of an auto is 18¢ per mile. Taxpayers can deduct as medical expenses premiums paid for the new Medicate Part D prescription drug insurance program.

Gifts to charity (Line 16). New or changed rules apply for certain contributions of: food inventory; real property for conservation purposes; facade easements; taxidermy property; exempt use property not used for an exempt use; clothing and household items; fractional interests in tangible personal property; and payments to donor advised funds. A taxpayer who uses a vehicle in providing donated services to a charity for relief related to Hurricane Katrina during 2006 computes his charitable mileage deduction using a standard mileage rate of 32¢, rather than the usual charitable standard mileage rate of 14¢.

Unreimbursed employee expenses (Line 20). The standard mileage rate used for computing unreimbursed employment-related business auto expenses is 44.5¢ per mile for 2006.

Total itemized deductions (Line 28). The allowable amount of itemized deductions is reduced if adjusted gross income in 2006 is more than $150,500 ($75,250 for married filing separately). For 2006, a taxpayer loses only 2/3 of the amount he would otherwise lose under the regular reduction computation.

Schedule B—Interest and Ordinary Dividends

Interest (Line 1). Accrued interest on Series E U.S. savings bonds issued in '66 or in '76 is taxable.

Excludable interest on Series EE or Series I U.S. savings bonds (Line 3). The exclusion for education related savings bond interest phases out at higher income levels. For 2006, the phaseout begins at modified adjusted gross income above $63,100 ($94,700 on a joint return).

Schedule C—Profit or Loss from Business and Schedule F, Profit or Loss from Farming

Car and truck expenses (Schedule C, Part II, Line 9; Schedule F, Part II, Line 12). The standard mileage rate is 44.5¢ for 2006.

Depreciation and section 179 expense (Schedule C, Part II, Line 13; Schedule F, Part II, Line 16). See entries for Form 4562, below.

Qualified timber property (Schedule C, Part V; Schedule F, Part II, Line 34). For qualified timber property in the GO Zone, the Rita GO Zone, or the Wilma GO Zone, the limit on expensing reforestation expenditures is increased by up to $10,000.

Clean-fuel vehicle and refueling property deductions. These deductions expired. They were available for property placed in service before Jan. 1, 2006.

Schedule SE—Self-Employment Tax

Self-employment tax (Schedule SE, Section A, Line 5; Section B, Line 7). The 12.4% social security tax applies to the first $94,200 of self-employment income. There is no ceiling on the Medicare tax wage base.

Bankruptcy (Schedule SE, Section A, Line 3; Section B, Line 3). A debtor in a Chapter 11 bankruptcy case must pay self-employment tax on his net earnings from self-employment even though the bankruptcy estate pays the income tax on his net profit. Report this by entering on the dotted line to the left of Line 3, “Chap. 11 bankruptcy income”and the amount of the net profit or (loss). Combine that amount with the total of lines 1 and 2 and enter the result on line 3.

Form 2106—Employee Business Expenses

Meal expenses (Part I, Line 5). The percentage of meal expenses that may be deducted by employees subject to the Department of Transportation (DOT) hours of service limits has increased to 75% for 2006.

Standard mileage rate (Part II, Section B). The standard mileage rate is 44.5¢ for 2006.

Limit on depreciation and expensing (Part II, Section D). The first-year limit on depreciation and the Code Sec. 179 deduction for most vehicles is $2,960 ($3,260 for trucks and vans.)

Alternative motor vehicle credit. A taxpayer may be able to take a credit on his return if he places an alternative motor vehicle in service in 2006. Use Form 8910. A taxpayer can no longer claim a deduction for clean fuel vehicles.

Form 3903—Moving Expenses

Standard mileage rate (Line 2). The standard mileage rate for using one's vehicle to move to a new home is 18¢ a mile for 2006.

Form 4562—Depreciation and Amortization

Election to expense certain tangible property under Sec. 179 (Part I). The maximum amount that may be expensed under Code Sec. 179 in 2006 is $108,000, with investment-based phaseout beginning at $430,000. Maximum expensing amount is increased by $35,000 for enterprise zone, renewal property and New York Liberty Zone property, and by up to $100,000 for Go Zone property.

Special depreciation allowance and other depreciation (Part II). Taxpayers may claim a 50% bonus depreciation deduction for qualified GO Zone property.

Amortization (Part VI). A taxpayer can elect to amortize certain expenses paid or incurred in creating or acquiring musical compositions or copyrights in musical compositions over a 5-year period instead of depreciating the property using the income forecast method.

Listed property (Part IV). First-year luxury auto limits for vehicles first placed in service in 2006 are $2,960 for autos and $3,260 for light trucks or vans.

Form 6251—Alternative Minimum Tax—Individuals

Exemption amount (Part II, Line 29). For 2006, the AMT exemption amount increased to $62,550 (joint filers and surviving spouses), $31,275 (married filing separately) and $42,500 (singles). The minimum exemption amount for a child under 18 (age 14 for 2005) has increased to $6,050.

Foreign earned income and housing cost exclusions (Part II, Line 31). Where a taxpayer excludes income under the foreign earned income exclusion or the housing cost exclusion for any tax year, special rules apply in computing the tentative minimum tax for AMT purposes.