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Thursday, Jan. 4, 2007 | It’s my favorite time of year: Tax Time. OK, maybe not my favorite, but I do get a strange enjoyment out of getting my taxes done each year. This year, I’m particularly excited to find out how we do on our capital gains after selling a townhouse last summer.
So I’m getting my papers in order, making sure I have every receipt, or tracking them down, and generally preparing to do taxes. A big decision for us this year is whether to do our own taxes, which we usually do, or whether to hire some genius tax whiz to do them for us. These are the same questions you should be asking yourself while you’re waiting for your employer to send those W-2s.
Doing your own taxes isn’t particularly difficult if you don’t mind a little paperwork and deciphering poorly written tax guidelines. If you can spare the expense, and your taxes are at all complicated, an accountant or enrolled agent may be the best choice. Or, download tax software, which will hold your hand the entire way with regular prompts designed to ensure that you don’t miss out on any deductions. Of course, you can also use the services of a chain tax preparer, but beware that many of them are merely following the software prompts that you can follow at home, at a fraction of the cost. If you do go to a tax preparer, don’t let them sell you a refund anticipation loan, where they loan you the amount of your refund the same day. Tax preparers try to make these loans sound very reasonable, but they are a big, high-interest mistake, and completely unnecessary considering how quickly the IRS processes electronically filed returns.
Get a big envelope and start filing W-2s, and interest earnings and investment statements as they arrive in the mail. Decide how and when you’re going to file. The Internal Revenue Service advises filing electronically and requesting that any refunds be directly deposited into your bank account, which can result in receiving funds as quickly as two weeks. The IRS also offers free e-filing to tax payers with adjusted gross incomes less than $52,000. Electronic filing also reduces tax errors, according to the IRS.
Prepare your tax return as soon as you have all the relevant documents, which should be by the end of January. If you owe the IRS money, you don’t have to file until April 15, which will give you time to plan for the expense. If the government owes you money, you can file right away and get it faster.
In either case, you’ll know that you need to change your exemptions on the W-4 maintained by your employer because if you’re doing it correctly, you should not get a refund nor owe the IRS. A big refund is exciting, but it’s really nothing more than an interest-free loan to the government. Not a great place for your money. Experts say taxpayers should aim to get the amount you owe the IRS, or the amount the IRS owes you, as close to zero as possible.
This is also a good time to review tax law changes for 2006 so you don’t miss any deductions and start tax planning for 2007.
There are several tax law changes and new guidelines that will affect your 2006 return thanks to the Pension Protection Act of 2006 and a $40 million tax bill that President Bush signed on Dec. 20.
Here’s what’s new for your 2006 taxes:
Extension of tax breaks for tuition, state and local sales tax and teacher classroom expenses — Bush signed a $40 million tax bill before the holidays that renews these for two years. The extensions had expired in December 2005.
- Taxpayers may deduct tuition for higher education expenses up to $4,000 for adjusted gross incomes of $65,000 or less ($130,000 for married couples filing jointly) or $2,000 for taxpayers with incomes of $80,000 or less ($160,000 for married couples). The tuition deduction may be taken even if you don’t itemize deductions on your return, but may not be taken if you are claiming an education credit for the same expense.
- Taxpayers may also deduct state sales tax instead of state income tax on their federal return based on whichever is higher.
- Teacher deduction — K-12 schoolteachers may deduct classroom expenses up to $250. The deduction may be taken even if the taxpayer is not itemizing deductions.
Telephone Excise Tax Refund
The telephone tax refund is a one-time payment available on your 2006 federal income tax return for taxes paid on long distance calls. According to several recent court decisions, long distance calls were not supposed to be included in the tax. The refund is available to individuals, businesses and tax-exempt organizations, and the IRS is expecting as many as 159 million claims. Taxpayers can either dig through the last 41 months of phone bills to find out just how much they’ve paid in long distance excise taxes or choose a standard refund. For individuals, the refund is between $30 and $60, depending on the total number of exemptions claimed on your 2006 tax return. Businesses can use their old phone bills or calculate a refund based on the past two months’ bills and a special IRS formula.
Hybrid Car Credit
The IRS has begun phasing out its hybrid car credit for Toyota cars because the company has sold more than 60,000 vehicles. But you can still take a partial credit for Toyotas and a full credit for hybrids built by Honda, Ford and Mercury. Check IRS.gov for more details.
Planning Ahead for 2007
There are several new tax changes related to charitable gifts, including a new rule requiring receipts for everything. That means if you want to deduct a gift from your 2007 tax return, no matter how small, you have to have a receipt or bank record to do so.
Also affecting charitable gifts in 2006 and 2007 is a new law allowing IRA owners over 70 and a half years to directly transfer, tax-free, up to $100,000 per year to an eligible charity. However, you can’t deduct the amount of your gift from your taxes. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension, or SEP, plans are not eligible.
The value of household good or articles of clothing given to charity after Aug. 17, 2006, is only deductible if the items are in good condition or better. Taxpayers may claim a deduction of more than $500 for any single item, regardless of its condition, with a qualified appraisal.
Prospective homebuyers have a new reason to embrace much-maligned private mortgage insurance: it is now tax deductible. PMI, which is required by lenders whenever a buyer can’t pay 20 percent of the costs upfront, was much maligned during the housing boom when low interest rates drove buyers to opt for piggyback home equity loans instead. Now, with the prime rate rising, and this new deduction, homebuyers are advised to reconsider. The new tax bill passed last month allows taxpayers who itemize deductions to deduct premiums paid on mortgages issued in 2007. The deduction is only available to taxpayers whose adjusted gross incomes are less than $110,000 ($55,000 for married taxpayers filing separately.)