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2006 Federal Income Tax Laws

by Adam Benjamin

Overview

Keep the money coming into the retirement bank.

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Income tax laws passed in 2006 kept the tax relief appreciated by taxpayers in prior years. During the legislative year, legislators did not produce any income tax reform with a popular impact worth mentioning. Congress dedicated their efforts to preserving tax advantages for retirement planning secured in earlier years, and deductions for state sales taxes and college costs. Members of the armed forces, however, received a new deduction for their funds set aside for retirement.
Continuing EGTRRA Retirement Advantages

The Pension Protection Act of 2006 extended the relief given to retirement planners by the Economic Growth and Tax Relief and Reconciliation Act of 2001. Deductions for retirement funds contributed to a an Individual Retirement Account can change a tax bracket; at the least, the tax reduction is worth the paperwork. EGTRRA raised the amount a planner could contribute and deduct in year, initially to $3,000, but scheduled the increase to end after 2010. PPA got rid of the ending date. For 2009, the limit is $5,500.

Direct Rollovers to Roth IRAs

PPA also allows citizens looking forward to retirement to roll over savings plan amounts into a Roth IRA without a 10 percent early distribution tax. Taxpayers who put money into a tax qualified retirement plan, a tax sheltered annuity or governmental 457 plan can take advantage of the transfer. The rule treats the rollovers like rollovers taxpayers make from a traditional IRA into a Roth IRA.
State And Local Sales Tax

Citizens attempting to reduce total governmental tax already could claim a deduction for taxes paid for state and local sales instead of a state and local income tax deduction. But, the end of 2005 would be the last day. Because legislators found the tax deduction worth keeping, the Tax Relief and Health Care Act of 2006 extended the tax relief through 2007. You can still use the deduction in the 2009 tax year.
Higher Education Expenses

Another two more years for deductions allowed for college tuition and fees. Students, or their parents, could lower the income tax charge by claiming the dollars taken out of pocket to attend a university. Before TRHC, the small, yet generous support for college attendance would last until the end of 2005. TRHC extended the tax relief through 2007. The deduction still applies for the 2009 tax year.
Combat Pay Deduction

Members of the Armed Forces get paid in nontaxable dollars for combat service. This pay treatment has a tradeoff in the loss of the tax deductions tied to the amount paid in taxable compensation. Amounts reserved from taxable take home pay and put into a retirement savings plan, for most citizens, add up to an important deduction from taxable income. The Heroes Earned Retirement Opportunities Act gave citizens who serve in combat the ability to claim a deduction for combat pay contributions.