Tax time is almost upon us again. And, as is almost always the case, there are some new things to be concerned about and some old things to make adjustments for.
There is a one-time tax credit available on the 2006 federal income tax return. It is a refund of excise taxes collected by phone companies on land lines, cell phones, and VoIP service on long distance telephone service and long distance and local bundled services between Feb. 28, 2003 and Aug. 1, 2006. These taxes are being refunded because of several recent court decisions which held that these taxes do not apply to long distance service. Taxpayers may request a refund for the actual amount of tax paid during this period by filling out Form 8913, Credit for Federal Telephone Excise Tax Paid, and filing it with the 2006 federal income tax return. If the phone records for the period are missing or incomplete, or if the taxpayer simply does not want to research the actual amount of tax paid, there is a standard amount that may be requested on whichever version of the Form 1040 the taxpayer files.
The standard amount ranges from $30 to $60, depending on the number of exemptions claimed on the 2006 return. In addition to the telephone tax credit, there are new credits available to those who held clean renewable energy bonds (CREB) or Gulf tax credit bonds (GTCB) during 2006. These bonds generally do not pay periodic interest, and the purpose of the credit is to compensate the holders of the bonds. To claim these credits, the taxpayers must file Form 8912 with their returns.
New Kiddie Tax Rules
The rules for taxing the investment income of minor children changed for 2006. The Kiddie tax now applies to children under 18, rather than under 14, with an investment income greater that $1,700. This provision taxes a portion of the investment income of the child at the parents’ marginal tax rate. If the child’s adjusted gross income is greater than his earned income by more than $6,050, the child may be subject to the Alternative Minimum Tax. As before, parents have the option of including all of the child’s income on their return but must file Form 8814 to do so.
Expired Tax Benefits That Didn’t
The instructions to the Form 1040 state that some deductions are no longer available for 2006. However, three of these were reinstated late in December – deductions for state and local sales taxes, higher education tuition and fees, and educator expenses. Because the tax forms were already printed, there is some creative reporting to be done. These deductions are claimed on lines also used for other deductions. For example, the higher education tuition and fees deduction is reported on line 35 of the Form 1040, which is also used to report the “domestic production activities deduction.” To best understand how to take these deductions, go to www.irs.gov and pull up Topic 302 – Highlights of Tax Changes (type it in the search box).
Checklist to Help Avoid Mistakes
Mistakes on a tax return can result in processing delays, costly penalties and inquiries from the IRS. Here is a checklist to help avoid common mistakes.
• Use the peel-off label
• Verify all the social security numbers on the return
• Check the correct status and use the correct tax table column
• Claim the correct number of dependents
• Double check all figures on the return
• Provide a daytime phone number
• Sign and date the return
• Attach all W-2s
• Mail the return to the correct processing center