Department of the Treasury Contents

Internal Revenue Service Introduction .............................. 1

Chapter

Publication 553 1. Tax Changes for Individuals ............... 2 (Rev. March 2006)

Cat. No. 15101G 2. Tax Changes for Businesses ............... 11

3. IRAs and Other Retirement Plans ........... 16 Highlights of 4. Exempt Organizations .................... 19

5. Estate and Gift Taxes ..................... 20 2005 Tax 6. Excise Taxes ............................ 20

Changes 7. Foreign Issues .......................... 22

8. How To Get Tax Help ..................... 24

Index .................................... 26

Introduction

This publication highlights tax law changes that take effect

in 2005, 2006, and later years, except those covered in

Publication 4492, Information for Taxpayers Affected by

Hurricanes Katrina, Rita, and Wilma (see below). The

chapters are divided into sections based on when the

changes take effect.

Taxpayers affected by Hurricanes Katrina, Rita, or

Wilma. Publication 4492 explains the major provisions of

the Katrina Emergency Tax Relief Act of 2005 and the Gulf

Opportunity Zone Act of 2005. It also discusses certain IRS

extended tax deadlines. However, it does not discuss the

following recent changes from Notice 2006-17 and Notice

2006-20. You can find these notices in Internal Revenue

Bulletin 2006-10 at www.irs.gov/pub/irs-irb/irb06-10.pdf.

Casualty and theft losses. In Notice 2006-17, the IRS

has extended to October 16, 2006, the deadline for making an election to claim a 2005 casualty or theft loss in

2004 if:

• Your loss is attributable to Hurricane Katrina, Rita, or

Wilma;

• Your loss occurred in the covered disaster area (see

Publication 4492) for the hurricane; and

• The deadline would otherwise be before October 16,

2006.

Extended tax deadlines. In Notice 2006-20, the IRS

has extended to August 28, 2006, deadlines that apply to

filing returns, paying taxes, and performing certain other

time-sensitive acts for certain taxpayers affected by HurriGet forms and other information cane Katrina. The extension applies to deadlines that ocfaster and easier by: cur after August 28, 2005, and before August 28, 2006.

The extension applies to affected taxpayers (see PublicaInternet • www.irs.gov tion 4492) determined by redefining “covered disaster

area” to include only the Gulf Opportunity Zone.
Adjusting your withholding or estimated tax payments

for 2006. If your tax for 2006 will be more or less than your

2005 tax, you may need to adjust your withholding or 1.

estimated tax payments accordingly. If your tax will decrease, you can get the benefit of lower taxes throughout Tax Changes for the year. If you will owe more tax, you can avoid a penalty

when you file your tax return.

See the following table for forms and publications that Individuals

will help you adjust your withholding or estimated tax

payments. See chapter 8 for information on ordering forms

and publications. 2005 Changes

To adjust your... Get Form... And Publication...

New Definition of a Qualifying Child Withholding W-4, Employee’s 919, How Do I

Withholding Adjust My Tax Beginning in 2005, the same definition of “qualifying child” Allowance Withholding? applies, with some exceptions, for each of the following tax Certificate benefits.

Estimated tax 1040-ES, Estimated 505, Tax • Dependency exemption. payments Tax for Individuals Withholding and

Estimated Tax • Head of household filing status.

• Earned income credit (EIC).

Photographs of missing children. The Internal Reve- • Child tax credits. nue Service is a proud partner with the National Center for

Missing and Exploited Children. Photographs of missing • Credit for child and dependent care expenses.

children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help In general, all four of the following tests must be met to

bring these children home by looking at the photographs claim someone as a qualifying child.

and calling 1-800-THE-LOST (1-800-843-5678) if you rec- Relationship test. The child must be your child (including ognize a child. a stepchild or eligible foster child), brother, sister, step- Comments and suggestions. We welcome your com- brother, stepsister, or a descendant of one of these relaments about this publication and your suggestions for tives.

future editions. An eligible foster child is any child who is placed with You can write to us at the following address: you by an authorized placement agency or by judgment,

decree, or other order of any court of competent jurisdic- Internal Revenue Service tion.

Business Forms and Publications Branch

SE:W:CAR:MP:T:B Residency test. The child must live with you for more

1111 Constitution Ave. NW, IR-6406 than half the year. Temporary absences for special circumWashington, DC 20224 stances, such as for school, vacation, medical care, military service, or business, count as time lived at home. A

We respond to many letters by telephone. Therefore, it child who was born or died during the year is considered to

would be helpful if you would include your daytime phone have lived with you for the entire year if your home was the

number, including the area code, in your correspondence. child’s home for the entire time he or she was alive during

You can email us at the year. Also, exceptions apply, in certain cases, for *taxforms@irs.gov. (The asterisk

must be included in the address.) Put “Publications Com- divorced or separated parents and parents of kidnapped

ment” on the subject line. children.

 Although we cannot respond individually to each email, Age test. The child must be under a certain age (depend- we do appreciate your feedback and will consider your ing on the tax benefit) to be your qualifying child. comments as we revise our tax products.

Dependency exemption, head of household filing

status, and EIC. For purposes of these tax benefits, a

child must be under age 19 at the end of the year, or under

age 24 at the end of the year if a student, or any age if

permanently and totally disabled.

Child tax credit. For purposes of the child tax credit, a

child must be under the age of 17 at the end of the year.

Credit for child and dependent care expenses. For

purposes of the credit for child and dependent care expenses, a child must be under the age of 13. The child can

Page 2 Chapter 1 Tax Changes for Individuals
be any age if he or she was not able to care for himself or “considered unmarried” and you paid over half the cost of

herself and lived with you for more than half the year. keeping up a home:

Support test. The child cannot have provided over half of 1. That was the main home for the entire year of your his or her own support during the year. For the definition of parent whom you can claim as a dependent (your support, see Publication 501, Exemptions, Standard De- parent did not have to live with you), or duction, and Filing Information. 2. In which you lived for more than half of the year with Exception. For purposes of the EIC only, the support either of the following: test does not apply.

a. Your qualifying child (defined earlier, but without More information. For more information about head of regard to the exception for children of divorced or household filing status or claiming an exemption for a separated parents). But, if your qualifying child is qualifying child or other dependent, see Publication 501. married at the end of the year, see Married child, For more information about the other tax benefits affected later. by the definition of a qualifying child, see the appropriate

publication as follows. b. Any other person whom you can claim as a dependent. • Publication 596, Earned Income Credit (EIC).

• Publication 972, Child Tax Credit. But you cannot use head of household filing status for a

person who is your dependent only because: • Publication 503, Child and Dependent Care Expenses. • He or she lived with you for the entire year, or

• You are entitled to claim him or her as a dependent

under a multiple support agreement. Dependency Exemption

A person who used to qualify as your dependent but who is Married child. If your qualifying child is married at the end

not your “qualifying child” may still qualify as your depen- of the year, both of the following must apply for the child to

dent as a “qualifying relative”. To claim the dependency be your qualifying child for purposes of head of household

exemption for a qualifying relative, the person cannot be filing status.

the qualifying child of any other person and the other tests • The child cannot file a joint return unless the return discussed in Publication 501 must be met. is filed only as a claim for refund and no tax liability

If you are a dependent of another person, you would exist for either spouse if they had filed sepacannot claim any dependents on your return. rate returns.

CAUTION

! • The child must be a U.S. citizen, U.S. national, or a

resident of the United States, Canada, or Mexico. An

Special Rule for Divorced and exception applies for certain adopted children.

Separated Parents

For purposes of the special rule for divorced or separated Qualifying Widow(er) Filing Status parents that applies to the dependency exemption and the

child tax credits, the custodial parent is the parent having Beginning in 2005, a foster child no longer qualifies you to

custody for the greater part of the year. Custody, for this use qualifying widow(er) filing status.

purpose, means the child lives in the parent’s main home.

The noncustodial parent is the parent who is not the custo- New Form 8901

dial parent. Under this special rule, a child can be treated

as the qualifying child or qualifying relative of the noncus- Use new Form 8901, Information on Qualifying Children

todial parent if he or she attaches to his or her tax return Who Are Not Dependents, to give the IRS information on

Form 8332 (or a similar statement containing the same any qualifying child for the child tax credit if the child is not

information) signed by the custodial parent. Other condi- your dependent. Complete and file Form 8901 if your

tions must be met and an exception applies to certain qualifying child is not your dependent because either of the

pre-1985 instruments. See the January 2006 revision of following applies.

Form 8332, Release of Claim to Exemption for Child of • You, or your spouse if filing jointly, can be claimed Divorced or Separated Parents, for more information. as a dependent on someone else’s 2005 return.

Head of Household Filing Status • Your qualifying child is married and files a joint return for 2005 (unless that joint return is filed only as

In general, you can use head of household filing status a claim for a refund and no tax liability would exist

only if, as of the end of the year, you were unmarried or for either spouse if they had filed separate returns).

Chapter 1 Tax Changes for Individuals Page 3
Earned Income Amount for Additional Rules for California Domestic

Child Tax Credit Partners

For 2005, the minimum earned income amount used to A registered domestic partner in California must continue

figure the additional child tax credit has increased to to report all wages, salaries, and other compensation for

$11,000. his or her personal services on his or her own return. This

reporting requirement was not changed by the California

Domestic Partners Rights and Responsibilities Act of Social Security and Medicare Taxes 2003, which took effect on January 1, 2005. Therefore, a

registered domestic partner cannot report half the com- For social security tax, the maximum amount of 2005 bined income earned by the individual and his or her wages subject to the tax has increased to $90,000. For domestic partner as a married person filing separately Medicare tax, all covered 2005 wages are subject to the does in California, a community property state. tax. For information about these taxes, see Publication 15

(Circular E), Employer’s Tax Guide. Increased Section 1202 Exclusion for

Income Limits Increased for Gain From Empowerment Zone

Reduction of Education Savings Bond Business Stock

Exclusion You generally can exclude up to 50% of your gain on the

sale or trade of qualified small business stock held by you For 2005, the amount of your interest exclusion is phased for more than 5 years. This is called the section 1202 out if your filing status is married filing jointly or qualifying exclusion. Beginning in 2005, you generally can exclude widow(er) and your modified adjusted gross income up to 60% of your gain if you meet the following additional (MAGI) is between $91,850 and $121,850. You cannot requirements. take the deduction if your MAGI is $121,850 or more.

1. You sell or trade stock in a corporation that qualified For all other filing statuses, your interest exclusion is as an empowerment zone business during substan- phased out if your MAGI is between $61,200 and $76,200. tially all of the time you held the stock. You cannot take a deduction if your MAGI is $76,200 or

more. For more information, see chapter 10 in Publication 2. You acquired the stock after December 21, 2000.

970, Tax Benefits for Education. Item (1) will still be met if the corporation ceased to

qualify after the 5-year period that begins on the date you Increase in Limit on Long-Term Care acquired the stock. However, the gain that qualifies for the

and Accelerated Death Benefits 60% exclusion cannot be more than the gain you would

have had if you had sold the stock on the date the corpora- Exclusion tion ceased to qualify.

The limit on the exclusion for payments made on a per The part of the gain that is included in income is 28%

rate gain. See Capital Gain Tax Rates in chapter 4 of diem or other periodic basis under a long-term care insur- Publication 550, Investment Income and Expenses. ance contract has increased for 2005. The limit applies to For more information about the section 1202 exclusion, the total of these payments and any accelerated death see Section 1202 Exclusion in chapter 4 of Publication benefits made on a per diem or other periodic basis under 550. For more information about empowerment zone busi- a life insurance contract because the insured is chronically nesses, see Publication 954, Tax Incentives for Distressed ill. Communities.

Under this limit, the excludable amount for any period is

figured by subtracting any reimbursement received Health Savings Account (HSA) (through insurance or otherwise) for the cost of qualified

long-term care services during the period from the larger of Deduction Limits Increased

the following amounts. For 2005, the maximum HSA deduction has increased to

$2,650 ($5,250 for family coverage). The maximum addi- • The cost of qualified long-term care services during tional deduction for individuals 55 or older has increased to the period. $600. For HSA purposes, the minimum annual deductible

• The dollar amount for the period ($240 per day for of a high deductible health plan remains at $1,000 ($2,000

any period in 2005). for family coverage) and the maximum out-of-pocket expenses limit has increased to $5,100 ($10,200 for family

See Section C of Form 8853, Archer MSAs and coverage). For more information, see Publication 969,

Long-Term Care Insurance Contracts, and its instructions Health Savings Accounts and Other Tax-Favored Health

for more information. Plans.

Page 4 Chapter 1 Tax Changes for Individuals
Archer MSA Deduction Limits If your adjusted gross income is above the amount for your

filing status, use the Deduction for Exemptions Worksheet Increased in the Form 1040 or Form 1040A instructions to figure the

amount you can deduct for exemptions. For 2005, the minimum annual deductible of a high deductible health plan has increased to $1,750 ($3,500 for family

coverage). The maximum annual deductible of a high Alternative Minimum Tax (AMT) deductible health plan has increased to $2,650 ($5,250 for

family coverage). The maximum out-of-pocket expenses The following changes to the AMT went into effect for

limit has increased to $3,500 ($6,450 for family coverage). 2005. For more information, see Form 6251, Alternative

For more information, see Publication 969. Minimum Tax—Individuals, and its instructions.

Exemption amount for a child. The minimum exemption Income Limits Increased for Student amount for a child under age 14 has increased to $5,850.

Loan Interest Deduction Domestic production activities deduction. The domestic production activities deduction is not taken into account For 2005, the amount of the student loan interest deduc- in figuring the alternative tax net operating loss deduction tion is phased out if your filing status is married filing jointly (ATNOLD). and your modified adjusted gross income (MAGI) is between $105,000 and $135,000. You cannot take the de- Farmers and fishermen. The foreign tax credit of a

duction if your MAGI is $135,000 or more. For all other farmer or fisherman using income averaging on Schedule

filing statuses, the income limits have not changed. For J no longer needs to be refigured for the AMT. This change

more information, see chapter 4 in Publication 970. also applies to 2004.

AMT foreign tax credit 90% limit repealed. You generStandard Deduction Amount ally can use your entire AMT foreign tax credit to reduce

your pre-credit tentative minimum tax. For tax years begin- Increased ning before 2005, the amount of alternative minimum tax

The standard deduction for people who do not itemize foreign tax credit was generally limited to 90% of your

pre-credit tentative minimum tax. deductions on Schedule A (Form 1040) is, in most cases,

higher for 2005. The amount depends on your filing status, Katrina additional exemption amount. The additional

whether you are 65 or older or blind, and whether an exemption amount on line 2 of Form 8914, Exemption

exemption can be claimed for you by another person. The Amount for Taxpayers Housing Individuals Displaced by

2005 Standard Deduction Tables are shown in Publication Hurricane Katrina, for providing housing for a person dis501. placed by Hurricane Katrina is allowable for the AMT.

Gulf Opportunity (GO) Zone. The following changes ap- Limit on Itemized Deductions ply to the AMT.

Increased • The interest on qualified GO Zone bonds is not a tax

preference item. If your adjusted gross income is above a certain amount,

you may lose part of your itemized deductions. In 2005, • No AMT adjustment is required for depreciation of

this amount has increased to $145,950 ($72,975 if married qualified GO Zone property that is eligible for the

filing separately). See the instructions for Schedule A special depreciation allowance.

(Form 1040), line 28, for more information on figuring the • The 90% limit on the ATNOLD does not apply to the amount you can deduct. portion of an ATNOLD attributable to qualified GO

Zone losses. Such portion can be applied to offset

Exemption Amount Increased up to 100% of alternative minimum taxable income

(figured without regard to the ATNOLD and the do- The amount you can deduct for each exemption has in- mestic production activities deduction). creased to $3,200 in 2005.

You lose all or part of the benefit of your exemptions if

your adjusted gross income is above a certain amount. Income Limits Increased for Hope and The amount at which the phaseout begins depends on Lifetime Learning Credits your filing status. For 2005, the phaseout begins at:

For 2005, the amount of your Hope or lifetime learning • $109,475 for married persons filing separately, credit is phased out if your modified adjusted gross income

• $145,950 for single individuals, (MAGI) is between $43,000 and $53,000 ($87,000 and

$107,000 if you file a joint return). You cannot claim an • $182,450 for heads of household, and education credit if your MAGI is $53,000 or more

• $218,950 for married persons filing jointly or qualify- ($107,000 or more if you file a joint return). For more

ing widow(er)s. information, see chapters 2 and 3 in Publication 970.

Chapter 1 Tax Changes for Individuals Page 5
Adoption Benefits Increased Car expenses and use of the standard mileage rate are

explained in chapter 4 of Publication 463, Travel, EnterBeginning in 2005, the maximum adoption credit has in- tainment, Gift, and Car Expenses.

creased to $10,630. Also, the exclusion from income of Medical- and move-related mileage. For 2005, the stan- benefits under your employer’s adoption assistance pro- dard mileage rate for the cost of operating your car for gram has increased to $10,630. These amounts are medical reasons or as part of a deductible move is 15 cents phased out if your modified adjusted gross income (MAGI) per mile. See Transportation under What Medical Exis between $159,450 and $199,450. You cannot claim the penses Are Deductible in Publication 502, Medical and credit or exclusion if your MAGI is $199,450 or more. See Dental Expenses, or Travel by car under Deductible MovForm 8839, Qualified Adoption Expenses, and its instruc- ing Expenses in Publication 521, Moving Expenses.

tions for more information.

Charitable-related mileage. For 2005, the standard mileage rate for the cost of operating your car for charitable Earned Income Credit (EIC) Amounts purposes remains 14 cents per mile.

Increased Hurricane Katrina. There are special standard mileage

rates in effect in 2005 for the cost of operating your car for The following paragraphs explain the changes to the credit providing charitable services solely related to Hurricane for 2005. For details, see Publication 596. Katrina. For the period August 25 through August 31,

2005, the standard mileage rate is 29 cents per mile. For Earned income amount increased. The maximum the period September 1 through December 31, 2005, the amount of income you can earn and still get the credit has standard mileage rate is 34 cents per mile. increased. You may be able to take the credit if:

• You have more than one qualifying child and you Temporary Suspension of Limits on

earned less than $35,263 ($37,263 if married filing Charitable Contributions

jointly),

Qualified contributions are not subject to the overall limit on • You have one qualifying child and you earned less itemized deductions or the 50% adjusted gross income than $31,030 ($33,030 if married filing jointly), or (AGI) limit. A qualified contribution is a charitable contribu-

• You do not have a qualifying child and you earned tion paid in cash or by check after August 27, 2005, and

before January 1, 2006, to a 50% limit organization (other less than $11,750 ($13,750 if married filing jointly).

than certain private foundations described in section The maximum amount of adjusted gross income (AGI) you 509(a)(3)) if you make an election to have the 50% limit not can have and still get the credit also has increased. You apply to these contributions. may be able to take the credit if your AGI is less than the Your deduction for qualified contributions is limited to amount in the above list that applies to you. your AGI minus your deduction for all other charitable

contributions. You can carry over any contributions you are Investment income amount increased. The maximum not able to deduct for 2005 because of this limit. In 2006,

amount of investment income you can have and still get treat the carryover of your unused qualified contributions the credit has increased to $2,700. as a carryover of contributions subject to the 50% limit.

Exception. Qualified contributions do not include a

Taxpayers affected by hurricanes. If you were affected contribution to a segregated fund or account for which you by Hurricane Katrina, Rita, or Wilma and your 2005 earned (or any person you appoint or designate) have or expect to income was less than your 2004 earned income, you may have advisory privileges with respect to distributions or be able to elect to use your 2004 earned income for the investments based on your contribution.

EIC to figure your 2005 EIC and additional child tax credit. More information. For more information, see Publication Also, you may be able to treat as a full-time student for the 526, Charitable Contributions. Publication 526 includes a EIC an individual under age 24 who was unable to attend worksheet you can use to figure your deduction if any limits classes because of one of the hurricanes. For details, see apply to your charitable contributions. Publication 4492.

Contributions of Cars, Boats, and Standard Mileage Rate Airplanes

Business-related mileage. For 2005, the standard mile- If you donate a car to a qualified organization after 2004, age rate for all business miles is: your deduction generally is limited to the gross proceeds

from its sale by the organization. This rule applies if the • 401

/2 cents per mile for the period January 1 through claimed value of the donated vehicle is more than $500. August 31, 2005, and However, if the organization makes significant intervening

• 481/2 cents per mile for the period September 1 use of or materially improves the car, you may be able to

through December 31, 2005. deduct its fair market value. In addition, you may be able to

Page 6 Chapter 1 Tax Changes for Individuals
deduct the car’s fair market value if the organization will

give the car, or sell it for a price well below fair market 2006 Changes value, to a needy individual to further the organization’s

charitable purpose.

Before 2005, you could deduct the fair market value of a Social Security and Medicare Taxes donated vehicle in most cases.

The new rules also apply to donations of boats, air- For social security tax, the maximum amount of 2006

planes, and any vehicle manufactured mainly for use on wages subject to the tax has increased to $94,200. For

public streets, roads, and highways. Medicare tax, all covered 2006 wages are subject to the

tax. For information about these taxes, see Circular E If the claimed value of the car is more than $500, you

must have a contemporaneous written acknowledgment of (Publication 15).

your contribution from the organization and must attach it

to your return. Form 1098-C, Contributions of Motor Vehi- Income Limits Increased for

cles, Boats, and Airplanes, can be used for this purpose. Reduction of Education Savings Bond For more information, see Cars, Boats, and Airplanes Exclusion under Contributions of Property in Publication 526.

For 2006, the amount of your interest exclusion is phased

Deductible Long-Term Premium Care out if your filing status is married filing jointly or qualifying

widow(er) and your modified adjusted gross income Limits Increased (MAGI) is between $94,700 and $124,700. You cannot

take the deduction if your MAGI is $124,700 or more. For 2005, the maximum amount of qualified long-term care For all other filing statuses, your interest exclusion is premiums you can include as medical expenses has in- phased out if your MAGI is between $63,100 and $78,100. creased. You can include qualified long-term care premi- You cannot take a deduction if your MAGI is $78,100 or ums up to the amounts shown below as medical expenses more. For more information, see chapter 10 in Publication on Schedule A (Form 1040). 970.

• Age 40 or under – $270.

• Age 41 to 50 – $510. Increase in Limit on Long-Term Care

and Accelerated Death Benefits • Age 51 to 60 – $1,020.

Exclusion • Age 61 to 70 – $2,720.

• Age 71 or over – $3,400. The limit on the exclusion for payments made on a per

diem or other periodic basis under a long-term care insurance contract has increased for 2006. The limit applies to Note. The limits on premiums is for each person. the total of these payments and any accelerated death

benefits made on a per diem or other periodic basis under

Expenses of Whaling Captains a life insurance contract because the insured is chronically

ill.

Beginning in 2005, you may be able to deduct as a charita- Under this limit, the excludable amount for any period is

ble contribution the reasonable and necessary whaling figured by subtracting any reimbursement received

expenses paid during the year in carrying out sanctioned (through insurance or otherwise) for the cost of qualified

whaling activities. The deduction is limited to $10,000 a long-term care services during the period from the larger of

year. To claim the deduction, you must be recognized by the following amounts.

the Alaska Eskimo Whaling Commission as a whaling • The cost of qualified long-term care services during captain charged with the responsibility of maintaining and the period. carrying out sanctioned whaling activities.

For more information, see Expenses of Whaling Cap- • The dollar amount for the period ($250 per day for

any period in 2006). tains in Publication 526.

Automatic 6-Month Extension Investment Income of Child Under

You can now use Form 4868, Application for Automatic Age 14 Extension of Time To File U.S. Individual Income Tax

Return, to obtain an automatic 6-month extension of time The amount of taxable investment income a child under

(generally 4 months if you are “out of the country”) to file the age of 14 can have without it being subject to tax at the

your individual income tax return. parent’s rate has increased to $1,700 for 2006.

Chapter 1 Tax Changes for Individuals Page 7
Health Savings Account (HSA) • $112,875 for married persons filing separately,

Deduction Limits Increased • $150,500 for single individuals,

For 2006, the maximum HSA deduction has increased to • $188,150 for heads of household, and

$2,700 ($5,450 for family coverage). The maximum addi- • $225,750 for married persons filing jointly or qualify- tional deduction for individuals 55 or older has increased to ing widow(er)s. $700. For HSA purposes, the minimum annual deductible

of a high deductible health plan has increased to $1,050

($2,100 for family coverage) and the maximum

out-of-pocket expenses limit has increased to $5,250 Alternative Minimum Tax (AMT)

($10,500 for family coverage).

Exemption amount for a child. The minimum exemption

Archer MSA Deduction Limits amount for a child under age 14 increased to $6,050 for

2006. Increased

At the time this publication went to print, Con- For 2006, the minimum annual deductible of a high deduct- gress was considering legislation that would ible health plan has increased to $1,800 ($3,650 for family CAUTION eliminate the following changes.

!

coverage). The maximum annual deductible of a high

deductible health plan has increased to $2,700 ($5,450 for Certain credits no longer allowed against the AMT. family coverage). The maximum out-of-pocket expenses The credit for child and dependent care expenses, credit limit has increased to $3,650 ($6,650 for family coverage). for the elderly or the disabled, education credits, mortgage

interest credit, and carryforwards of the District of ColumStandard Deduction Amount bia first-time homebuyer credit are no longer allowed

against the AMT, and a new tax liability limit applies. This Increases

limit is your regular tax minus any tentative minimum tax

The standard deduction is, in most cases, higher for 2006. (figured without any AMT foreign tax credit).

The amount depends on your filing status, whether you are AMT exemption amount decreased. The AMT exemp- 65 or older or blind, and whether an exemption can be tion amount has decreased to $33,750 ($45,000 if married claimed for you by another person. The 2006 Standard filing jointly or qualifying widow(er); $22,500 if married filing Deduction Tables are shown in Publication 505. separately).

Limit on Itemized Deductions Limits Increased for Hope and Increased Lifetime Learning Credits

If your adjusted gross income is above a certain amount, For 2006, the maximum Hope credit has increased to you may lose part of your itemized deductions. In 2006, $1,650 (100% of the first $1,100 of qualified education this amount has increased to $150,500 ($75,250 if married expenses and 50% of the next $1,100 of qualified educa- filing separately). See Publication 505 for more information tion expenses). These dollar amounts are doubled for on figuring the amount you can deduct. students attending an eligible education institution in the

Gulf Opportunity Zone. Phaseout of Reductions of Personal For 2006, the amount of your Hope or lifetime learning

Exemptions and Itemized Deductions credit is phased out if your modified adjusted gross income

(MAGI) is between $45,000 and $55,000 ($90,000 and

Taxpayers with adjusted gross income above a certain $110,000 if you file a joint return). amount may lose part of their deduction for personal ex- You cannot claim an education credit if your MAGI is

emptions and itemized deductions. Beginning in 2006, the $55,000 or more ($110,000 or more if you file a joint amount by which these deductions are reduced is only 2/3 return). For more information, see chapters 2 and 3 in

of the amount of the reduction that would otherwise have Publication 970.

applied. See Publication 505 for more information on figuring your deductions. Residential Energy Credits

Exemption Amount Increases You may be eligible for two new credits, the nonbusiness

energy property credit and the residential energy efficient The amount you can deduct for each exemption has in- property credit, for making energy saving improvements to creased to $3,300 in 2006. your home in 2006. For credit purposes, costs are treated

You lose part of the benefit of your exemptions if your as being paid when the original installation of the item is

adjusted gross income is above a certain amount. The completed, or in the case of costs connected with the

amount at which the phaseout begins depends on your construction or reconstruction of a building, when your

filing status. For 2006, the phaseout begins at: original use of the constructed or reconstructed building

Page 8 Chapter 1 Tax Changes for Individuals
begins. If less than 80% of the use of an item is for property that is installed on or in connection with your main

nonbusiness purposes, only that portion of the costs that home located in the United States. This includes labor

are allocable to the nonbusiness use can be used to costs properly allocable to the onsite preparation, assemdetermine the credit. bly, or original installation of the property. Qualified energy

A home includes a house, houseboat, mobile home, property is any of the following.

cooperative apartment, condominium, and certain manu- • Certain electric heat pump water heaters, electric factured homes. You must reduce the basis of your home heat pumps, geothermal heat pumps, central air by the amount of credit allowed. conditioners, and natural gas, propane, or oil water

If you are a member of a qualified condominium heaters.

management association for a condominium • Qualified natural gas, propane, or oil furnaces or hot which you own or a tenant-stockholder in a coTIP

water boilers. operative housing corporation, you are treated as having

paid your proportionate share of any costs of such associa- • Certain advanced main air circulating fans used in

tion or corporation. Credits must be allocated based on the natural gas, propane, or oil furnaces.

ratio of individual qualified costs to total qualified costs in

the case of joint occupancy. To qualify for the credit, qualified energy property must meet certain performance and quality Nonbusiness energy property credit. You may be able CAUTION standards.

!

to take a credit equal to the sum of:

• 10% of the amount paid in 2006 for qualified energy Residential energy efficient property credit. You may

efficiency improvements installed during 2006, and be able to take a credit of 30% of your costs of qualified

photovoltaic property, solar water heating property, and • Any residential energy property costs paid in 2006. fuel cell property. This includes labor costs properly allocaHowever, this credit is limited as follows. ble to the onsite preparation, assembly, or original installation of the property and for piping or wiring to interconnect • A total accumulated credit limit of $500 for all tax such property to the home. This credit is limited to: years.

• $2,000 for qualified photovoltaic property costs, • An accumulated credit limit of $200 for windows for

all tax years. • $2,000 for qualified solar water heating property

costs, and • A credit limit for residential energy property costs for

all tax years of $50 for any advanced main air circu- • $500 for each half kilowatt of capacity of qualified lating fan; $150 for any qualified natural gas, pro- fuel cell property for which qualified fuel cell property pane, or oil furnace or hot water boiler; and $300 for costs are paid. any item of energy efficient building property.

Qualified photovoltaic property costs. Qualified pho- Qualified energy efficiency improvements. Qualified tovoltaic property costs are costs for property that uses energy efficiency improvements are the following items solar energy to generate electricity for use in a home installed on or in your main home located in the United located in the United States and used as a home. This

States if these items are new and can be expected to includes costs relating to a solar panel or other property remain in use for at least 5 years. installed as a roof or a portion of a roof.

• Any insulation material or system which is specifi- Qualified solar water heating property costs. Qualically or primarily designed to reduce the heat loss or fied solar water heating property costs are costs for propgain of a home when installed in or on such home. erty to heat water for use in a home located in the United

States and used as a home if at least half of the energy • Exterior windows (including skylights). used by the property for such purpose is derived from the • Exterior doors. sun. This includes costs relating to a solar panel or other

property installed as a roof or a portion of a roof. To qualify • Any metal roof installed on a home, but only if this for the credit, the property must be certified for perform- roof has appropriate pigmented coatings which are ance by the nonprofit Solar Rating Certification Corpora- specifically and primarily designed to reduce the tion or a comparable entity endorsed by the government of heat gain of the home. the state in which the property is installed.

 For information on determining if a home is your main Qualified fuel cell property costs. Qualified fuel cell

home, see Publication 523, Selling Your Home. property costs are costs for qualified fuel cell property

installed on or in connection with your main home located To qualify for the credit, qualified energy effi- in the United States. Qualified fuel cell property is an ciency improvements must meet certain energy integrated system comprised of a fuel cell stack assembly CAUTION efficiency requirements.

!

and associated balance of plant components that converts

Residential energy property costs. Residential en- a fuel into electricity using electrochemical means. To

ergy property costs are costs of new qualified energy qualify for the credit, the fuel cell property must have a

Chapter 1 Tax Changes for Individuals Page 9
nameplate capacity of at least one-half kilowatt of electric- Earned Income Credit (EIC) Amounts ity using an electrochemical process and an electricity-only Increased generation efficiency greater than 30%.

Costs allocable to a swimming pool, hot tub, or The following paragraphs explain the changes to the credit

any other energy storage medium that has a for 2006.

CAUTION function other than the function of such storage

!

do not qualify for the residential energy efficiency credit. Earned income amount increased. The maximum

amount of income you can earn and still get the credit has

Electric and Clean-Fuel Vehicles increased for 2006. You may be able to take the credit if:

• You have more than one qualifying child and you The clean-fuel vehicle and refueling property deduction earn less than $36,348 ($38,348 if married filing expired for vehicles placed in service in 2006. The qualified jointly), electric vehicle credit is reduced by 75% for vehicles

placed in service in 2006, and no credit will be allowed after • You have one qualifying child and you earn less than

2006. For more information about electric and clean-fuel $32,001 ($34,001 if married filing jointly), or

vehicles, see chapter 12 in Publication 535, Business • You do not have a qualifying child and you earn less Expenses. than $12,120 ($14,120 if married filing jointly).

Alternative Motor Vehicle Credit The maximum amount of adjusted gross income (AGI) you

can have and still get the credit also has increased. You

You may be able to claim this credit if you place an may be able to take the credit if your AGI is less than the

alternative motor vehicle in service for business or per- amount in the above list that applies to you.

sonal use after 2005. An alternative motor vehicle must

meet certain requirements and be a new: Investment income amount increased. The maximum

amount of investment income you can have and still get • Advanced lean burn technology vehicle, the credit has increased to $2,800 for 2006.

• Qualified alternative fuel vehicle,

Nontaxable combat pay election extended. You can • Qualified fuel cell vehicle, or elect to have your nontaxable combat pay included in • Qualified hybrid vehicle. earned income when you figure your earned income credit

for 2006. This election was previously due to expire at the

For more information, see Form 8910, Alternative Motor end of 2005 but has been extended through 2006. For

Vehicle Credit. more information about the election, see Publication 596.

Alternative Fuel Vehicle Refueling Earned Income Amount for Additional

Property Credit Child Tax Credit

You can claim this credit if you place qualified alternative For 2006, the minimum earned income amount used to

fuel vehicle refueling property in service for business or figure the additional child tax credit has increased to

personal use after 2005. This includes certain property $11,300.

used to store or dispense a clean-burning fuel or recharge

motor vehicles propelled by electricity. For more informa- Standard Mileage Rate tion, see Form 8911, Alternative Fuel Vehicle Refueling

Property Credit.

Business-related mileage. For 2006, the standard mileage rate for all business miles is 441

/2 cents per mile. Car Adoption Benefits Increased expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463. Beginning in 2006, the maximum adoption credit has increased to $10,960. Also, the exclusion from income of

benefits under your employer’s adoption assistance pro- Medical- and move-related mileage. For 2006, the stangram has increased to $10,960. These amounts are dard mileage rate for the cost of operating your car for

phased out if your modified adjusted gross income (MAGI) medical reasons or as part of a deductible move is 18 cents

is between $164,410 and $204,410. You cannot claim the per mile. See Transportation under What Medical Excredit or exclusion if your MAGI is $204,410 or more. penses Are Includible in Publication 502 or Travel by car

under Deductible Moving Expenses in Publication 521.

Charitable-related mileage. 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.

Page 10 Chapter 1 Tax Changes for Individuals
Qualified Contributions Expired

For 2006, you can no longer elect to treat gifts by cash or 2.

check as qualified contributions on Schedule A. Qualified

contributions for which you made this election were not Tax Changes for subject to the 50% of adjusted gross income limit or the

overall limit on itemized deductions. Businesses

Deductible Long-Term Care Premium

Limits Increased 2005 Changes

For 2006, the maximum amount of qualified long-term care

premiums you can include as medical expenses has in- Self-Employment Tax creased. You can include qualified long-term care premiums up to the amounts shown below as medical expenses The maximum amount of net earnings subject to the social on Schedule A (Form 1040). security part of the self-employment tax for tax years be-

• Age 40 or under – $280. ginning in 2005 has increased to $90,000. All net earnings

of at least $400 are subject to the Medicare part of the tax. • Age 41 to 50 – $530.

• Age 51 to 60 – $1,060. Depreciation and Section 179

• Age 61 to 70 – $2,830. Deduction

• Age 71 or over – $3,530.

Increased section 179 limits. The maximum section 179

Note. deduction you can elect for property you placed in service The limits on premiums is for each person. in 2005 has increased to $105,000 for qualified section 179

property ($140,000 for qualified enterprise zone property, Expired Tax Benefits qualified renewal community property, and qualified New

York Liberty Zone property). This limit is reduced by the The following tax benefits have expired and will not apply amount by which the cost of section 179 property placed in for 2006. service during the tax year exceeds $420,000. For quali-

• Deduction from adjusted gross income for educator fied section 179 Gulf Opportunity (GO) Zone property

expenses. acquired after August 27, 2005, the maximum section 179

deduction is higher than the deduction for most section 179 • Tuition and fees deduction. property. See chapter 2 of Publication 946, How To Depre-

• Deduction for state and local general sales taxes. ciate Property.

• District of Columbia first-time homebuyer credit (for Depreciation limits on passenger automobiles, trucks homes purchased after 2005). or vans, and electric vehicles. The total depreciation

deduction (including the section 179 deduction) you can

At the time this publication went to print, Con- take for a passenger automobile (that is not a truck or van

gress was considering legislation that would re- or an electric vehicle) that you use in your business and

CAUTION instate these benefits. You can visit www.irs.gov first place in service in 2005 is $2,960. For a truck or van

!

for current information on tax changes. (such as a minivan or a sport utility vehicle) built on a truck

chassis, the total depreciation deduction you can take is

$3,260. For an electric vehicle, the total depreciation deduction you can take is $8,880. See Maximum Depreciation Deduction in chapter 5 of Publication 946.

These limits are reduced if the business use of

the vehicle is less than 100%. CAUTION

!

Limited applicability of special depreciation

allowance. The additional special depreciation allowance

(including the increased limits for passenger automobiles)

only applies to certain property placed in service in 2005.

You can claim a special allowance for certain aircraft,

certain property with a long production period, and qualified New York Liberty Zone property you placed in service

in 2005. You can also claim a special allowance for qualiChapter 2 Tax Changes for Businesses Page 11
fied GO Zone property you acquired after August 27, 2005. Exception to Oil Depletion Deduction See chapter 3 of Publication 946. for Independent Producers

Recovery periods for depreciation of certain natural For tax years ending after August 8, 2005, the 50,000

barrels-per-day limit for purposes of determining if an inde- gas gathering and transmission lines and electric pendent producer of oil or gas can use the percentage transmission property. Natural gas gathering lines depletion method increased to 75,000 barrels, based on placed in service after April 11, 2005, are treated as 7-year the average, rather than the actual, daily runs for the tax property under the Modified Accelerated Cost Recovery year. For more information, see Publication 535, chapter System (MACRS). In addition, natural gas distribution lines 10.

and certain electric transmission property placed in service

after April 11, 2005, are treated as 15-year property under Deduction for Qualified U.S. MACRS. For each type of property, the original use of the

property must begin with you after April 11, 2005. This Refineries

treatment does not apply to property placed in service For property placed in service after August 8, 2005, you under a binding contract in effect before April 12, 2005, or may elect to deduct 50% of the cost of any qualified to property you manufacture, construct, or produce for your refinery property located in the United States. For more

own use if you began the manufacture, construction, or information, see Internal Revenue Code section 179C.

production of the property before April 12, 2005. See

chapter 4 of Publication 946. Research Credit Expanded

Domestic Production Activities The research credit has been expanded as follows.

Deduction • The credit may be claimed on 20% of costs paid or

incurred after August 8, 2005, for qualified research You may be able to claim a domestic production activities undertaken by an energy research consortium. deduction (DPAD) for tax years beginning after 2004. For

2005, your DPAD is generally 3% of the smaller of: • The 65% limit on contract research expenses has

been increased to 100% if paid or incurred after

• Your qualified production activities income, or August 8, 2005, for qualified energy research to an

eligible small business, university, or federal labora- • Your adjusted gross income for an individual, estate, tory. or trust (taxable income for all other taxpayers) figured without the DPAD. For more information, see Form 6765, Credit for Increasing Research Activities. However, your DPAD generally cannot be more than At the time this publication went to print, the 50% of the Form W-2 wages you paid to your employees. research credit had expired for amounts paid or For more information, see Form 8903, Domestic Pro- CAUTION incurred after 2005, but Congress was consider-

!

duction Activities Deduction. ing legislation to reinstate the credit. You can visit

www.irs.gov for current information on tax changes.

Recapture of Section 197

Amortization Investment Credit Expanded

If you sell or otherwise dispose of multiple amortizable The investment credit has been expanded to include the

following new credits for periods after August 8, 2005. section 197 intangibles after August 8, 2005, in a single

transaction or series of related transactions, ordinary in- • Qualifying advanced coal project credit. come recapture is figured as if all such intangibles were a

single asset. Section 197 intangibles include patents, • Qualifying gasification project credit.

copyrights, governmental licenses and permits, covenants For more information, see Form 3468, Investment not to compete, franchises, trademarks, and trade names. Credit. For more information, see Publication 535, chapter 9.

Outright Sales of Timber by Distilled Spirits Credit

Landowners The distilled spirits credit is a new general business credit

available to distillers, importers, and eligible wholesalers of Outright sales of timber held for more than 1 year by distilled spirits for the cost of financing the federal excise

landowners qualify for capital gains treatment after 2004. tax on bottled distilled spirits. The credit applies to tax

For more information, see the instructions for Part III of years beginning after September 30, 2005. See Form

Form T. 8906, Distilled Spirits Credit, for more information.

Page 12 Chapter 2 Tax Changes for Businesses
Nonconventional Source Fuel Credit For purposes of the 100 shareholder limit, members of a

family are treated as one shareholder. A family is defined

New Form 8907, Nonconventional Source Fuel Credit, as the common ancestor, the lineal descendants of the

must be filed to claim this credit for tax years beginning common ancestor, and the spouses (or former spouses) of

after 2004. For tax years ending after 2005, this credit will the lineal descendants or the common ancestor. For more

be treated as a general business credit. In certain circum- information, see Internal Revenue Code section

stances, the credit has been extended to facilities that 1361(c)(1).

produce coke and coke gas fuel. For more information, see

Form 8907. Nonqualified Deferred Compensation

Plans Biodiesel and Renewable Diesel Fuels

Credit All amounts deferred after 2004 under a nonqualified deferred compensation (NQDC) plan for all tax years are You can claim this new general business credit for certain: currently includible in gross income and subject to addi-

• Biodiesel produced and sold or used in your trade or tional taxes to the extent not subject to a substantial risk of

business after 2004, and forfeiture and not previously included in gross income,

unless certain requirements are met. This change may • Renewable diesel sold or used in your trade or busi- also apply to deferrals made prior to 2005 under certain ness after 2005. circumstances. Federal income tax withholding and new

reporting requirements also apply to NQDC. See section 5 The fuel may be in a qualified mixture. A small agri-bi- of Publication 15-A, Employer’s Supplemental Tax Guide, odiesel producer credit is also available for tax years end- for more information. ing after August 8, 2005. For more information, see Form

8864, Biodiesel and Renewable Diesel Fuels Credit.

Fringe Benefit Parking Exclusion and

Renewable Electricity, Refined Coal, Commuter Transportation Benefit

and Indian Coal Production Credit You can generally exclude a limited amount of the value of

qualified parking and commuter highway vehicle transpor- The renewable electricity production credit was extended

for qualified facilities placed in service before January 1, tation and transit passes you provide to an employee from

2008. The credit has been expanded to include electricity the employee’s wages subject to employment taxes. For

2005, the monthly exclusion for qualified parking has in- from qualified hydropower production for facilities placed in

service after August 8, 2005. The credit period is increased creased to $200 and the monthly exclusion for commuter

to 10 years for open-loop biomass (using agricultural live- highway vehicle transportation and transit passes has instock waste), geothermal, solar energy, small irrigation creased to $105. See Qualified Transportation Benefits in

power, landfill gas, and trash combustion facilities placed section 2 of Publication 15-B, Employer’s Tax Guide to

in service after August 8, 2005. For tax years ending after Fringe Benefits.

August 8, 2005, certain cooperatives can elect to allocate

any part of the renewable electricity, refined coal, and Increase to FUTA Tax Deposit Indian coal production credit among its patrons. See Form Requirement 8835, Renewable Electricity, Refined Coal, and Indian

Coal Production Credit, for more information. The deposit threshold for FUTA tax has increased from

$100 to $500. The $500 threshold applies to FUTA tax Qualified Railroad Track Maintenance deposits required for taxes reported on Form 940 and

Credit 940-EZ, Employer’s Annual Federal Unemployment

(FUTA) Tax Return, and 940-PR, Planilla Para La DeclaraFor tax years beginning after 2004 and before 2008, cer- ci ́on Anual Del Patrono—La Contribuci ́on Federal Para El

tain taxpayers may be able to claim a credit for expendi- Desempleo (FUTA), for periods beginning after 2004. tures made to maintain railroad track (including roadbed,

bridges, and related track structures) owned or leased by a Increase to Withholding on Class II or Class III railroad. For more information, see

Form 8900, Qualified Railroad Track Maintenance Credit. Supplemental Wage Payments

Exceeding $1,000,000 Electing S Corporation Status For payments made after 2004, the flat withholding rate on

For tax years beginning after 2004, the maximum number supplemental wage payments that exceed $1,000,000

of shareholders that an S corporation may have has in- during the year has increased to 35%. See section 7 of

creased from 75 to 100. Publication 15 (Circular E) for more information.

Chapter 2 Tax Changes for Businesses Page 13
Form 7004 Revised Meal Expenses When Subject to

“Hours of Service” Limits Form 7004, Application for Automatic 6-Month Extension

of Time To File Certain Business Income Tax, Information, Generally, you can deduct only 50% of your business-re- and Other Returns, replaces the following extension forms lated meal expenses. You can deduct a higher percentage for tax years which end on or after December 31, 2005. for meal expenses while traveling away from your tax

• Form 2758, Application for Extension of Time To File home for business purposes if the meals take place during

Certain Excise, Income, Information, and Other Re- or incident to any period subject to the Department of

turns. Transportation’s “hours of service” limits. (These limits

apply to workers who are under certain federal regula- • Form 8736, Application for Automatic Extension of tions.) The percentage increases to 75% for 2006. Busi- Time To File U.S. Return for a Partnership, REMIC, ness meal expenses are covered in chapter 1 of or for Certain Trusts. Publication 463. Reimbursements for employee meal ex-

• Form 8800, Application for Additional Extension of penses are covered in chapter 13 of Publication 535.

Time To File U.S. Return for a Partnership, REMIC,

or for Certain Trusts. Deduction for Energy Efficient

Commercial Building Property All returns listed on page 1 of Form 7004 are eligible for

an automatic 6-month extension of time to file from the due For property placed in service in 2006 or 2007, you can date of the return. See the instructions for Form 7004 for deduct the cost of energy efficient building property. The details. maximum deduction for any building for all tax years is

$1.80 multiplied by the square footage of the building.

Energy efficient building property includes property in- 2006 Changes stalled as part of:

• Interior lighting systems;

Self-Employment Tax • Heating, cooling, ventilation, and hot water systems;

and

The maximum amount of net earnings subject to the social • The building envelope. security part of the self-employment tax for tax years beginning in 2006 has increased to $94,200. All net earnings The property must be certified as being part of a plan to of at least $400 are subject to the Medicare part of the tax. reduce annual energy and power costs for those systems

by at least 50% in comparison to a reference building that Depreciation and Section 179 meets certain requirements. For more information, see

Deduction Internal Revenue Code section 179D.

Increased section 179 limits. The maximum section 179 Work Opportunity Credit and

deduction you can elect for property you placed in service Welfare-to-Work Credit Expired in 2006 has increased to $108,000 for qualified section 179

property ($143,000 for qualified enterprise zone property, Generally, the work opportunity credit and the

qualified renewal community property, and qualified New welfare-to-work credit have expired for wages paid to indiYork Liberty Zone property). This limit is reduced by the viduals who began working for you after 2005.

amount by which the cost of section 179 property placed in At the time this publication was going to print, service during the tax year exceeds $430,000. For quali- Congress was considering legislation that may fied section 179 Gulf Opportunity (GO) Zone property CAUTION reinstate and extend these credits.

!

acquired after August 27, 2005, the maximum section 179

deduction is higher than the deduction for most section 179 Hurricane Katrina exception. You can claim the work property. See chapter 2 of Publication 946. opportunity credit after 2005 only for wages paid to Hurri- Depreciation limits on electric vehicles. The total de- cane Katrina employees. For more information, see Form preciation deduction (including the section 179 deduction) 5884, Work Opportunity Credit. you can take for an electric vehicle is $8,980. This limit is

reduced if the business use of the vehicle is less than Alternative Motor Vehicle Credit 100%.

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,

Page 14 Chapter 2 Tax Changes for Businesses
• Qualified alternative fuel vehicle, Energy Efficient Appliance Credit • Qualified fuel cell vehicle, or For tax years beginning in 2006 and 2007, qualified pro-

• Qualified hybrid vehicle. ducers and manufacturers of certain energy efficient appliances may be able to claim a tax credit for dishwashers,

For more information, see Form 8910. clothes washers, and refrigerators that meet certain energy efficient standards and are produced or manufactured

Alternative Fuel Vehicle Refueling during the calendar year ending with or within the tax year.

For more information, see Internal Revenue Code section Property Credit 45M.

You can claim this credit if you place qualified alternative

fuel vehicle refueling property in service for business or Clean Renewable Energy Bond Credit

personal use after 2005. This includes certain property and Gulf Bond Credit

used to store or dispense a clean-burning fuel or recharge

motor vehicles propelled by electricity. For more informa- New credits are available if you are a holder of a clean

tion, see Form 8911. renewable energy bond or Gulf tax credit bond. If you hold

a clean renewable energy bond or Gulf tax credit bond on

Energy Efficient Home Credit one or more credit allowance dates of the bond, you are

allowed a credit in the amount of 25% of the annual credit

An eligible contractor may claim a credit of up to $2,000 for on each credit allowance date. For more information on

each energy efficient home constructed and substantially these credits, see Form 8912, Clean Renewable Energy

completed by the contractor after August 8, 2005. The Bond Credit and Gulf Bond Credit, when it is released in

home must also be acquired in 2006 or 2007 from the 2006.

contractor by a person for use as a residence in the United

States. The credit is allowed in the tax year the home was Fringe Benefit Parking Exclusion acquired from the contractor. Construction includes substantial reconstruction and rehabilitation. For a manufac- You can generally exclude a limited amount of the value of

tured home, the manufactured home producer is treated as qualified parking you provide to an employee from the

an eligible contractor. The home must be certified as hav- employee’s wages subject to employment taxes. For 2006,

ing a level of annual heating and cooling at least 50% the monthly exclusion for qualified parking has increased

below the annual level of a comparable dwelling unit with to $205. See Qualified Transportation Benefits in section 2

the building envelope components accounting for at least a of Publication 15-B.

10% reduction. For certain manufactured homes, the 50%

requirement is reduced to 30%, or it does not apply if the Withholding Income Tax on Wages of home meets the requirements of the Energy Star Labeled

Homes program. For more information, see Form 8908, Nonresident Aliens

Energy Efficient Home Credit. For wages paid after December 31, 2005, employers must

use a new procedure to figure federal income tax withhold- Investment Credit for Energy Property ing on wages of nonresident aliens. For more information,

Expanded see Publication 15 (Circular E).

For periods in 2006 and 2007, the investment credit for Annual Employment Tax Filing for energy property has been expanded to include the business installation of qualified fuel cells, stationary Small Employers

microturbine power plants, and equipment that uses solar To reduce burden on small employers, the IRS has simpli- energy for illumination. In addition, the credit percentage fied the rules for filing employment tax returns to report has increased to 30% for solar energy property placed in social security, Medicare, and withheld federal income service in 2006 and 2007. For more information, see Form taxes. Starting with calendar year 2006, certain employers 3468. must file new Form 944, Employer’s ANNUAL Federal Tax

Return, instead of the Form 941, Employer’s QUARTERLY Renewable Electricity, Refined Coal, Federal Tax Return. The IRS will be sending a notice to

and Indian Coal Production Credit each employer that must file Form 944. Generally, the first

annual Form 944, for calendar year 2006, is due January

The credit has been expanded to include Indian coal sold 31, 2007.

after 2005 over a 7-year credit period. See Form 8835 for Two Spanish versions of Form 944 will be available,

more information. Forma 944-PR, Planilla para la Declaraci ́on Federal

ANUAL del Patrono, for employers in Puerto Rico, and

Forma 944(SP), Declaraci ́on Federal ANUAL de Impuestos del Patrono o Empleador, for employers in the United

Chapter 2 Tax Changes for Businesses Page 15
States. Employers in American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S.

Virgin Islands use Form 944-SS, Employer’s ANNUAL 3.

Federal Tax Return.

For more information about annual employment tax

filing and tax deposit rules, see Treasury Decision 9239. IRAs and Other

You can find T.D. 9239 on page 401 of Internal Revenue

Bulletin 2006-6 at www.irs.gov/pub/irs-irbs/irb06-06.pdf. Retirement Plans

Expired Tax Benefits 2005 Changes

In addition to certain provisions discussed earlier, the following tax benefits have expired as shown below.

Individual Retirement Arrangements • Indian employment credit (for tax years beginning

after 2005). (IRAs)

• Accelerated depreciation for qualified Indian reserva- For more information about IRAs, see Publication 590, tion property (for property placed in service after Individual Retirement Arrangements (IRAs). 2005).

Traditional IRA contribution and deduction limit. The • 15-year recovery period for qualified leasehold im- contribution limit to your traditional IRA for 2005 has in- provements and qualified restaurant improvements creased to the smaller of: (for property placed in service after 2005).

• $4,000, or • Credit for electricity produced from a facility using

solar energy (for a facility placed in service after • Your taxable compensation for the year. 2005).

If you were age 50 or older in 2005, the most that can be • Expensing of environmental remediation costs (ex- contributed to your traditional IRA for 2005 is the smaller cept for qualified contaminated sites in the Gulf Op- of: portunity Zone) (for costs paid or incurred after

2005). • $4,500, or

• Suspension of the 100% of net income limit on per- • Your taxable compensation for the year. centage depletion for oil and gas from marginal wells

(for tax years beginning after 2005). Roth IRA contribution limit. If contributions on your be- • Deduction for corporate donations of computer tech- half were made only to Roth IRAs, your contribution limit nology or equipment (for donations made in tax for 2005 is generally the smaller of: years beginning after 2005).

• $4,000, or • Certain tax incentives based on the designation of

• Your taxable compensation for the year. the District of Columbia Enterprise Zone (for any

period after 2005).

If you were age 50 or older in 2005 and contributions on • Possessions corporation tax credit (for tax years be- your behalf were made only to Roth IRAs, your contribution ginning after 2005). limit for 2005 is generally the smaller of:

• $4,500, or At the time this publication went to print, Congress was considering legislation that would re- • Your taxable compensation for the year.

CAUTION instate many of these benefits. You can visit

!

However, if your modified AGI is above a certain amount, www.irs.gov for current information on tax changes. your contribution limit may be reduced.

Modified AGI limit for traditional IRA contributions

increased. For 2005, if you were covered by a retirement

plan at work, your deduction for contributions to a traditional IRA is reduced if your modified adjusted gross income (AGI) is:

• More than $70,000 but less than $80,000 for a married couple filing a joint return or a qualifying

widow(er),

• More than $50,000 but less than $60,000 for a single

individual or head of household, or

Page 16 Chapter 3 IRAs and Other Retirement Plans
• Less than $10,000 for a married individual filing a Elective deferrals (401(k) plans). For 2005, the limit on

separate return. elective deferrals for participants in 401(k) plans and SARSEPs (excluding SIMPLE plans) is $14,000. For all filing statuses other than married filing separately,

the upper and lower limits of the phaseout range has Catch-up contributions. For 2005, a plan can permit

increased by $5,000. participants who are age 50 or older at the end of the

calendar year to make catch-up contributions of up to

Increase in limit on salary reduction contributions $4,000.

under a SIMPLE IRA. For 2005, salary reduction contri- The catch-up contribution a participant can make for a

butions that your employer could make on your behalf year cannot exceed the smaller of:

under a SIMPLE IRA has increased to $10,000. • $4,000, or

Additional salary reduction contributions to SIMPLE • The excess of the participant’s compensation over IRAs for persons 50 and older. For 2005, additional the elective deferrals that are not catch-up contribu- salary reduction contributions could be made to your tions. SIMPLE IRA if:

• You were age 50 or older in 2005, and

Simplified Employee Pensions (SEPs) • No other salary reduction contributions could be

made for you to the plan for the year because of The following changes apply to SEPs. For more informa- limits or restrictions, such as the regular annual limit. tion, see Publication 560.

For 2005, the additional amount is the smaller of: Elective deferral (SARSEPs) limit. The limits on elective

deferrals and catch-up contributions for participants in • $2,000, or SARSEPs are discussed earlier under Elective deferrals • Your compensation for the year reduced by your (401(k) plans).

other elective deferrals for the year. Deduction limit increased. The maximum deduction for

contributions to a SEP remains unchanged at 25% of the Modified AGI. Beginning in 2005, the domestic produc- compensation paid or accrued during the year to your tion activities deduction is added back to income when eligible employees participating in the plan. However, for figuring modified AGI. 2005, the maximum combined deduction for a participant’s

elective deferrals and other SEP contributions has in- Modified AGI for conversion purposes. Beginning in creased to $42,000. 2005, modified AGI for conversion purposes will not include required distributions from qualified retirement plans Contribution limit increased. For 2005, the annual limit

(including IRAs). on the amount of employer contributions to a SEP has

increased to the smaller of:

Qualified Plans • 25% of an eligible employee’s compensation, or

The following changes apply to qualified plans. For more • $42,000.

information, see Publication 560, Retirement Plans for

Small Business. Compensation limit. For 2005, the maximum amount of

an employee’s compensation you can consider when figur- Limits on contributions and benefits. For 2005, the

maximum annual benefit for a participant under a defined ing SEP contributions (including elective deferrals) and the

deduction for contributions has increased to $210,000. benefit plan has increased to the smaller of:

• 100% of the participant’s average compensation for SIMPLE Plans his or her highest 3 consecutive calendar years, or

• $170,000. The following changes apply to SIMPLE plans. For more

information, see Publication 560.

For 2005, a defined contribution plan’s maximum annual Salary reduction contributions. For 2005, the limit on contributions and other additions (excluding earnings) to salary reduction contributions to a SIMPLE plan has in- the account of a participant has increased to the smaller of: creased to $10,000.

• 100% of the compensation actually paid to the par- Catch-up contributions. For 2005, a SIMPLE plan can ticipant, or permit participants who are age 50 or older at the end of

• $42,000. the calendar year to make catch-up contributions of up to

$2,000.

The catch-up contribution a participant can make for a Compensation limit. For 2005, the maximum compensa- year cannot exceed the smaller of: tion used for figuring contributions and benefits has increased to $210,000. • $2,000, or

Chapter 3 IRAs and Other Retirement Plans Page 17
• The excess of the participant’s compensation over deduction for contributions to a traditional IRA will be

the salary reduction contributions that are not reduced (phased out) if your modified adjusted gross incatch-up contributions. come (AGI) is:

• More than $75,000 but less than $85,000 for a married couple filing a joint return or a qualifying 403(b) Plan Changes widow(er),

The following changes apply to 403(b) plans. For more • More than $50,000 but less than $60,000 for a single information, see Publication 571, Tax-Sheltered Annuity individual or head of household, or Plans (403(b) Plans). • Less than $10,000 for a married individual filing a

Increase in the limit on elective deferrals. For 2005, the separate return.

limit on elective deferrals has increased to $14,000. .

Catch-up contributions. If you are age 50 or older by the Additional salary reduction contributions to SIMPLE end of 2005, you may be permitted to make additional IRAs for persons age 50 or older. For 2006, additional catch-up contributions of up to $4,000 to your 403(b) plan. salary reduction contributions can be made to your

Limit on annual additions. For 2005, the limit on annual SIMPLE IRA if:

additions has increased to $42,000. • You will be age 50 or older in 2006, and

Catch-up Contributions to Thrift • No other salary reduction contributions can be made

for you to the plan for the year because of limits or Savings Plan (TSP) restrictions, such as the regular annual limit.

Participants in the TSP who are age 50 or older at the end For 2006, the additional amount is the smaller of: of the year generally can make catch-up contributions to

the plan. For 2005, the maximum catch-up contribution has • $2,500, or increased to $4,000. For more information, see Publication

721, Tax Guide to U.S. Civil Service Retirement Benefits. • Your compensation for the year reduced by your

other elective deferrals for the year.

2006 Changes Qualified Roth Contribution Programs

For tax years beginning after 2005, 401(k) and 403(b) Individual Retirement Arrangements plans can create a qualified Roth contribution program so (IRAs) that participants may elect to have part or all of their

elective deferrals to the plan designated as after-tax Roth For more information about IRAs, see Publication 590. contributions.

Traditional IRA contribution and deduction limit. If you

will be age 50 or older in 2006, the most that can be Qualified Plans

contributed to your traditional IRA for 2006 will be the

smaller of: The following changes apply to qualified plans. For more

information, see Publication 560. • $5,000, or

• Your taxable compensation for the year. Limits on contributions and benefits. For 2006, the

maximum annual benefit for a participant under a defined

Roth IRA contribution limit. benefit plan has increased to the smaller of: If you will be age 50 or older

in 2006 and contributions on your behalf are made only to • 100% of the participant’s average compensation for Roth IRAs, your contribution limit for 2006 will generally be his or her highest 3 consecutive calendar years, or the smaller of:

• $175,000 (subject to cost-of-living increases). • $5,000, or

• Your taxable compensation for the year. For 2006, a defined contribution plan’s maximum annual

contributions and other additions (excluding earnings) to However, if your modified AGI is above a certain amount, the account of a participant has increased to the smaller of: your contribution limit may be reduced.

• 100% of the compensation actually paid to the par- Modified AGI limit for traditional IRA contributions ticipant, or increased for a married couple filing a joint return. For

2006, if you are covered by a retirement plan at work, your • $44,000 (subject to cost-of-living increases).

Page 18 Chapter 3 IRAs and Other Retirement Plans
Compensation limit. For 2006, the maximum compensa- Catch-up contributions. If you are age 50 or older by the

tion used for figuring contributions and benefits has in- end of 2006, you may be permitted to make additional

creased to $220,000. catch-up contributions of up to $5,000 to your 403(b) plan.

Elective deferrals (401(k) plans). For 2006, the limit on Limit on annual additions. For 2006, the limit on annual

elective deferrals for participants in 401(k) plans and SAR- additions has increased to $44,000.

SEPs (excluding SIMPLE plans) is $15,000.

Catch-up Contributions to Thrift Catch-up contributions. For 2006, a plan can permit

participants who are age 50 or older at the end of the Savings Plan (TSP)

calendar year to make catch-up contributions of up to

$5,000. Participants in the TSP who are age 50 or older at the end

The catch-up contribution a participant can make for a of the year generally can make catch-up contributions to

the plan. For 2006, the maximum catch-up contribution has year cannot exceed the smaller of: increased to $5,000. For more information, see Publication • $5,000, or 721.

• The excess of the participant’s compensation over

the elective deferrals that are not catch-up contributions.

4.

Simplified Employee Pensions (SEPs)

The following changes apply to SEPs. For more informa- Exempt Organizations

tion, see Publication 560.

Deduction limit increased. The maximum deduction for 2005 Changes contributions to a SEP remains unchanged at 25% of the

compensation paid or accrued during the year to your

eligible employees participating in the plan. However, for Acknowledgment Required for 2006, the maximum combined deduction for a participant’s

elective deferrals and other SEP contributions has in- Contributions of Cars, Boats, and

creased to $44,000. Airplanes

Contribution limit increased. For 2006, the annual limit Qualified organizations that receive car donations after on the amount of employer contributions to a SEP has 2004 must give the donor a written acknowledgment of the increased to the smaller of: contribution. Form 1098-C (Copies B and C) can be used

• 25% of an eligible employee’s compensation, or for this purpose. This rule applies if the claimed value of the

donated vehicle is more than $500. • $44,000 (subject to cost-of-living increases). For contributions for which you completed an acknowledgment in 2005, file Copy A of Form 1098-C with the

Compensation limit. For 2006, the maximum amount of Internal Revenue Service by February 28, 2006 (March 31,

an employee’s compensation you can consider when figur- 2006, if you file electronically).

ing SEP contributions (including elective deferrals) and the Boats, airplanes, and other vehicles. This rule also ap- deduction for contributions has increased to $220,000. plies to donations of boats, airplanes, and any vehicle

manufactured mainly for use on public streets, roads, and SIMPLE Plans highways. However, this rule does not apply to donations

of inventory. The following change applies to SIMPLE plans. For more

information, see Publication 560. Penalty. There is a penalty for knowingly furnishing a

false or fraudulent acknowledgment or knowingly failing to Catch-up contributions. For 2006, a SIMPLE plan can furnish a required acknowledgment in the manner, at the permit participants who are age 50 or older at the end of time, and showing the information required. For details the calendar year to make catch-up contributions up to about this penalty, see Notice 2005-44 on page 1287 of $2,500. Internal Revenue Bulletin 2005-25 at www.irs.gov/pub/

irs-irbs/irb05-25.pdf.

403(b) Plan Changes Completing and filing Form 1098-C. For help in completing and filing Form 1098-C, see the 2005 General The following changes apply to 403(b) plans. For more Instructions for Forms 1099, 1098, 5498, and W-2G and information, see Publication 571. the 2005 Instructions for Form 1098-C. The General InIncrease in the limit on elective deferrals. For 2006, the structions provide the requirements for filing on paper,

limit on elective deferrals has increased to $15,000. electronically, or on magnetic media, while the Instructions

Chapter 4 Exempt Organizations Page 19
for Form 1098-C give specific instructions for completing

the form. To order these instructions and Form 1098-C, 2006 Changes see How to Get Tax Help, later.

Because paper forms are scanned during

processing, you cannot file with the IRS Forms Estate Tax Applicable Exclusion CAUTION 1096 or 1098-C that you print from the IRS

!

Amount Increased website.

An estate tax return for a U.S. citizen or resident needs to

Notice of Income From Donated be filed only if the gross estate exceeds the applicable

exclusion amount for the year of death, which has in- Intellectual Property creased as shown below.

A taxpayer who contributes qualified intellectual property Exclusion to a charity may be entitled to a charitable deduction, in Year Amount addition to any initial deduction allowed in the year of 2006, 2007, and 2008 ................ $2,000,000 contribution, based on a specified percentage of the quali- 2009 ............................. 3,500,000 fied donee income received by the donee with respect to

the qualified intellectual property. Any additional charitable

deductions attributable to qualified donee income may be Annual Exclusion for Gifts Increased

allowed in the year of the contribution or in later years. The

donee organization may be required to file Form 8899, The annual exclusion for gifts of present interests made to

Notice of Income From Donated Intellectual Property, if the a donee during the calendar year has increased to

property produces net income for the year. The donee $12,000.

must file the form with the IRS and provide a copy of the The annual exclusion for gifts made to spouses who are

form to the donor. not U.S. citizens has increased to $120,000.

More information. Form 8899 and instructions is now Maximum Estate and Gift Tax Rate

available at www.irs.gov. Reduced

For estates of decedents dying, and gifts made, after 2005,

the maximum rate for the estate tax and the gift tax is as

follows. 5.

Maximum

Year Tax Rate Estate and Gift Taxes 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46%

2007, 2008, and 2009 . . . . . . . . . . . . . . . . . 45%

2005 Changes Generation-Skipping Transfer (GST)

Exemption Increased

Annual Exclusion for Gifts To The generation-skipping transfer (GST) lifetime exemption

Spouses Increased has increased to $2,000,000. The annual increase can

only be allocated to transfers made during or after the year

The annual exclusion for gifts made to spouses who are of the increase.

not U.S. citizens has increased to $117,000.

Maximum Estate and Gift Tax Rate

Reduced 6.

For estates of decedents dying, and gifts made, in 2005,

the maximum rate for the estate tax and the gift tax reduced to 47%. Excise Taxes

Changes to State Death Taxes Various excise tax provisions of the Internal Revenue

Code were added or affected by American Jobs Creation

For estates of decedents dying after 2004, the credit for Act of 2004, The Energy Policy Act of 2005, and the Safe,

state death taxes is replaced with a deduction for state Accountable, Flexible, and Efficient Transportation Equity

death taxes. Act of 2005 (SAFETEA). Some of the major changes to the

Page 20 Chapter 6 Excise Taxes
forms and publications are highlighted below. Explana- Truck, Trailer, and Semitrailer tions of the changes are included in the following products. Chassis and Bodies, and Tractors • Form 720, Quarterly Federal Excise Tax Return

Tractors that have a gross vehicle weight of 19,500 pounds • The Instructions for Form 720 or less and a gross combined weight of 33,000 pounds or

• Form 4136, Credit for Federal Tax Paid on Fuels less are excluded from the 12% retail tax.

• Form 8849, Claim for Refund of Excise Taxes Kerosene for Use in Aviation • Publication 510, Excise Taxes for 2006

The taxation and claims relating to kerosene for use in

aviation have been revised. The terminology has changed

from aviation-grade kerosene to kerosene for use in avia- Heavy Highway Vehicle Use tion. Generally, kerosene is taxed at $.244 per gallon

unless a reduced rate applies. Tax (Form 2290)

Undyed Diesel Fuel and Undyed

Repeal of Installment Agreement Kerosene, Use on a Farm

The election to pay in installments has been repealed, Registered ultimate vendors claims for undyed diesel fuel

beginning with Form 2290 for the period July 1, 2005, and undyed kerosene (other than kerosene for use in

through June 30, 2006. aviation) sold for use on a farm for farming purposes have

been eliminated. Ultimate purchasers may use Schedule C

(Form 720), Schedule 1 (Form 8849), or Form 4136 to

make these claims. Changes Effective for the Third

Quarter of 2005 Leaking Underground Storage Tank

(LUST) Tax

Taxable Tires The LUST tax rate ($.001) generally applies to removals,

entries, and sales of dyed diesel fuel, dyed kerosene,

Super single tires designed for steering are taxable at the kerosene for use in aviation (nontaxable uses and foreign

rate of $.0945, retroactive to January 1, 2005. Taxpayers trade), gasoline blendstocks, kerosene used for a feedmust file Form 720X to report the $.04725 tax rate increase stock purpose, and diesel fuel or kerosene used in Alaska.

on super single tires designed for steering reported on The following IRS Nos. have been added to Form 720.

Forms 720 for the first and second calendar quarters of • IRS No. 105, Dyed diesel fuel, LUST tax. 2005.

• IRS No. 107, Dyed kerosene, LUST tax.

• IRS No. 111, Kerosene for use in aviation, LUST tax Changes Effective for the on nontaxable uses, including foreign trade.

Fourth Quarter of 2005 • IRS No. 119, LUST tax, other exempt removals.

The LUST tax will not be credited or refunded, except for

exported taxable fuel. The rates on Schedule C (Form Gas Guzzler Tax 720), Schedules 1 and 2 (Form 8849), and Form 4136

have been reduced by $.001 to reflect this change. Lines The gas guzzler tax on limousines with a gross unloaded have been added to Schedule C (Form 720), Schedule 1 vehicle weight of greater than 6,000 pounds is repealed, (Form 8849), and Form 4136 to make claims for exported effective for sales, uses, or leases by the manufacturer, taxable fuel. producer, or importer.

Fishing Rods and Fishing Poles

Fishing rods and fishing poles (and component parts)

taxed at a rate of 10% will have a maximum tax of $10 per

article.

Chapter 6 Excise Taxes Page 21
nonprofit educational organization. Other conditions must

Changes Effective for the First be met.

Quarter of 2006

Changes Effective for the

Air Transportation Taxes Second Quarter of 2006

For amounts paid during 2006, the tax on the use of

international air travel facilities will be $14.50 per person Reinstatement of the Oil Spill Liability for flights that begin or end in the United States, or $7.30 Tax

per person for domestic segments that begin or end in

Alaska or Hawaii (applies only to departures). For amounts The oil spill liability taxes (IRS Nos. 18 and 21) have been

paid for each domestic segment of taxable transportation reinstated beginning April 1, 2006.

of persons by air, the domestic segment tax is $3.30 per

segment for transportation that begins in 2006.

Arrow Shafts 7.

The tax on arrow shafts has increased to $.40 per arrow

shaft. Foreign Issues Renewable Diesel

Renewable diesel will generally be treated the same as 2005 Changes biodiesel for credit purposes. The renewable diesel mixture credit is $1.00 per gallon of renewable diesel.

Foreign Tax Credit Diesel-Water Fuel Emulsion

If you claim the credit for foreign taxes on an accrual basis, A reduced rate of tax on a diesel-water fuel emulsion you must generally use the average exchange rate for the

applies if certain conditions are met. IRS No. 104 has been tax year to which taxes relate. However, in tax years

added to Form 720. Claims can be made for nontaxable beginning in 2005 and later years, you can elect to use the

uses of a diesel-water fuel emulsion and for diesel fuel exchange rate in effect on the date the taxes were paid.

used to produce a diesel-water fuel emulsion. For details, see Publication 514, Foreign Tax Credit for

Individuals.

Taxable Tires

Alternative Minimum Tax Foreign Tax Three new IRS Nos. have been added to report taxable Credit 90% Limit Repealed tires instead of IRS No. 66.

Beginning in 2005, you generally can use your entire • IRS No. 108, Taxable tires other than biasply or alternative minimum tax foreign tax credit to reduce your super single tires. pre-credit tentative minimum tax. For tax years beginning

• IRS No. 109, Taxable tires, biasply or super single before 2005, the amount of alternative minimum tax fortires (other than super single tires designed for eign tax credit was generally limited to 90% of your

steering). pre-credit tentative minimum tax. See Form 6251 and its

instructions. • IRS No. 113, Taxable tires, super single tires designed for steering. Phaseout of Extraterritorial Income

Exclusion

Claims for Exempt Sales of Fuel by The extraterritorial income (ETI) exclusion provisions are

Registered Credit Card Issuers being phased out, generally for transactions after 2004.

For transactions during 2005, taxpayers may claim 80% of Claims for gasoline, undyed diesel fuel, and undyed ker- the otherwise applicable ETI exclusion. The phaseout of

osene used exclusively by a state or local government or the ETI exclusion provisions does not apply to transactions

nonprofit educational organization can be made by the in the ordinary course of a trade or business under a

registered credit card issuer if the fuel was purchased with binding contract if such contract is between the taxpayer

a credit card issued to the state or local government or and an unrelated person (as defined under the ETI excluPage 22 Chapter 7 Foreign Issues
sion provisions) and such contract is in effect on Septem- the amount of one personal exemption ($3,300 for 2006).

ber 17, 2003, and at all times thereafter. For more information, see Notice 2005-77, 2005-46 I.R.B.

For more information, see the 2005 Form 8873, Extra- 951. You can find Notice 2005-77 on page 951 of Internal

territorial Income Exclusion, and instructions. Revenue Bulletin 2005-46 at www.irs.gov/pub/irs-irbs/

irb05-46.pdf.

Residents of Japan Source of Compensation for Labor or Beginning in 2005, if you are a nonresident alien and a Personal Services resident of Japan, you generally cannot claim the following

benefits. The new U.S.-Japan income tax treaty, which In tax years beginning after July 13, 2005, new rules apply became effective on January 1, 2005, does not allow them. in determining the source of compensation for labor or

• Exemptions for spouse and dependents. personal services performed as an employee. If you file

your tax returns on a calendar year basis, the new rules • Qualifying widow(er) filing status. apply to your returns for 2006 and later years.

• Single filing status for people who are married, have Under the new rules, compensation (other than fringe

a child, and do not live with their spouse. benefits) is sourced on a time basis. Fringe benefits (such

as housing and education) are sourced on a geographical However, if you choose to have the old U.S.-Japan treaty basis. For more information, see Regulations section apply in its entirety for 2005, you may be able to claim 1.861-4 on page 429 of Internal Revenue Bulletin 2005-35 these benefits on your 2005 Form 1040NR, U.S. Nonresi- at www.irs.gov/pub/irs-irbs/irb05-35.pdf. dent Alien Income Tax Return.

Phaseout of Extraterritorial Income

New Rules for Partnership Exclusion

Withholding on Effectively Connected The extraterritorial income (ETI) exclusion provisions are Income (ECI) being phased out, generally for transactions after 2004.

For transactions during 2006, taxpayers may claim 60% of For partnership tax years beginning after May 18, 2005, the otherwise applicable ETI exclusion. The phaseout of new regulations under section 1446 provide the rules for a the ETI exclusion provisions does not apply to transactions partnership to withhold tax on ECI allocated to a foreign in the ordinary course of a trade or business under a partner. See Partnership Withholding on Effectively Con- binding contract if such contract is between the taxpayer nected Income in Publication 515, Withholding of Tax on

Nonresident Aliens and Foreign Entries. and an unrelated person (as defined under the ETI exclusion provisions) and such contract is in effect on September 17, 2003, and at all times thereafter. New Rules for Publicly Traded For more information, see the 2005 Form 8873 and Partnership (PTP) Withholding on instructions.

Distributions to Foreign Partners

New Rules for Acceptance Agents For partnership tax years beginning after May 18, 2005, a

PTP can no longer elect to withhold tax based on ECI New rules apply to acceptance agents. There are four allocable to its foreign partners. The PTP must withhold on major changes to the rules. the distribution of that income to its foreign partners.

For more information, see Publicly Traded Partnerships • Applicants are subject to suitability checks.

under Partnership Withholding on Effectively Connected • Acceptance agent agreements must be renewed Income in Publication 515. every 4 years.

• Agreements in effect under the old procedures will

expire on December 31, 2006. Acceptance agents 2006 Changes will need to apply under the new procedures to

maintain their approved status.

Exception From the Filing • Acceptance agents may request that their names be

added to a public list of agents published periodically Requirement for Nonresident Aliens by the IRS.

Generally, the requirement to file a return has been elimi- For more information, see Rev. Proc. 2006-10 on page 293

nated for nonresident aliens who earn wages effectively of Internal Revenue Bulletin 2006-2 at www.irs.gov/pub/

connected with a U.S. trade or business that are less than irs-irbs/irb06-02.pdf.

Chapter 7 Foreign Issues Page 23
• Research your tax questions online.

8. • Search publications online by topic or keyword.

• View Internal Revenue Bulletins (IRBs) published in

the last few years. How To Get Tax Help • Figure your withholding allowances using our Form

W-4 calculator.

You can get help with unresolved tax issues, order free • Sign up to receive local and national tax news by

publications and forms, ask tax questions, and get more email.

information from the IRS in several ways. By selecting the • Get information on starting and operating a small

method that is best for you, you will have quick and easy business.

access to tax help. Phone. Many services are available by phone.

Contacting your Taxpayer Advocate. If you have attempted to deal with an IRS problem unsuccessfully, you

should contact your Taxpayer Advocate. • Ordering forms, instructions, and publications. Call The Taxpayer Advocate independently represents your 1-800-829-3676 to order current-year forms, in- interests and concerns within the IRS by protecting your structions, and publications and prior-year forms rights and resolving problems that have not been fixed and instructions. You should receive your order through normal channels. While Taxpayer Advocates can- within 10 days. not change the tax law or make a technical tax decision,

they can clear up problems that resulted from previous • Asking tax questions. Call the IRS with your tax

contacts and ensure that your case is given a complete questions at 1-800-829-1040.

and impartial review. • Solving problems. You can get face-to-face help

To contact your Taxpayer Advocate: solving tax problems every business day in IRS

Taxpayer Assistance Centers. An employee can • Call the Taxpayer Advocate toll free at

1-877-777-4778; explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your • Call, write, or fax the Taxpayer Advocate office in local Taxpayer Assistance Center for an appoint- your area; ment. To find the number, go to

• Call 1-800-829-4059 if you are a www.irs.gov/localcontacts or look in the phone

TTY/TDD user; or book under United States Government, Internal

Revenue Service. • Visit www.irs.gov/advocate. • TTY/TDD equipment. If you have access to TTY/

For more information, see Publication 1546, How To Get TDD equipment, call 1-800-829-4059 to ask tax

Help With Unresolved Tax Problems (now available in questions or to order forms and publications.

Chinese, Korean, Russian, and Vietnamese, in addition to • TeleTax topics. Call 1-800-829-4477 and press 2 to

English and Spanish). listen to pre-recorded messages covering various

tax topics. Free tax services. To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. • Refund information. If you would like to check the

It contains a list of free tax publications and an index of tax status of your 2005 refund, call 1-800-829-4477

topics. It also describes other free tax information services, and press 1 for automated refund information or

including tax education and assistance programs and a list call 1-800-829-1954. Be sure to wait at least 6

of TeleTax topics. weeks from the date you filed your return (3 weeks

if you filed electronically). Have your 2005 tax re- Internet. You can access the IRS website 24

turn available because you will need to know your hours a day, 7 days a week, at www.irs.gov to

filing status and the exact whole dollar amount of take the following actions. your refund. • E-file your return. Find out about commercial tax

preparation and e-file services available free to eli- Evaluating the quality of our telephone services. To gible taxpayers. ensure that IRS representatives give accurate, courteous, • Check the status of your 2005 refund. Click on and professional answers, we use several methods to Where’s My Refund. Be sure to wait at least 6 evaluate the quality of our telephone services. One method weeks from the date you filed your return (3 weeks is for a second IRS representative to sometimes listen in if you filed electronically). Have your 2005 tax re- on or record telephone calls. Another is to ask some callers turn available because you will need to know your to complete a short survey at the end of the call. filing status and the exact whole dollar amount of

your refund. Walk-in. Many products and services are avail-

• Download forms, instructions, and publications. able on a walk-in basis.

• Order IRS products online.

Page 24 Chapter 8 How To Get Tax Help
• Products. You can walk in to many post offices, • Current-year forms, instructions, and publications.

libraries, and IRS offices to pick up certain forms, • Prior-year forms, instructions, and publications. instructions, and publications. Some IRS offices, • Tax Map: an electronic research tool and finding libraries, grocery stores, copy centers, city and aid. county government offices, credit unions, and office • Tax law frequently asked questions (FAQs). supply stores have a collection of products available to print from a CD-ROM or photocopy from • Tax Topics from the IRS telephone response system. reproducible proofs. Also, some IRS offices and

libraries have the Internal Revenue Code, regula- • Fill-in, print, and save features for most tax forms.

tions, Internal Revenue Bulletins, and Cumulative • Internal Revenue Bulletins.

Bulletins available for research purposes. • Toll-Free and email technical support. • Services. You can walk in to your local Taxpayer Buy the CD-ROM from National Technical Information Assistance Center every business day to ask tax Service (NTIS) at www.irs.gov/cdorders for $25 (no han- questions or get help with a tax problem. An em- dling fee) or call 1-877-233-6767 toll free to buy the ployee can explain IRS letters, request adjustments CD-ROM for $25 (plus a $5 handling fee). to your account, or help you set up a payment plan. CD-ROM for small businesses. Publication You can set up an appointment by calling your local

Center and, at the prompt, leaving a message re- 3207, The Small Business Resource Guide,

CD-ROM for 2005, has a new look and en- questing Everyday Tax Solutions help. A represen- hanced navigation features. This year’s CD includes: tative will call you back within 2 business days to

schedule an in-person appointment at your conve- • Helpful information, such as how to prepare a

nience. To find the number, go to www.irs.gov/lo- business plan, find financing for your business, and

calcontacts or look in the phone book under United much more.

States Government, Internal Revenue Service. • All the business tax forms, instructions, and publications needed to successfully manage a business. Mail. You can send your order for forms, instruc- • Tax law changes for 2005. tions, and publications to the address below and

receive a response within 10 business days after • IRS Tax Map to help you find forms, instructions,

your request is received. and publications by searching on a keyword or

topic.

National Distribution Center • Web links to various government agencies, busi- P.O. Box 8903 ness associations, and IRS organizations. Bloomington, IL 61702-8903 • “Rate the Product” survey—your opportunity to

CD-ROM for tax products. You can order Pub- suggest changes for future editions.

lication 1796, IRS Federal Tax Products An updated version of this CD is available each year in

CD-ROM, and obtain: early April. You can get a free copy by calling

1-800-829-3676 or by visiting www.irs.gov/smallbiz. • A CD that is released twice so you have the latest

products. The first release ships in late December

and the final release ships in late February.

Chapter 8 How To Get Tax Help Page 25
To help us develop a more useful index, please let us know if you have ideas for index entries.

Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Indian employment . . . . . . . . . . . . . 16 Energy efficient commercial

401(k) plans .................. 17, 19 Investment .................. 12, 15 building property . . . . . . . . . . . . . . 14

403(b) plans .................. 18, 19 Lifetime learning . . . . . . . . . . . . . . . 5, 8 Estate tax applicable exclusion

Nonconventional source amount . . . . . . . . . . . . . . . . . . . . . . . . . 20

fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Estimated tax payments .......... 2 A Possessions corporation tax . . . . 16 Exchange rate, foreign Accelerated death benefits . . . . . 4, 7 Qualified railroad track taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Acceptance agents . . . . . . . . . . . . . . 23 maintenance . . . . . . . . . . . . . . . . . 13 Exempt organizations, car Adoption . . . . . . . . . . . . . . . . . . . . . . 6, 10 Renewable electricity, refined coal, donations . . . . . . . . . . . . . . . . . . . 6, 19 Airplanes, contributions of . . . . . . . 6, and Indian coal Exemption amount . . . . . . . . . . . . . 5, 8 19 production ................ 13, 15 Expired tax benefits ......... 11, 16 Alternative minimum tax . . . . . . . 5, 8 Research . . . . . . . . . . . . . . . . . . . . . . . 12 Extended tax deadlines .......... 1 Foreign tax credit . . . . . . . . . . . . . . . 22 Residential energy ............... 8

Welfare-to-work Extension: Annual exclusion for gifts: . . . . . . . . . . . . . . . . . 14

Work opportunity Form 4868 ....................... 7 To spouses who are not U.S. . . . . . . . . . . . . . . . 14

Form 7004 . . . . . . . . . . . . . . . . . . . . . . 14 citizens . . . . . . . . . . . . . . . . . . . . . . . 20 Credits not allowed against Extraterritorial income exclusion, Archer MSA . . . . . . . . . . . . . . . . . . . . . 5, 8 AMT ............................. 8 phaseout of ................ 22, 23 Assistance (See Tax help)

D F B Deadlines, extended tax .......... 1 Form 2290: Boats, contributions of . . . . . . . 6, 19 Dependency exemption . . . . . . . . 2, 3 Repeal of installment Depletion: agreement . . . . . . . . . . . . . . . . . . . . 21 C Independent producers . . . . . . . . . 12 Form 720, first quarter of 2006: Cars, contributions of . . . . . . . . 6, 19 Depreciation: Air transportation taxes . . . . . . . . . 22

Casualty and theft losses ........ 1 Cars . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Arrow shafts . . . . . . . . . . . . . . . . . . . . 22

Child, new definition of Electric transmission Diesel-water fuel emulsion . . . . . . 22

qualifying property . . . . . . . . . . . . . . . . . . . . . . 12 ....................... 2 Registered credit card Electric vehicles ............ 11, 14 Clean-fuel vehicles . . . . . . . . . . . . . . 10 issuers . . . . . . . . . . . . . . . . . . . . . . . 22

Natural gas gathering lines . . . . . 12 Combat pay . . . . . . . . . . . . . . . . . . . . . . 10 Renewable diesel . . . . . . . . . . . . . . . 22

Natural gas transmission Comments on publication ........ 2 Taxable tires . . . . . . . . . . . . . . . . . . . . 22

lines . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Contributions, charitable Form 720, fourth quarter of 2005: . . . . . . . . 11 Section 179 deduction ...... 11, 14 Temporary suspension of Fishing rods and fishing Trucks or vans . . . . . . . . . . . . . . . . . . 11 limits . . . . . . . . . . . . . . . . . . . . . . . . . . 6 poles . . . . . . . . . . . . . . . . . . . . . . . . . 21

Depreciation limits .......... 11, 14 Whaling captains ................ 7 Gas guzzler tax . . . . . . . . . . . . . . . . . 21

Credits: Divorced parents ................. 3 Kerosene for use in aviation . . . . 21

Additional child tax Domestic partners, California .... 4 Leaking underground storage tank . . . . . . . . . . . 4, 10

Alternative fuel vehicle refueling Domestic production activities (LUST) tax . . . . . . . . . . . . . . . . . . . 21

deduction . . . . . . . . . . . . . . . . . . . . . . 12 Truck, trailer, and semitrailer property .................. 10, 15

Alternative motor vehicle chassis and bodies, and . . . . . . 10,

tractors . . . . . . . . . . . . . . . . . . . . . . . 21 14 E

Biodiesel and renewable diesel Undyed diesel fuel and undyed Earned income credit . . . . . . . . . 6, 10 kerosene, use on a farm. . . . . . 21 fuels . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Education benefits: Child and dependent care Form 720, second quarter of 2006: Education savings bond . . . . . . . 4, 7 expenses ...................... 2 Oil spill liability tax . . . . . . . . . . . . . . 22

Hope credit . . . . . . . . . . . . . . . . . . . . 5, 8 Child tax ......................... 2 Form 720, third quarter of 2005: Lifetime learning credit . . . . . . . . . 5, 8 Clean renewable energy Taxable tires . . . . . . . . . . . . . . . . . . . . 21

Education savings bond bond. . . . . . . . . . . . . . . . . . . . . . . . . . 15 Form: exclusion . . . . . . . . . . . . . . . . . . . . . 4, 7 Distilled spirits . . . . . . . . . . . . . . . . . . 12 1040-ES ......................... 2

Educator expenses District of Columbia first-time 1098-C . . . . . . . . . . . . . . . . . . . . . . 6, 19 deduction . . . . . . . . . . . . . . . . . . . . . . 11 homebuyer . . . . . . . . . . . . . . . . . . . 11 3468 ........................ 12, 15

Earned income Elective deferrals . . . . . . . . . . . . . . . . 17 . . . . . . . . . . . . . . 6, 10 4868 ............................. 7

Electric vehicles . . . . . . . . . . . . . . . . 10 Electric transmission 5884 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Energy efficient appliance . . . . . . 15 property . . . . . . . . . . . . . . . . . . . . . . . . 12 6765 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Energy efficient home . . . . . . . . . . 15 Electric vehicles ............. 10, 11 7004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Gulf bond . . . . . . . . . . . . . . . . . . . . . . . 15 Empowerment zone business 8835 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Hope . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 8 stock ............................ 4 8839 ............................. 6

Page 26
Form: (Cont.) J Natural gas transmission

8861 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Japan-U.S. tax treaty . . . . . . . . . . . . 23 lines . . . . . . . . . . . . . . . . . . . . . . . . . . 12

8864 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Refineries . . . . . . . . . . . . . . . . . . . . . . . . 12

8899 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Residents of Japan . . . . . . . . . . . . . . 23 L 8900 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Roth IRAs .................... 16, 18 Limit on elective deferrals . . . . . . 18, 8901 ............................. 3 19 8903 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Long-term care . . . . . . . . . . . . . . . . . 4, 7 S 8906 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Long-term care premiums . . . . 7, 11 S corporations . . . . . . . . . . . . . . . . . . . 13 8907 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Section 1202 exclusion ........... 4 8908 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

8910 ........................ 10, 14 M Section 179 deduction ....... 11, 14

8911 ........................ 10, 15 Maximum estate and gift tax Section 197 recapture . . . . . . . . . . . 12

8912 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Self-employment tax......... 11, 14

940 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Meal expenses . . . . . . . . . . . . . . . . . . . 14 Separated parents ................ 3

940-EZ . . . . . . . . . . . . . . . . . . . . . . . . . 13 Medicare tax . . . . . . . . . . . . . . . . . . . . 4, 7 SIMPLE plans ................ 17, 19

940-PR . . . . . . . . . . . . . . . . . . . . . . . . . 13 Mileage rate, standard . . . . . . . . 6, 10 Simplified employee pensions 944 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 (SEPs)...................... 17, 19 944(SP) . . . . . . . . . . . . . . . . . . . . . . . . 15 N Social security tax . . . . . . . . . . . . . . 4, 7 944-PR . . . . . . . . . . . . . . . . . . . . . . . . . 15 Source of compensation . . . . . . . . 23 944-SS . . . . . . . . . . . . . . . . . . . . . . . . . 15 Natural gas gathering lines . . . . . 12

Special depreciation allowance: T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Natural gas transmission Limited applicability . . . . . . . . . . . . . 11 W-4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Property subject to Fringe benefits ............... 13, 15 Nonqualified deferred allowance . . . . . . . . . . . . . . . . . . . . 11

FUTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 compensation plans . . . . . . . . . . 13 Standard deduction . . . . . . . . . . . . 5, 8 Nonresident aliens .......... 15, 23 Standard mileage rate . . . . . . . . 6, 10 G State and local general sales tax Generation-skipping transfer (GST) P deduction . . . . . . . . . . . . . . . . . . . . . . 11

exemption . . . . . . . . . . . . . . . . . . . . . 20 Partnership withholding on State death taxes . . . . . . . . . . . . . . . . 20 effectively connected Student loan interest ............. 5 income . . . . . . . . . . . . . . . . . . . . . . . . . 23 H Suggestions for publication ..... 2 Personal exemptions ............. 8 Head of household ............... 3

Planes (See Airplanes) Health savings account T Publicly traded partnership (HSA). . . . . . . . . . . . . . . . . . . . . . . . . . 4, 8 withholding on distributions to Tax help ....................... 24-25

Help (See Tax help) foreign partners . . . . . . . . . . . . . . . 23 Taxpayer Advocate . . . . . . . . . . . . . . 24

Hurricanes: Thrift Savings Plan .......... 18, 19 Katrina . . . . . . . . . . . . . . . . . . . . . . . 6, 10 Q Timber. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Rita .............................. 6

Qualified contributions Trucks or vans . . . . . . . . . . . . . . . . . . . 11 Wilma . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 . . . . . . . 6, 11

Qualified plans Tuition and fees deduction . . . . . . 11 ............... 17, 18

Qualifying widow(er) ............. 3 I

Income from donated intellectual W

R Whaling captain .................. 7 property . . . . . . . . . . . . . . . . . . . . . . . . 20

Railroad track: Withholding . . . . . . . . . . . . . . . . . . . . . . 13 Investment income:

Qualified expenditures for railroad For 2006 ......................... 2 Child under age 14 .............. 7

Nonresident aliens . . . . . . . . . . . . . . 15 IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 track maintenance credit . . . . . 13

Contribution and deduction Rate of exchange for foreign ■

limit . . . . . . . . . . . . . . . . . . . . . . . 16, 18 taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Modified AGI limit ....... 16, 17, 18 Recovery periods:

Roth IRAs .................. 16, 18 Electric transmission

SIMPLE IRAs ............... 17, 18 property . . . . . . . . . . . . . . . . . . . . . . 12

Itemized deductions .............. 8 Natural gas gathering lines . . . . . 12

Page 27