This week, Gail tells you about brand new tax rule changes that can save you money, as long as you are aware of them before it's too late.
I hope you've been enjoying a happy and healthy holiday season.
Just before Christmas, when the rest of us were baking cookies and dragging ourselves through shopping malls, a miracle of sorts occurred in Washington. Seized by the spirit of the season or perhaps by the fact that many of them were now "lame ducks" (i.e. not returning next year), Democrats and Republicans on Capitol Hill set aside election bitterness and came together to overwhelmingly pass a year-end pot pouri of tax breaks which will save individuals and businesses an estimated $45 billion plus.
President Bush signed the "Tax Relief and Health Care Act of 2006" on December 20th. These tax rule changes — more than 200 of them! — are so last minute that the beleaguered IRS does not even have time to incorporate them into its 2006 income tax forms. So, as the song goes, "you better watch out," or you could very well miss them.
Many of the provisions restore and/or extend tax breaks that expired at the end of last year. Let me repeat, these tax breaks are retroactive so they apply to both 2006 and 2007 federal tax returns. For individuals, these include such things as:
-You will again be able to choose whether it is more advantageous to deduct state and local sales taxes instead of state and local income taxes. This is a huge gift to folks who live in states that have no income tax, such as Florida and Texas.
If you are planning to re-model your home, for instance, it makes sense to "bunch up" big-ticket purchases so they all occur in a single year.
-Parents with students in college may be able to deduct up to $4,000 for tuition and fees. This is available to single taxpayers whose adjusted gross income (AGI) is $65,000 or less or joint filers with a maximum AGI of $130,000. Single taxpayers whose AGI is $80,000 or less ($160,000 for those who file jointly) can deduct up to $2,000.
This deduction is especially valuable to upper-income parents who don't qualify for either the Hope or Lifetime Learning tax credits, which have much lower income caps.
Note: if you take the deduction, you cannot also claim either of the above mentioned higher education tax credits.
-Those who work in education can deduct up to $250 worth of classroom supplies that they personally paid for. According to tax authority CCH, in 2005 — the last year this was available — more than 3 million individuals claimed this deduction.
Virtually anyone who works at least 900 hours in a K-12 environment is eligible.
-Military personnel serving in a combat zone can include combat pay to determine if they are eligible for the earned income tax credit.
In addition, this act beefs up the enforcement powers of the IRS by increasing the size of rewards that can be paid to "whistleblowers" who turn in tax cheats. It also raises the penalty on those who submit "frivolous" filings that clog the tax courts. An example would be claiming that the income tax system is unconstitutional.
Also extended are many of the tax breaks aimed at rewarding taxpayers who install or adopt devices aimed at saving energy. Unfortunately, the only one that affects individual consumers as opposed to businesses is the credit for installing solar-powered equipment such as water heaters and photovoltaic cells.
The "residential energy property credit," which lets you deduct a portion of the cost of installing energy efficient windows, doors, water heaters and certain appliances, was not extended. However, it still has life left: it expires at the end of 2007.
Unlike many of the other provisions, this legislation makes permanent enhancements to Health Savings Accounts (HSAs).
Contributions to HSAs are tax-deductible, your money grows tax-deferred, and provided it is used to pay for healthcare expenses — even after you retire — it can be withdrawn tax-free.
Starting next year, the maximum you can contribute to one of these employer-sponsored accounts will no longer be limited by the plan's deductible amount. Thus, next year, a single individual will be able to contribute as much as $2,850.
In addition, you can contribute the maximum annual amount even if you don't become eligible to participate in the HSA until after the first of the year.
This is just the tip of the iceberg. If you own a business, there are significant tax breaks for research and development expenses. The deduction for donations of computers and other technology to libraries and schools is extended through 2007.
Small businesses, in particular, will benefit from a simpler method of calculating two tax credits that reward employers who hire the economically disadvantaged. Up to 40 percent of the first year's wages can be taken as a credit that reduces the company's tax bill on a dollar-for-dollar basis.
Be on the lookout for more details on these and other tax-saving changes.
The IRS is going to launch a major effort to educate taxpayers, but as always, it's up to you to know what deductions/credits you're eligible for. In light of the fact that this legislation was passed so late in the year, it's unlikely even tax software providers were able to incorporate it into their programs for do-it-yourself filers.
In the long run, hiring a professional to compute your 2006 taxes might actually save you money.
Hope this helps,
If you have a question for Gail Buckner and the Your $ Matters column, send them to: firstname.lastname@example.org, along with your name and phone number.