I've got news on last-minute law changes and some suggestions on trimming your bil1. Read this carefully while you still have time for savings!
2006 Law Changes
Four new laws since May. In addition, Congress might act late (or even retroactively!) to continue some expired tax goodies or ones set to expire this year.
Check the items below to make sure whether you are affected by any new rules.
Telephone Tax Refund
IRS has announced how to recover excise taxes charged on long distance calls. The courts say excise taxes between February 28, 2003 and I August l, 2006 must be refunded. IRS will do this via your tax return.
Safe Harbor Method.
No need to dig out 41 months' worth of phone bills and add up the excise tax. You may simply claim a flat amount on your 2006 tax return. It depends on household size:
||Number of Exemptions on Your 2006 Return
||Amount of Your Refund
That's it. Maximum credit is $60.
The claim is a line on your 2006 tax return. If you don't need to file a tax return, there's a special Form, l040EZ-T, to claim the refund.
IRS will release new Form 8913 for those who have records and think they can claim more than the fixed amounts. I haven't seen the Form, but IRS says that individuals and businesses with gross receipts over $25,000 may use it.
There's a special date to remember for donations of clothing and household items to charities: Remember August 17, 2006. Contributions after this date may include only items whose condition is "good or better". IRS has not offered any help to decide what is "good or better". If IRS decides to audit this issue, your records had better be in good order. A few photos will probably be a big help!
This affects parents with a child who has not reached age 18 by the end of 2006. If the child has investment income (interest, dividends, and capital gains) of more than $1,700 in 2006 there is a problem. The child may not simply file his/her own tax return. A special rule requires the investment income over $1,700 to be taxed at the higher of the child's rate, or that of the parents. Parents and child must study the issue before either files a tax return.
Combat Pay and IRAs.
Combat pay to members of the armed services is not counted for tax purposes. New law lets you use the combat pay to qualify for IRA deductions even though the combat pay is not taxed. It's retroactive, too:
2004 and 2005 Contributions can be made as late as May 28, 2009. The tax return needs to be amended. If you are entitled to a refund, you may claim it by filing an amendment within one year of the contribution, even though this may be later than the normal end of the statute of limitations period.
Charity From An IRA.
For 2006 and 2007 only, folks over age 70-1/2 may make gifts to a charity directly from an IRA or Roth IRA. Up to $100,000 given to a charity by the custodian of the IRA will not be treated as income, and your deduction is automatic.
This can increase tax savings two ways: (1) since the income is not declared, there can be no effect causing higher income from social security, or the host of other income rules pegged to income, and (2) folks who cannot itemize their deductions will get full value from the contribution.
Folks over 70-1/2 have mandatory minimum distributions each year. If any part of this minimum is directly contributed, it may still be counted as part of the minimum distribution.
?Expired - To be revived?
Some provisions expired after 2005, but might still be retroactively approved by Congress. I recommend you keep track of such items in case there is a last-minute reprieve. The most important:
- Election to deduct either sales taxes or state taxes
- $250 deduction for classroom supplies of teachers
- Tuition deductions
- Credits for research and two different jobs credits
January — Time to Get Ready
Preparing your tax information is simple if you spend a few minutes each week. Start collecting the records and keep them in a special place. Review them each week.
Many tax records show up in your January mail. Usually IRS also gets a copy, so don't miss any of these!
W-2s. Read them carefully. l.:..t-J Contact employer if there is a problem. If one is missing after January, contact employer. If you can't locate the employer, you'll need to collect your pay stubs.
1099s. There should be a l.:..t-J 1099-INT or I099-DIV for each account Which pays illteresfor dividends. Even tax-exempt interest will be reported this year.
Other 1099s. A real estate sale means a I099-S. Stock sales yield I099-B. Pensions - I099-R. There are several others. Watch for the words "Important Tax Information Enclosed" on the envelope.
Form 1098. That's your mortgage interest. Banks use this form. With a private loan, you need the payment book or a statement from lender to verify the amount.
Other Income. Look for other reports of income. You may see forms for state tax refunds, unemployment income, prizes, gambling wins, or rents you collect. Read each of these carefully.
Your Records. Check your rn own records carefully for both income and deductions. Look back over the year in your mind. Your calendar and your check register will help your memory. I'd prefer that you have receipts for all expenses, but if you recall paying a deductible expense, claim it.
Start compiling the information right away. Don't wait until the day before you give the information to me. Make careful lists of missing items. Write down any questions you might have for me.
Take a few minutes each week to review your information. Short reviews help you remember items you might miss. Your subconscious mind will dig up things you forgot. It's your money at stake here -- protect it!
Need To Send l099s?
You may need to send Form 1099 to someone else. There are two cases:
- Business/Rental. You must report payments for services.
- "Nominee" amounts. If you are named as receiving income, but part or all of the income really belongs to someone else, you are a nominee.
You must issue Form 1099 to the other party by January 31. IRS wants a copy by February 28. There are penalties for not sending them!
Business/Rental. If you paid $600 or more to anyone during 2006 you may need to issue the form. Look at "business" expenses only. Expenses in your personal life are not reported. Nor are payments to a corporation.
Some bills show both labor and materials. If any part of the payment was for services, report the total amount on Form 1099. Paying for merchandise alone doesn't count. Rent you pay to an agent instead of to a landlord is excepted. Look for repairs, painters, consultants, builders and the like.
You need name, address, and Tax I.D. Number for these people. Call them or send Form W-9 to request the information. If someone uses their own name, they should give you their Social Security Number (like 555-55-5555). If they give a business name, you should see an Employer I.D. Number (like 55-5555555).
Nominees. Limits are lower. If you pay $10 or more to another, you must file the form. You file the same type of 1099 as you received, but you are filing as a "middle man".
Getting the Forms. I can help, or you can get forms from IRS. If you need my help, please call early! My tax season is hectic and the deadline comes quickly. You can get forms from IRS at 1-800-829-3676. Or you can download them at www.irs.gov. You need Form1099-MISC and Form 1096 as a cover sheet.
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