| Your Master Tax Advisor/ Mei-Feng Moe New Tax Laws that benefit you |
| Tax Breaks Enacted in the Final Days of 2006 The Tax Increase Prevention and Reconciliation Act and the Pension Protection Act extended several tax relief provisions that were scheduled to expire after tax year 2005. Three provisions which will most likely impact individual taxpayers are the educator's expense deduction, tuition and fees deduction and the election to deduct state and local sales taxes. These have all been extended through 2007. Because the IRS finalized tax forms for 2006 before these provisions were extended, individual taxpayers will not see these items printed on Form 1040 and you will need to follow special instructions to take these deductions. Educator's expense deduction is claimed on the same line (23) as "Archer MSA deduction" with a marginal notation "E" entered on the dotted line. Tuition and fees deduction is claimed on the same line (35) as "domestic production activities deduction" with a "T" notation. If you are also claiming the two deductions printed on the form, a marginal notation "B" will need to be entered as well and a statement showing the breakdown amounts will need to be attached to the return. The sales tax deduction is entered on the same line (5) as "state and local income taxes" on schedule A with a "ST" notation. Credit for Federal Telephone Excise Tax Paid This is a one-time refund available on 2006 federal returns for a refund of excise taxes you paid on your long-distance or bundled services. Imposed since 1988, several courts have recently ruled against the IRS holding that the tax does not apply to long-distance service as it is billed today. If you paid the telephone tax on your long-distance or bundled service after 02/28/03 and before 08/01/06, you are eligible to claim this refund on your 2006 tax return. Individual taxpayers may claim the actual amount of tax paid plus interest, or you may use a standard amount: $30 for a person filing a return with one exemption, $40 for two exemptions, $50 for three exemptions, or $60 maximum for four or more exemptions. If you are not required to file a tax return, a Form 1040EZ-T may be used to claim the telephone tax refund. Businesses and nonprofit organizations may also claim this tax refund, which must be based on the actual amount paid. Energy Credits The Energy Tax Incentives Act of 2005 added a new Nonbusiness Energy Credit available for tax years 2006 and 2007. Qualified energy efficiency improvements (such as insulation, exterior windows, skylights or doors, metal roofs, storm window/doors installed over certain types of windows/doors) and residential energy property expenditures (electric and geothermal heat pumps, central air conditioners, natural gas, propane, or oil water heaters and furnaces) installed in your main home in the United States qualify for this credit. The maximum lifetime credit for all types of property combined is $500, of which $200 is the maximum for exterior windows. For purchase of solar or fuel cell property to improve energy to your home, the residential Energy Efficient Property Credit may be claimed. The credit is 30 percent of qualified property cost with a maximum of $2000 credit limit for photovoltaic property, $2000 for solar water heating property and $500 for each 0.5 kilowatt of capacity from fuel cell property. Unlike the Nonbusiness Energy Credit, there is no lifetime maximum for this credit. The 2005 Energy Act also introduced a new credit for hybrid and other alternative fuel vehicles. You may qualify for this credit if you purchased a new vehicle after 12/31/05 and the vehicle has been certified by a manufacturer and acknowledged by the IRS. The credit amount varies depending on the vehicle and is phased out after the manufacturer records the sale of 60,000th vehicle. Change to the KiddieTax The age threshold at which a child is subject to kiddie tax is raised from under age 14 to under age 18. This means that more taxpayers will be subject to this tax. A child may have to pay tax on investment income at his/her parent's highest marginal tax rate until the child turns 18. HEROS Act The Heroes Earned Retirement Opportunities Act (HEROS), signed into law on Memorial Day 2006, allows military personnel to make IRA contributions retroactive to 2004 and 2005 based on combat pay excluded from income. Eligible military members have until May 28, 2009 to make these special back-year contributions. Amended returns may be filed to claim tax benefits related to IRA contributions one year from the date the contribution is actually made. Saver's Credit Last, but not least, one tax benefit that's worth mentioning is the saver's credit, which was originally scheduled to expire after 2006, but now has been made permanent. So please, take advantage of this credit by paying into an IRA, 401(k), or other qualified plans for yourself! |
| About the Author Mei-Feng Moe (May) is a Master Tax Advisor certified by H&R Block. In addition to giving tax advice and preparing income tax returns, she has also been teaching income tax courses for a number of years. She is an Enrolled Agent who may represent clients before the IRS. She also holds series 6 and series 63 security licenses. |
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