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Be aware of the kiddie tax and charity deductions —
and also the “filer’s special.”
Heads up, taxpayers.
This weekend, tucked between the afterglow of Thanksgiving feasting
and the adrenalin rush of Christmas shopping to come, is one of your
last best chances to map out what to do before Dec. 31 to put your
tax affairs in order for the April 16 filing deadline.
As in 2006, the traditional April 15 deadline lands in a weekend
next year, so we all have a little more time to file. But as always,
most of us have only until Dec. 31 to make many of the big decisions
that will increase our refunds or trim our balances due.
Uncle Sam even is running a blue light special this season.
Virtually everyone who files will get a one-time $30 or larger tax
credit that essentially is a refund of some old telephone excise
taxes that federal courts say the government overcharged. The
credits run as high as $60 depending on your household’s size, or
more if you are a business owner or keep really good records.
There are a few changes to look out for too.
The so-called kiddie tax, a potential trap for parents who put
sizable assets in their children’s names, now applies to children as
old as 18, not 14 as before. Charitably inclined senior citizens get
a new tax break if they donate IRA funds to their favorite cause.
The rest of us potentially face some new record keeping requirements
to prove we gave at all.
But despite the passage of two major tax bills in 2006 — the Tax
Increase Prevention and Reconciliation Act, or TIPRA, and the
Pension Protection Act, or PPA — the next income tax return most of
us wrestle with probably won’t seem remarkably different from the
last one, tax mavens say. So plan to start arranging potential
deductions and tweaking your year-end cash flow now to arrange the
best deal you can when you file.
Tough luck, kid
One of this year’s biggest potential shocks for upper income
families especially, may be the change in what’s known as the kiddie
tax, said Randy Gardner, a University of Missouri-Kansas City tax
law specialist and co-author of 101 Tax Saving Ideas.
The kiddie tax is a calculation designed to make it more difficult
for high-income households to shift large shares of that income to
their children to reduce the family’s total tax obligation.
“The tax previously applied to children 14 or younger,” Gardner
said.
“Now, it’s 18 and that is going to affect a lot of people,” he said.
Under the old law, parents of a child age 14 to 18 could transfer
assets to an account in a child’s name and know that the first $850
of that income would be tax free and that any additional income
probably would be taxed at about 15 percent, or what the child would
pay as a young adult filing his or her first return.
The new law raises that age to 18 and puts new limits on the
family’s potential tax break. The first $850 remains tax free, the
next $850 is taxed at 15 percent and anything above that $1,700 is
taxed at the parents’ rate, which can be as high as 35 percent.
Kiddie taxes apply only to what’s known as unearned income, usually
stock dividends, interest payments or the like, and not any money
youngsters earn working. But the new rules mean, among other things,
that larger amounts of college savings in Uniform Gifts to Minors
Accounts or similar plans might be taxed more heavily.
Transferring those funds into a more tax advantaged account, such as
a 529 plan for college, triggers an even knottier set of potential
tax complications. The cleanest way to make the change, experts say,
may be selling the investment in the child’s account, paying capital
gains taxes on that transaction and depositing what’s left in the
new, tax friendlier account.
But talk with a tax adviser first, suggests Jackie Perlman, senior
research tax analyst at H&R Block Inc. in Kansas City. It may not be
necessary to cash out the child’s account if the specific
investments in a portfolio won’t cause immediate tax complications.
“It just means you have some additional planning to do,” Perlman
said.
Sweet charity
Following your charitable impulses to bigger tax savings next spring
will be more complicated this time around.
On the plus side, if you are a senior citizen who’s required to pull
money out of an Individual Retirement Account this year, you can
make all or part of the distribution tax free by transferring the
money directly to a church or charity.
On the minus side, it will be tougher to fudge the value of other
charitable contributions if, unlikely as it seems, you were ever
tempted to do that. The Internal Revenue Service this year requires
receipts for all the cash you give — including to the collection
plate at church, the bell ringers’ kettles at the mall or the scout
troop fundraisers at work — after Aug. 17, 2006. You also may be
asked to prove that non-cash contributions you claim, such as used
clothing to a charity thrift shop, are in “good” condition.
“One problem is that we still don’t know how enforceable those
changes are going to be,” said Aimee Sanita, co-owner of Circle Tax
& Accounting Inc. in Westport.
“There are still a lot of details that haven’t been spelled out,”
she said.
A new Pension Protection Act provision that allows retirees to
transfer money from their traditional IRA directly to a qualified
charity is a potentially huge tax break for those who qualify, said
Mike Martin, CPA and tax specialist at Mike Martin & Associates Inc.
in Blue Springs.
Traditional IRAs — the tax deferred ones introduced two decades ago
— require that savers begin pulling money out of the accounts,
whether they need to or not, after they reach age 70˝ and to pay
income taxes on the withdrawals. The new law scraps those income
taxes for any of the IRA money that is transferred to a recognized
church or charity.
Savers who do this “can’t claim a deduction for making the
contribution, but they are still better off not having the taxable
income than they are claiming the deduction,” Martin said.
Conversely, the IRS is getting tougher about other charitable
deductions. It’s still possible to top off last-minute contributions
to favored churches or charities, but the new tax laws require
stricter documentation for any cash donors give.
Donors also must attest that any noncash contributions are in good,
usable condition in order to qualify for deductions for their
donations.
Much like the way IRS clamped down on perceived inflated deductions
for used-car donations a year ago, the service is taking a closer
look at inflated values for used clothing, appliances and similar
contributions now.
“The problem is, no one thinks there’s anything wrong with their
underwear,” said UMKC’s Gardner.
Meantime, there’s one potentially lucrative charitable donation
that’s always in style and easily verifiable for IRS tax
calculators, said Ken Logan, a certified financial planner with Peck
& Associates in Prairie Village.
“Giving appreciated stock is always good,” Logan said.
“You claim the deduction and the charity gets the gains,” he said.
Favor your 401(k)
Popping as much money as possible into your 401(k) or equivalent
plan at work is another perennial tax saver that works again this
year, said Chuck Weber, a CPA and certified financial planner at
Weber, Dorton, Beckstrom & Co. in Shawnee.
The contributions are subtracted from your taxable income, but not
tax deductible.
But that is a significant tax benefit now, plus a good deal in the
future when withdrawals are apt to be taxed at lower rates than your
income now, Weber said.
Individuals can contribute up to $15,000 to their plans for 2006,
and $5,000 more than that if they are 50 or older.
Small business owners have other options, added Circle Tax’s Sanita.
“We do a lot of SEP-IRAs,” she said.
SEPs, for simplified employee pension plans, are highly flexible
IRAs for self-employed workers and small-business owners that allow
contributions as high as 25 percent of their compensation, up to
$44,000 currently. And one particularly useful feature for qualified
participants this time of the year is that SEP choices and
contributions can be put off until the owner’s filing deadline,
usually in April, but as late as October if extensions are involved.
Your investments outside retirement plans also remain potential
sources of tax savings, said Martin in Blue Springs. You can gauge
them by adding up your losses and gains so far, comparing those to
potential losses and gains on investments you haven’t yet sold, and
then gauging your chances, by Dec. 31, of selling potential losers
to offset capital gains and as much as $3,000 of your ordinary
income.
Finally, you may be able to bunch some of your income, bonuses,
year-end billings and the like, into January to postpone income and
lump some potentially deductible expenses such as early 2008 tax
payments or cusp of the year medical costs into December to tweak
your tax savings further.
Average tax refunds continue to rise, IRS reports
1997 — $1,295
1998 — $1,342
1999 — $1,542
2000 — $1,624
2001 — $1,714
2002 — $1,939
2003 — $1,973
2004 — $2,073
2005 — $2,144
2006 — $2,237
File these away
Standard deductions are higher
IRS is taxing less of your income this year, even if you don’t
itemize. The new standard deductions* are:
Married, filing jointly — $10,300
Single — $5,150
Married, filing separately — $5,150
Head of household — $7,550
*Standard deductions are larger for taxpayers born before Jan. 2,
1942, or who are blind.
You may not need to file if…
•You are single, under 65 with income below $8,450 or 65 with income
below $9,700.
•You are married, filing jointly, under 65 with income below
$16,900. (This filing threshold is $1,000 higher if one of you is 65
or $2,000 higher if you both are.)
•You are married, filing separately, with income below $3,300.
•You are a head of household, under 65, with income below $10,850 or
65 with income below $12,100.
•You are a qualifying widow or widower, with a dependent child and
income below $13,600. (This threshold is $14,600 if you are 65.)
Some taxpayers in special situations involving alternative minimum
tax obligations, early retirement plan withdrawals, advance earned
income tax credit payments or self employment income may need to
file even if their incomes are lower than the filing thresholds.
Also, some taxpayers who don’t have to file otherwise may want to in
order to claim tax credits or special refunds for which they may be
eligible.
Contacting the IRS
The Internal Revenue Service Web site, which is at www.irs.gov, is a
primary source for forms, publications, answers to frequently asked
questions and other information, plus additional contact information
if you need that.
Taxpayers who don’t use the Internet can call the service’s basic
toll-free number, (800) 829-1040, for the same help.
By GENE MEYER
The Kansas City Star |
