Confusing changes coming to tax code


Published: Thursday, January 18, 2007 at 6:01 a.m.
Last Modified: Wednesday, January 17, 2007 at 1:59 p.m.
Tax time is near and you know what that means, right?
It means changes, and lots of them. Why must we poor taxpayers have to put up with this constant tinkering of the code?
Oh well, as Richard Hooker, a British theologian said, ''Change is not made without inconvenience, even from worse to better.''
That about sums up the many tax code changes that will affect your 2006 return. For instance, educators are still allowed to deduct up to $250 per year for unreimbursed expenses for supplies they buy for their classroom. That deduction was scheduled to end in 2005.
The problem is some of the changes won't be reflected in the tax forms that the IRS sent out. That's because Congress, known for moving at a glacial pace, passed the Tax Relief and Health Care Act of 2006 too late to make the IRS' publication deadline.
The tax forms and first round of instructions, in fact, were printed well before the president signed the bill into law in December, says David Bergstein, a CPA and analyst for CCH Complete Tax (www.completetax.com), an online tax program for the do-it-yourself tax filer.
So this is your notice from me. Whether you plan on doing your own taxes or having them prepared by a professional, you need to read up on these changes.
You can do that by going to the IRS Web site (www.irs.gov). Once there, click on the link for ''individuals'' and you will see a number of announcements you should read before starting your own tax return or having someone else do it.
''If you don't know what you don't know, you don't know what to ask,'' Bergstein said.
This tax year may be particularly problematic for people who prepare their own return, says Cindy Hockenberry, tax information analyst for the National Association of Tax Professionals (NATP).
''People will look at the form that was mailed to them and not realize that some deductions have been extended,'' Hockenberry said. If you plan to buy a tax-preparation program you need to go to the software company's Web site and download all updates, she said.
Even IRS commissioner Mark Everson warned Congress that this would be a confusing year. In a letter to Sen. Max Baucus, D-Mont., now chairman of the Senate Finance Committee, Everson wrote in December that all the late changes will challenge the agency and ''add significant risk to an already high risk filing season.''
To get you started on your research, here is a crib sheet of some of the changes for 2006 you may not be aware of as outlined by NATP and CCH:
  • Individual taxpayers may still elect to deduct either state and local income taxes or state and local general sales taxes as an itemized deduction. Look for Publication 600, which will include the state and local sales tax tables and instructions for claiming the sales tax deduction.
  • For 2006 only, taxpayers are eligible for the Telephone Excise Tax Refund, which is designed to refund previously collected long distance telephone taxes. The refund is available to anyone who paid such taxes on a landline, wireless, or Voice over Internet Protocol service.
    And so that we all don't have to go digging for old telephone bills, the IRS is offering a standard refund amount that ranges from $30 to $60. How much you get is based on the number of exemptions you claim on your tax return. The standard amount is not available to businesses and nonprofits, which must base their refund on the actual amount of tax paid.
  • Just as a reminder, the maximum limit for a 401(k) plan, a tax-sheltered 403(b) annuity, a salary reduction simplified employee pension (SEP) plan, or a government-sponsored 457 plan increases to $15,000 in 2006. People ages 50 or older can make additional catch-up contributions to their plans of $5,000 in 2006.
  • Beginning in 2006, there are new energy-saving tax credits. The credit is subject to a lifetime limitation of $500.
  • For the first time, you can divide your refund and have it deposited in up to three separate accounts. This includes having the money sent directly to a retirement account such as a 401(k) or an Individual Retirement Account.
    To have your refund divided, you have to complete and attach to your federal income tax return Form 8888 ''Direct Deposit of Refund to More Than One Account.''
    The latter change may be welcome among many couples who file jointly. I've encountered quite a few spouses who learn - after the fact - that their husband or wife spent the joint tax refund without their knowledge.
    Spouses who keep separate accounts can now split the refund before the money comes into the household. ''This might reduce a lot of arguments,'' Bergstein said.
    See, Hooker was right. Some change is for the better even if it's inconvenient.
    Write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071, or singletarym@washpost.com.
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