New steps to take now for easing tax bite

Personal Finance

November 19, 2006|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

It's that time again to look for moves to make before year's end to trim your upcoming tax bill.

Of course, there are the evergreens: Sock away money in tax-friendly 401(k)s or individual retirement accounts. Sell off loser stocks to offset capital gains on winners. Bundle medical expenses so they're large enough to deduct. And don't forget to use up cash remaining in a flexible spending account.

These tactics are still worthwhile. But there are a few new tax breaks worth looking at this year, as well as some recent tax revisions that might change your investment strategy or the way you make donations. And there's one new refund option aimed to encourage savings.


Phone tax refund. The Treasury Department this year finally abolished a tax on long-distance calls that had been imposed to finance the Spanish-American War of 1898. A one-time refund will be given to those who paid the tax on phone bills after Feb. 28, 2003, and before August of this year.

Millions will be eligible. A line to claim the federal telephone tax credit will appear on returns (it will be Line 71 on the 1040). Even those whose income is low enough that they don't need to file a return will be able to claim the refund by filling out a new form, the 1040EZ-T, said Barbara Weltman, author of J.K. Lasser's 1001 Deductions and Tax Breaks.

You can figure your refund based on how much you actually paid, if you have old phone bills, Weltman said. Or, you can opt for the standard refund. That amounts to $30 for an individual, $40 for a two-person household, $50 for three and $60 for families of four or more.

Energy credits. This is the first year for credits designed to encourage people to make their home more energy-efficient, said Mark Luscombe, principal tax analyst with CCH Inc. in Illinois. (A credit reduces your bottom-line tax bill dollar-for-dollar. That makes it better than a deduction.)

You can get a maximum credit of $500 over two years for adopting certain energy-saving measures. The credit will cover part of the cost of adding insulation or installing exterior windows and doors. (No more than $200 can be claimed for windows.)

Also, the credit can be applied within limits to furnaces, heat pumps, hot water boilers and advanced main air-circulating fans.

"All these have to meet energy-efficient standards," Luscombe said.

Those going solar by installing solar panels or solar water heaters may receive an annual credit worth up to $2,000.

But don't procrastinate. Energy credits are only good for this year and next.

Hybrid credits. Buyers of fuel-efficient hybrid vehicles are entitled to a credit worth a few hundred dollars to more than $3,000, depending on the vehicle.

If you've been considering a hybrid, buy now rather than next year, said Theresa Bandell, manager of Stegman & Co., a Towson accounting firm.

That's because the credit applies only to the first 60,000 hybrids sold by each manufacturer and then starts phasing out, she said.

This is already happening with some popular models. For example, consumers who bought a Toyota Prius before the end of September will receive a $3,150 credit. But Toyota hit the 60,000 limit, so the credit as of October has been cut in half to $1,575. The Prius credit will drop again in April and disappear in October.

There are other tax revisions this year that filers may not be aware of but could affect their tax planning:

"Kiddie" tax. High-income parents often transfer securities to their teenagers to take advantage of the teens' lower tax rates. Congress shut the door on this by raising the age of the so-called kiddie tax.

Under this tax, children aren't taxed on the first $850 of unearned income, usually dividends, interest and capital gains. The next $850 is taxed at the child's rate. Anything above $1,700 is taxed at the parents' rate. The kiddie tax used to apply to children until they reached age 14, and thereafter they were taxed at their own rate. Now, the kiddie tax doesn't disappear until they reach age 18.

Bill Fleming, a tax director at PricewaterhouseCoopers in Hartford, Conn., said his clients had been shifting securities to teens in anticipation of a change in the capital gains tax rate. Beginning in 2008 and through 2010, that rate will drop to zero for those in the two lowest income tax brackets. The goal was that high school students could sell securities without paying any tax on the gains and then use the money for college, Fleming said. "Now that's gone," he said.

Fleming now advises parents to invest in tax-friendly 529 college savings plans.

Alternative minimum tax. Congress this year provided short-term relief from the AMT, saving about 15 million returns from the AMT this tax season, according to Luscombe. Designed decades ago to prevent the rich from avoiding taxes, the AMT was never adjusted for inflation and is increasingly snagging middle-income families.

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