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Top 5 Tax Changes
1. Tougher Kiddie Tax Laws
Last year, the Kiddie Tax rules grew up. Under the old rules, any unearned income above $1,600 was taxed at the parent's higher tax rate until the child turned 14. But because of new rules that took effect in 2006, that age has now been bumped up to 18, and adjusted for inflation. So here's the deal: Unearned income above $1,700, including investment gains in custodial accounts, is taxed at the parent's higher rate until age 18.
What should families take away from this? Going forward, parents may find custodial accounts, such as UGMAs and UTMAs, less attractive, says Donna LeValley, contributing editor to J.K. Lasser's 'Your Income Tax 2007.' She believes the 529 Plan is more helpful, especially for those with younger children, since the money grows federally tax-free and many states offer parents a state tax deduction. Click here for more details on the Kiddie Tax.
2. New Telephone Refund
Consider this tax break a small gift from Uncle Sam. The IRS is refunding taxpayers a nominal amount of money if they paid federal excise taxes on their long-distance or bundled services between Feb. 28, 2003, and Aug. 1, 2006. (It seems customers were initially overcharged since the Federal Excise Tax doesn't apply to long-distance service.) All you have to do to get it is request this refund on your 2006 return. The U.S. Department of the Treasury estimates individuals will be refunded around $10 billion.
How much is this refund worth to you? Taxpayers have two choices. They can collect all of their past bills and request the entire amount. (Documentation is required.) Or, they can simply take a standard refund amount, which ranges between $30 and $60 depending on how many exemptions a family takes.
3. New Home Energy Credits
If you made your home more energy efficient this past year, Uncle Sam will reward you for your efforts. According to the Energy Policy Act, consumers who installed energy efficient items for their home during 2006 are eligible for a tax credit worth up to $500. Qualifying items include everything from insulation and new exterior windows to hot water boilers and oil furnaces. The new law even allows a credit for those concerned citizens who added solar panels (worth up to $2,000) or a fuel-cell power plant (worth up to $500) to their homes.
The good news is that the energy credit is good for 2007, as well.
4. Tougher Rules on Donations
According to the Pension Protection Act of 2006, all noncash donations must be in "good used condition or better." Also gone are the days when you can simply guess how much a bag of clothing is worth. Now you must keep a list of every item you donate and estimate its "fair market value."
For 2007, taxpayers will need a receipt or cancelled check for every cash donation, no matter how small. So churchgoers who make a weekly donation to the "plate" may want to make a symbolic donation at services and then write a check to the parish instead.
5. Popular Breaks Renewed
The Republican Congress did its best to pass legislation during its final days. In December it passed an extension for three popular tax breaks.
· The educator expense deduction. This allows teachers to write off up to $250 for supplies.
· The college tuition deduction. This lets families deduct up to $4,000 in college tuition and fees.
· The state and local sales tax deduction. Here, taxpayers can choose between deducting their state income tax bill -- or their state sales tax bill. This provides those living in income-tax-free states a fairly large tax break.
Article by Stacey Bradford
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