A new tax act signed by President Bush this past week may deliver some treats for taxpayers just in time for the holidays.
The Tax Relief and Healthcare Act of 2006 will now extend and in some cases modify several important tax provisions that will affect a lot of taxpayer this year. The passage of two other major tax bills--the Tax Increase Prevention and Reconciliation Act of 2005 and Pension Protection Act of 2006--offer many other tax benefits for 2006.
But time is running out to cash in. While you don't have to file your return until April 16, 2007, you'll need to use these strategies before the end of the year to take advantage of these tax breaks.
Here are six tax-saving tips you don't want to miss for 2006. The first two are directly related to the law that Bush signed this past week.
--Prepay January 2007 college tuition payment. This will increase the amount of tuition you can apply to Hope or Lifetime Learning Credits. Plus, the new law signed this week reinstates tuition and fees deductions for higher education expenses. This deduction had expired earlier this year and it's back. You can deduct up to $4,000, depending on your income.
--Teachers: Buy $250 worth of supplies. Teachers who purchase classroom supplies and are not reimbursed may deduct up to $250, another provision that had expired earlier this year and was brought back with the new law.
--Make a charitable donation and get a receipt. To deduct any charitable donation of money, the IRS now says you must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution.
Also, the clothes or furniture you donate to Salvation Army or a thrift store now - anytime after August 17, 2006 -- have to be in good used condition and you may have to prove it. So have the thrift store issue you a written receipt with the market value of the items and take a photo.
--Pay your January mortgage payment now. If you pay your January 2007 mortgage payment by the end of the year, you may be able to claim the interest portion of the payment as part of your itemized deductions for 2006.
--Pay fourth quarter state estimated income tax. If you make estimated payments to state or local government, pay your January payment before the end of the year, so you can claim that on your itemized deductions. But keep in mind if you paid a lot of sales tax this year. The new law reinstated the IRS provision that lets you choose between taking a deduction for your state income tax or all of the sales tax you paid for the year.
--Put your child's income in a 529 plan. This year the age that children are subject to the "kiddie tax" increased. So anyone earning substantial income under the age of 18 will be taxed at their parent's income tax rate (before it was under age 14).
Kids must earn less than $1,700 in interest, dividends, capital gains and other non-wage income or they're taxed at their parent's rate. A way around that is to put that extra income in a state-sponsored 529 college savings plan.
Most states offer a state income tax deduction for contributions, or put the money in some other tax-advantaged account. (Another idea: Put it in a Roth IRA. That won't save you from paying taxes on the money. But you won't have to pay tax on that money when you take it out.) These strategies should give you a tax break regardless of whether you fall into the Alternative Minimum Tax zone or not, but talk to a tax adviser or use the AMT Assistant tool on the Internal Revenue Service website (www.irs.gov) to make sure you're clear.
Sharon Epperson’s book, "The Big Payoff: 8 Steps Couples Can Take To Make The Most Of Their Money – And Live Richly Ever After" (Collins) hits stores in May 2007.