Column: Tax breaks return in force

Column: Tax breaks return in force

	Published : Tue, 30 Jan 2007 21:01 By : Agencies Print this Story

WASHINGTON (AFX) - Telephone users, energy-savvy homeowners and parents of older teens should pay special attention at tax time this year. Many changes affecting 2006 tax returns are aimed squarely at you.

On balance, the news is good.

Even if you don't have to file a tax return you can get a refund on certain telephone taxes.

And late last year, Congress reinstated several popular tax breaks for the middle class, including a deduction of up to $4,000 for higher education tuition and fees. The provision, which expired at the end of 2005, was designed to help taxpayers whose incomes put them beyond the reach of two education tax credits that primarily help moderate- and lower-income families.

Lawmakers also reinstated a deduction for state and local sales taxes that primarily benefits people living in states without an income tax. Also restored was a deduction of up to $250 for teachers' expenses.

Congress also took something away from family pocketbooks last year -- raising the age at which teens are subject to the 'kiddie' tax, the tax on the child's investment income that must be figured at the parent's top rate instead of the child's generally lower rate.

Before, only those under 14 were subject to the higher tax; now, those under 18 are included. That change may ensnare earnings on certain college funds or savings vehicles started before taxpayer-friendly 529 college plans became widely available.

And there's a bit of bad news for packrats. Taking a tax deduction for donating the deteriorating junk in your attic to charity is harder. Household goods and clothing donated after Aug. 17, 2006, must be in 'good used condition or better' to qualify for the deduction, available to taxpayers who itemize.

But if you improved your home's energy conservation, you may be able to take a residential energy credit. A credit is a dollar-for-dollar reduction in tax liability, whereas a deduction only reduces the income against which tax is assessed.

Homeowners who purchased insulation, certain energy-efficient windows, hot water boilers, furnaces, air conditioners or similar equipment in 2006 can claim the residential energy credit. Taxpayers can take a credit for 10 percent of the cost, though there's a maximum, and specific limits apply to certain equipment.

People who purchased hybrid or other alternative-fuel vehicles can also take a credit, though it's reduced if the manufacturer has sold 60,000 or more such vehicles. A list of vehicles and their credits is on the Internal Revenue Service Web site at http://www.irs.gov.

Most taxpayers can claim a one-time refund on federal excise taxes for long-distance telephone service -- whether for landline, cell phone or Voice over Internet Protocol. The government stopped collecting the 3 percent tax after July 2006 after businesses repeatedly fought the tax and won.

You can claim either a standard refund of $30 to $60, depending on the number of exemptions checked on your tax return, or the actual excise taxes paid for service billed between March 1, 2003, and July 31, 2006, if you have phone bills documenting the tax. You don't have to itemize deductions to claim this refund.

Even if you aren't required to file a tax return -- perhaps your income was too low -- you can still get the refund. There's a new form, 1040 EZ-T, for this purpose.

This year the IRS will, if requested, deposit a refund directly into three separate financial accounts, such as checking, savings and retirement. The idea, said IRS Commissioner Mark W. Everson, is to encourage savings and dampen demand for refund anticipation loans, which provide quick cash for high fees using the expected refund as collateral.

Also for 2006, the usual inflation-related increases are in place for personal and dependent exemptions, standard deductions, thresholds at which certain tax benefits begin to phase out and the maximum income for claiming earned income credit. There's a slight increase in income threshold for the phase-out of the deduction for IRA contributions by joint filers already covered by retirement plans at work.

There's a new wrinkle affecting taxpayers who have hit age 70 1/2, the age at which required minimum withdrawals from IRAs begin. They can now make a direct transfer of up to $100,000 from the IRA to a qualifying charity. The amount of that transfer is excluded from taxable income.

Though this may primarily benefit wealthy taxpayers who don't need the money, it's also a way for the less-well-off to avoid paying income taxes on their required IRA withdrawals and to put the money to charitable use.

In another IRA-related change, military personnel who received nontaxable combat pay in 2006 can include that as earned income when figuring IRA contributions. That gives them a higher IRA contribution, and if they put money into a traditional IRA, it may also mean a higher tax deduction. (Contributions to Roth IRAs aren't tax deductible, though they have tax benefits later on.)

Congress' restoration in December of the expired deductions for education expenses and state and local sales taxes came too late to be reflected on 2006 tax forms and publications, which were printed earlier in the fall.

To incorporate the changes, the IRS says that some lines on the forms will essentially do double duty: For example, Line 5 of the Schedule A itemized deductions form is for state and local income taxes, but taxpayers who choose to deduct state sales taxes instead will enter that figure there.

The IRS says it will send updated instructions to taxpayers who are mailed tax packets. But with electronic tax preparation and filing skyrocketing, not many people still receive such packets.

All forms and instructions are posted on the IRS' Web site.