Timely Tips to Help Trim Your 2006 Income Taxes
Previewing your 2006 tax return can alert you to money-saving tactics for the end of the year. There are old and new twists to consider-and one bonus of up to $60 with no planning.
Phony charge. After losing court challenges, the Treasury has rescinded a 3 percent excise tax on long-distance phone calls and will refund some of it, going back to March 2003.
People who accept a standard amount won't have to dig up records of their long-distance calls. A line on the 2006 return will allow a rebate of between $30 and $60. The most is for those with at least four exemptions on the 2006 return-a couple with two kids, for example. The least is for someone with one exemption.
People who don't file a tax return because they have no taxable income can use Form 1040EZ-T for a rebate.
Living green. Improving your home's energy efficiency can yield a tax credit of up to $500 for a portion of the cost of upgrading heating and cooling equipment, windows and doors, and insulation. Each dollar of credit saves a dollar of tax. But note: The $500 cap applies to spending in 2006 and 2007 combined. Also available are larger credits for using solar energy.
Buyers of hybrid cars can get a tax credit of $250 to $3,150, based on the model. The credit covers sales in 2006 and later, but waiting might hurt since the credit phases out for an automaker when its overall hybrid sales top 60,000, already occurring on Toyotas.
Larger nest egg. The cap on employee 401(k) contributions this year is $15,000, up from $14,000; people 50 or older can save an extra $5,000, up from $4,000.
The ceiling on IRA deposits for 2006 is $4,000, the same as for 2005. But people 50 or older can invest an extra $1,000, up from $500.
Self-employed people with SEP retirement accounts or certain Keogh plans may be able to put away as much as $44,000, up from $42,000.
Family ties. Minors may face higher tax on investments for 2006 and beyond unless dividends, capital gains, and other income are curtailed in favor of deferred income, tax-exempt interest, and long-term growth.
Blame an expanded kiddie tax that can tax part of a child's income not at the child's typically low rate but at a parent's usually higher one. Before 2006, the kiddie tax applied to minors under age 14. It now applies through 17. Relief: The kiddie tax won't kick in until 2006 investment income tops $1,700.
Waiting for Congress. Unless expired deductions are restored, some breaks will disappear this year. People who pay little or no state income tax won't be able to deduct sales tax instead-an option that may also be worthwhile if you pay hefty sales tax on a car or other pricey item.
Also in limbo: deductions of up to $250 for teachers who buy classroom items and up to $4,000 for college tuition.
Managing income. Some ways to bolster 2006's deductions include accelerating some of next year's charitable giving into 2006, making payments of state and local tax for 2006 before year-end, and buying equipment for a sideline business. Selling a doggy investment at a loss can offset an investment gain or other income.
This story appears in the October 9, 2006 print edition of U.S. News & World Report.