Tax Law Changes 2006

There have been new laws since May, 2006.  In addition, Congress acted in 2006 to continue some expired tax goodies that were set to expire.. 

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 August 1, 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 You 2006 Return              Amount of Your Refund 

One                                                                                         $30                 

Two                                                                                         $40

Three                                                                                       $50

Four                                                                                         $60

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, 1040EZ-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.  

Non-cash Charity

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.”  If IRS decides to audit this issue, your records had better be in good order.  A few photos will probably be a big help.

Kiddie Tax

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 70½ 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 70½ 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