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Its tax time and everyone is looking for deductions that would ensure them a refund or at least reduce their tax liability. From charitable contributions to hiring one of your children to work in your business is available to you through the IRS tax code. You just need to know how. Well, I have identified a few tax tips and changes that may actually help you accomplish your goal.
Restrictions on Charitable Contributions:
All cash contributions made in tax years beginning after August 17, 2006, to any qualified charity must be supported by a dated bank record or a dated receipt. In other words, if you did not deposit the money first in your bank account, the IRS can disallow this expense.
If you are a cash base business, you must obtain a bank account and deposit the money into the bank; then withdraw the money if you want to make cash contributions to a charity (i.e. your church or pastor) or you must write a check. This only applies if you are going to report the contribution on your tax return.
Tax Tip for the Entrepreneur:
If you are self employed or own your own business, did you know that you could hire your children to work in your company? If they are under the age of 18, you may hire your child to work in your company and pay them up to $5,150.00; it will be a deduction for you; and, your child will not be required to file a tax return. Most of all, you can still claim him/her as a dependent. (Note: There will be additional paperwork for you to complete with having employees. However, the benefit should out way that expense.)
Tax Tip for the Employer:
The due date for filing Form 940 for 2006 is January 31, 2007. However, if you deposited all your FUTA tax when it was due, you may file Form 940 by February 12, 2007.
If the IRS receives your return after the due date, they will treat your return as if you filed it on time if the envelope containing your return is properly addressed, contains sufficient postage, and is mailed First Class or sent by an IRS-designated private delivery service by the due date. However, if you do not follow these guidelines, the IRS will consider your return filed when it is actually received.
Credit for Federal Telephone Excise Tax:
If you were billed after February 28, 2003, and before August 1, 2006, for the federal telephone excise tax on long distance or bundled service, you may be able to request a credit or refund of the tax paid. You had bundled service if your local and long distance service was provided under a plan that does not separately state the charge for local service.
You cannot request the credit if you have already received a credit or refund from your service provider. If you request the credit, you cannot ask your service provider for a credit or refund and must withdraw any request previously submitted to your provider.
Form 1040 Changes:
The majority of taxpayers file electronically, but taxpayers using a paper Form 1040 will have to follow special instructions if they are claiming any of the three deductions. Form 1040 will not be updated. Instead, taxpayers should follow these steps:
State and Local General Sales Tax Deduction:
The deduction for state and local general sales taxes will be claimed on Schedule A (Form 1040), line 5, “State and local income taxes.” Enter “ST” on the dotted line to the left of line 5 to indicate you are claiming the general sales tax deduction instead of the deduction for state and local income tax.
The IRS also will issue Publication 600 for 2006, which includes the state and local sales tax tables, a worksheet and instructions for figuring the deduction.
This option is available to all taxpayers regardless of where they live, though it’s primarily designed to benefit residents of the eight states without state and local income taxes.
Higher Education Tuition and Fees Deduction:
Taxpayers must file Form 1040 to take this deduction for up to $4,000 of tuition and fees paid to a post-secondary institution. It cannot be claimed on Form 1040A.
The deduction for tuition and fees will be claimed on Form 1040, line 35, “Domestic production activities deduction.” Enter “T” on the dotted line to the left of that line entry if claiming the tuition and fees deduction, or “B” if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering “B,” taxpayers must attach a breakdown showing the amounts claimed for each deduction.
Educator Expense Adjustment to Income:
Educators must file Form 1040 in order to take the deduction for up to $250 of out-of-pocket classroom expenses. It cannot be claimed on Form 1040A.
The deduction for educator expenses will be claimed on Form 1040, line 23, “Archer MSA Deduction.” Enter “E” on the dotted line to the left of that line entry if claiming educator expenses, or “B” if claiming both an Archer MSA deduction and the deduction for educator expenses on Form 1040. If entering “B,” taxpayers must attach a breakdown showing the amounts claimed for each deduction.
The self-employment tax rate on net earnings remains the same for 2006. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
The maximum amount subject to the social security part for tax years beginning in 2006 has increased to $94,200. All net earnings of at least $400 are subject to the Medicare part.
The maximum amount subject to the social security part for tax years beginning in 2007 has increased to $97,500 from $94,200 in 2006. All net earnings of at least $400 are subject to the Medicare part.
Standard Mileage Rate:
For 2006, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for your business is 44.5 cents a mile for all business miles driven.
For 2007, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck is increased to 48.5 cents a mile for business miles driven.
Income Limits Increased for Hope and Lifetime Learning Credits:
For 2006, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $45,000 and $55,000 ($90,000 and $110,000 if you file a joint return). You cannot claim an education credit if your MAGI is $55,000 or more ($110,000 or more if you file a joint return). This is an increase from the 2005 limits of $43,000 and $53,000 ($87,000 and $107,000 if filing a joint return).
Limit on Itemized Deductions Increases:
If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2006, this amount is increased to $150,500 ($75,250 if married filing separately). In 2005, the amount was $145,950 ($72,975 if married filing separately). Beginning in 2006, the amount by which these itemized deductions are reduced is only 2/3 of the amount of the reduction that otherwise would have applied.
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