Tax breaks passed at last minute will require some adjustments in filing

Personal Finance

January 14, 2007|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

Congress breathed new life last month into some expired tax breaks - but not in time to make the Internal Revenue Service deadline for printing up its 2006 tax forms.

The result: Lines to take deductions for sales tax, college tuition and classroom supplies don't appear on tax forms or in instruction booklets.

The IRS recently posted instructions on its Web site on how people filing paper returns can report these deductions. If you're one of these, keep an eraser handy.

FOR THE RECORD - The name of a tax preparer in Eileen Ambrose's personal finance column on Sunday was incorrect. The full name is Liberty Tax Service.
The Sun regrets the error.

If you file electronically, software programs are supposed to be updated with the latest instructions. That will eliminate some confusion. Yet you could still be affected.

The IRS won't start processing returns that claim one of these three deductions until Feb. 3. Paper returns that come in earlier will be held until the IRS is ready to process them, says Jim Dupree, a spokesman for the IRS in Baltimore. But electronic returns filed before Feb. 3 will be rejected if they claim one of the three tax breaks. These filers will have to resubmit their returns, Dupree says.

Filing taxes is confusing enough without deductions failing to match up with lines on forms. Do-it-yourselfers filing paper returns are the most likely to get stumped and frustrated.

If you still file your return the old-fashioned way, here's how to claim the three deductions:

Sales tax. You have the option of deducting state sales taxes you paid last year or the amount you shelled out in state and local income taxes. Congress reinstated this deduction for 2006 and 2007 after it had expired in 2005.

The sales tax option largely benefits those in nine states with low or no income taxes, including Florida, Texas and Alaska, says David Bergstein, a tax analyst with CCH Inc., a provider of tax information.

Maryland isn't among them. But if you bought a big-ticket item last year (say, a boat), you might be better off deducting the sales tax, he says.

You can deduct the actual sales taxes paid if you still have the receipts, or you can use the sales tax estimates in IRS publication 600.

You must claim the sales tax deduction on line 5 of Schedule A and file that along with a form 1040. Line 5 is also the line to claim state and local taxes. On the left of line 5, write "ST" to signal that you're claiming the sales tax deduction.

Classroom expenses. Teachers from kindergarten through high school will be able to deduct the cost of school supplies that they pay for with their own money. This deduction, worth up to $250, has been revived for 2006 and 2007.

You must claim this deduction on line 23 of the 1040. This is also the line for the Archer Medical Savings Account deduction. You should put an "E" to the left of entry if you are only claiming the education expense deduction. Put a "B" there if you are claiming both the education and medical account deductions. If you're taking both, you'll need to attach a statement showing how much you are claiming for each.

Higher education tuition and fees. This deduction, worth up to $4,000 of tuition and fees paid to colleges or other postsecondary schools, is back for 2006 and 2007. The maximum deduction is available to single filers with adjusted gross income of $65,000 or less and to joint filers with income up to $130,000.

Up to $2,000 can be deducted by single filers earning more than $65,000 but not more than $80,000, and joint filers with incomes exceeding $130,000 but not more than $160,000.

The deduction must be claimed on line 35 of the 1040, which is also the line for "domestic production activities deduction." If you're taking the tuition deduction only, put a "T" in the space to the left of the entry. If you're taking the tuition and the domestic production deductions, put a "B" there instead.

Attach a statement that breaks out the amount of each deduction.

This isn't the first time that tax breaks didn't pass on time to be included on forms. It happened when Congress introduced the sales tax deduction in 2004 and the year after when tax relief provisions were adopted in the wake of Hurricane Katrina.

But CCH's Bergstein says that some do-it-yourselfers filing paper returns might miss a deduction if they aren't aware that Congress extended these tax breaks or don't visit the IRS Web site for updates. He predicts an uptick in amended returns this year once filers realize they missed out on a deduction.

On the other hand, Bergstein notes, this might be the year when self-preparers abandon paper returns and file online or hire a tax professional.

Tax software programs will ask filers questions and direct them to the correct lines if they are entitled to deductions. And professionals should be up-to-date on the last-minute tax changes and how to claim deductions.

"We have been blasting our members with information," says Cindy Hockenberry, tax information analyst with the National Association of Tax Professionals.

To keep up-to-date on filing instructions, go to www.irs.gov.

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