Give and Take in New Rules for New Year

Times Staff Writers

On programs such as Social Security, Medicare and the fat content of cookies, Uncle Sam will shuffle the deck in 2006. And if he deals aces with one hand, watch out because he might try to grab some back with the other.

Elderly Americans on Social Security will get an automatic cost-of-living increase of 4.1% this month. But about 25% of the increase will be reclaimed to pay for higher monthly premiums for Medicare's Part B, which covers visits to doctors' offices and some outpatient procedures. Similar up-the-mountain, down-the-mountain maneuvers can be found in new tax provisions.

What's going on is the annual New Year's revisions in federal laws and regulations to reflect actions and decisions made by Congress or the executive branch -- often with little public notice. And, as in previous years, this year there are winners, losers, and people who end up being both.

In the winners category, more tax benefits are on the way to high-income Americans, as well as an increase in an important tax break for the working poor. Meanwhile, about 11 million upper-income taxpayers will see an increase of $260.40 in their Social Security taxes. That's because the amount of wages on which the 6.2% tax is levied will automatically rise to $94,200 from the current $90,000.

Food product makers who must provide more labeling information to alert customers who are allergic to such ingredients as milk, eggs, wheat and peanuts may count themselves as losers -- though people with those allergies may count themselves winners.

Among the in-betweens may be the Girl Scouts of America, the cookie industry and their millions of customers. Beginning this year, the Food and Drug Administration will require cookie packages to disclose levels of transfatty acids, which are associated with higher cholesterol and heart disease.

The Girl Scouts, who start selling cookies in homes and offices across the land this month, have announced that transfats have been removed from three popular cookies: Thin Mints, Caramel DeLites and Peanut Butter Patties. Also, two transfat-free cookies have been added: Thanks-A-Lots and the reduced-fat Cartwheels.

On the other hand, Kraft Foods, which makes Oreos, said it would not roll out transfat-free Oreos until current stocks had been sold. Some other manufacturers are expected to follow a similar policy.

Meanwhile, on the energy front, a bill this year includes several consumer incentives intended to lower fuel usage. Tax credits will be available to buyers of gas-electric hybrid cars -- anywhere from $1,700 to $3,000 depending on the model.

Also, as much as $500 in credits can be claimed by taxpayers who buy home insulation and energy-saving exterior windows, as well as more-fuel-efficient appliances, heat pumps and solar-powered hot-water systems.

The credits should be good news for makers of those products as well as for those who buy them. At the same time, for those who worry about the burgeoning federal deficit, tax credits are a real though indirect form of government spending.

The scheduled changes in tax rules may be among the most far-reaching: High-income taxpayers will benefit from the gradual repeal of two income tax provisions that have limited their deductions and personal exemptions for a decade. In 2010, when the repeal is fully phased in, households with incomes exceeding $1 million a year will save about $20,000 in taxes, an independent analysis found.

Working-poor parents will be able to earn about $1,000 more and still qualify for the Earned Income Tax Credit, a type of tax "refund" that has eclipsed welfare as a main source of cash assistance for low-income families.

A single parent with two children will be able to claim the credit if the parent earns less than $36,348. For two parents filing jointly, the cutoff will be $38,348.

The majority of middle-class taxpayers (those who do not itemize deductions) will get another sweetener in the standard deduction. In 2006, it will rise to $10,300 for a married couple filing jointly, and $5,150 for singles. The amounts for 2005 were $10,000 and $5,000, respectively.

Although many people count tax cuts as purely good news, economists point out that, at least in the short term, they come at the cost of more red ink in Washington.

Also, some analysts and groups advocating for the poor say that as much as two-thirds of the $40 billion in spending cuts over five years that Congress passed in December -- cuts that fell heavily on people with low incomes and college students who depend on loans -- could have been avoided if the tax cuts had not taken effect.

Of all the annual changes in government benefits, none is more closely watched than the Social Security cost-of-living adjustment, or COLA. Unlike most private pensions, Social Security is indexed to compensate for inflation. COLAs are credited with playing a major role in keeping the poverty rate among the elderly lower than it is for society as a whole.

But in recent years, double-digit percentage increases in the Medicare Part B premium have eaten away at the Social Security COLA. Part B covers office visits to doctors and other outpatient services, and Part A covers hospital care. Because of differences in how the two parts of the program are funded, there is no monthly premium for Part A.

"If all of your COLA goes to pay for the premium increase year after year, you never see an increase. Technically, your retirement income is actually falling," said Kirsten Sloan, a health policy analyst with AARP.

For most seniors, the situation may be unpleasant, but not dire. However, some low-income beneficiaries can, in effect, be denied a COLA because of the increase in the Medicare premium.

For the average retiree, the Medicare premium hike will take about one-quarter of the COLA.

Retired workers will receive an average monthly check of $1,002 in 2006, an increase of $39. But the Medicare Part B premium, which is deducted from most Social Security checks, will increase by $10.30, to $88.50 a month.

The increase in the Part B premium is directly tied to healthcare costs. By law, the premiums must cover 25% of the program's costs, so they must be adjusted each year to keep pace with healthcare inflation.

The increase of 17% in 2005 was the biggest in the program's history. For 2006, beneficiaries will face a 13% increase.

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