Tax Breaks Return in Force for 2006( ZT)

Column: Phone Users, Energy Savers Get Tax Breaks, but Parents Lose on 'Kiddie' Tax
Keyword -- Telephone users, energy-savvyhomeowners and parents of older teens should pay special attention attax time this year. Many changes affecting 2006 tax returns are aimedsquarely at you.
Even if you don't have to file a tax return you can get a refund on certain telephone taxes.

Andlate last year, Congress reinstated several popular tax breaks for themiddle class, including a deduction of up to $4,000 for highereducation tuition and fees. The provision, which expired at the end of2005, was designed to help taxpayers whose incomes put them beyond thereach of two education tax credits that primarily help moderate- andlower-income families.

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

Congress also took something awayfrom family pocketbooks last year -- raising the age at which teens aresubject to the "kiddie" tax, the tax on the child's investment incomethat must be figured at the parent's top rate instead of the child'sgenerally lower rate.

Before, only those under 14 were subject tothe higher tax; now, those under 18 are included. That change mayensnare earnings on certain college funds or savings vehicles startedbefore taxpayer-friendly 529 college plans became widely available.

Andthere's a bit of bad news for packrats. Taking a tax deduction fordonating 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, availableto taxpayers who itemize.

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

Homeownerswho purchased insulation, certain energy-efficient windows, hot waterboilers, furnaces, air conditioners or similar equipment in 2006 canclaim the residential energy credit. Taxpayers can take a credit for 10percent of the cost, though there's a maximum, and specific limitsapply to certain equipment.

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

Mosttaxpayers can claim a one-time refund on federal excise taxes forlong-distance telephone service -- whether for landline, cell phone orVoice over Internet Protocol. The government stopped collecting the 3percent tax after July 2006 after businesses repeatedly fought the taxand won.

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

Even ifyou aren't required to file a tax return -- perhaps your income was toolow -- you can still get the refund. There's a new form, 1040 EZ-T, forthis purpose.

This year the IRS will, if requested, deposit arefund directly into three separate financial accounts, such aschecking, savings and retirement. The idea, said IRS Commissioner MarkW. Everson, is to encourage savings and dampen demand for refundanticipation loans, which provide quick cash for high fees using theexpected refund as collateral.

Also for 2006, the usualinflation-related increases are in place for personal and dependentexemptions, standard deductions, thresholds at which certain taxbenefits begin to phase out and the maximum income for claiming earnedincome credit. There's a slight increase in income threshold for thephase-out of the deduction for IRA contributions by joint filersalready covered by retirement plans at work.

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

Thoughthis 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 ontheir required IRA withdrawals and to put the money to charitable use.

Inanother IRA-related change, military personnel who received nontaxablecombat pay in 2006 can include that as earned income when figuring IRAcontributions. That gives them a higher IRA contribution, and if theyput money into a traditional IRA, it may also mean a higher taxdeduction. (Contributions to Roth IRAs aren't tax deductible, thoughthey have tax benefits later on.)

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

Toincorporate the changes, the IRS says that some lines on the forms willessentially do double duty: For example, Line 5 of the Schedule Aitemized deductions form is for state and local income taxes, buttaxpayers who choose to deduct state sales taxes instead will enterthat figure there.

The IRS says it will send updated instructionsto taxpayers who are mailed tax packets. But with electronic taxpreparation and filing skyrocketing, not many people still receive suchpackets.

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

On the Net: http://www.irs.gov