Overview of The Pension Protection Act of 2006

Here is a pamphlet that gives a good overview of the major provisions of the 2006 law.

Pension Protection Act of 2006 -- Section 529 College Savings Plans

Section 529 College Savings Plans have become very popular vehicles through which to save tax-sheltered dollars for future education expenses. Before the 2006 tax act was passed, Section 529 Plans were slated to lose many of their favorable tax attributes after the year 2010 due to the "sunset" provisions included in the big 2001 tax law. The Pension Protection Act of 2006 has exempted Section 529 plans from these "sunset" provisions and keeps all of the favorable tax attributes of these plans in place indefinitely.

Social Security Tax to increase in 2007

The Social Security Administration recently announced that the Social Security tax (OASDI portion) wage base will be increased to $97,500 for the year 2007. Read the press release.

The Federal Insurance Contributions Act (FICA) imposes two taxes on the wages earned by employees & the self-employment income earned by business owners. The Medicare tax (Hospital Insurance) is 2.9% of all earnings with no maximum. The Social Security tax (Old Age, Survivors & Disability Insurance or OASDI) is 12.4% on earnings up to a maximum amount set by the Social Security Administration each year. The tax rates have been the same since 1990, but the wage base for the OASDI portion has consistently increased over the years.

For 2006, the OASDI wage base caps out at $94,200 which means the maximum Social Security Tax that can be imposed on any individual is $11,680.80 ($94,200 x 12.4%). The new wage base for 2007 will result in a maximum OASDI tax of $12,090 ($97,500 x 12.4%) on anyone earning at least $97,500. This is a tax increase of $409.20.

Pension Protection Act of 2006 –- Charity Provisions

Here is an overview of some of the Charitable Contribution changes made by the Pension Protection Act of 2006:

• New restrictions on deductions for donations of clothing & household items. For all donations of clothing & household items made after August 17, 2006, you are only allowed a tax deduction for the fair market value of items that are "in good used condition or better." - IRC Sec. 170(b)(16)(A). Of course, there is no official guidance about what constitutes "good" condition. The new law also leaves a trap door by stating that the IRS "may by regulation deny a [tax] deduction... for any contribution of clothing or a household item which has minimal monetary value." - IRC Sec. 170(b)(16)(B). This provision was enacted to reduce the amount of deductions taken for items of little monetary value such as used socks & undergarments. Neither of these requirements apply to any single item worth more than $500 for which you have a qualified appraisal. So even an item that is not in good condition can be potentially be deductible if you have it appraised.

• Increased recordkeeping requirements on monetary contributions of any amount. Starting in 2007, the new law disallows the charitable deduction for any monetary gift (cash, check or credit card) for which the donor does not have a satisfactory record of the contribution. This applies to gifts of any amount--no minimum! Satisfactory records can be:
• a cancelled check;
• a receipt from the charitable organization showing their name, the date of the contribution, and the amount of the contribution; or
• other reliable written records showing name, date & amount (such as a credit card receipt or statement with charity's name).

Read a detailed summary of charitable provisions of The Pension Protection Act of 2006.