Paying too much in taxes? Some steps you can take
On the Money
From the January 6, 2006 print edition
It’s a new year, often the occasion for two things: resolutions and income taxes.
Benjamin Franklin left us many proverbs to ponder, particularly around the turn of a new year. One “resolutionary” admonition is, “Each year one vicious habit discarded, in time might make the worst of us good.”
If paying too much income tax is a “vicious habit,” here’s some promising news for 2006.
A new year brings us all closer to retirement. A fresh saving tool, the Roth 401(k), is now available. Starting in 2006, you are able to designate part or all of your 401(k) contribution to a Roth 401(k), if your employer’s 401(k) plan allows it. All income from Roth plans will be tax-free when withdrawn at retirement.
You can contribute up to $15,000 (or $20,000 if you’re 50 and over) into a Roth 401(k), as opposed to only $4,000 (or $5,000) in a regular Roth.
For those interested in discarding the vicious vehicle vice of SUVs, the deduction for buying a hybrid-powered automobile increases to $3,400 in 2006, generating a tax credit that varies by make and model. For example, a Toyota Prius generates a $3,150 bottom-line credit; the Ford Escape’s credit is $2,650. These credits are limited to the first 60,000 hybrids the manufacturer sells.
In 2006, the gift tax exemption rises to $12,000, up from $11,000 last year.
Parents often give those gifts to their children as a way of avoiding estate taxes. In 2006, $2 million will be estate tax-free, up from $1.5 million in 2005. The estate tax is scheduled to be discontinued in 2010.
If improving your primary residence this year, some items will qualify for a 10 percent tax credit. For example, new skylights, outside doors, windows or pigmented roofing, high-efficiency furnaces, water heaters and central air conditioners. However, the credit is limited. The maximum credit is $500 with no more than $200 attributable to windows.
Additionally, a 30 percent credit is available for the cost of solar energy systems to heat the air or water in your home. Unfortunately, pools and hot tubs don’t count. This credit is limited to $2,000 apiece for home furnaces and water heaters, but is available for vacation homes as well.
Though the sales tax deduction and the teacher’s deduction were to be discontinued at the end of 2005, they may be extended. Sales tax and teacher’s supplies receipts will be necessary to claim the deductions.
For those who may not have atoned for past vices, the Internal Revenue Service has a broad-based, limited-time opportunity for taxpayers to come forward and settle an array of transactions the IRS considers abusive. Taxpayers have until Jan. 23 to submit their settlement documents to the IRS.
The initiative, described in Announcement 2005-80, identifies 21 transactions eligible for the program. Consisting of both listed and nonlisted transactions, they include a wide collection of schemes involving funds used for employee benefits, charitable remainder trusts, offsetting foreign currency option contracts, debt straddles, lease strips and certain abusive conservation easements.
All eligible transactions carry the same settlement terms except the applicable penalty level. Further details on the 21 covered transactions are available in publication FS-2005-17 (www.irs.gov/newsroom).
Another 2005 initiative extended into 2006 is relief for taxpayers affected by the major hurricanes. Deadlines for affected taxpayers to file returns, pay taxes and perform other time-sensitive acts have been postponed until Feb. 28. Additional details are available at the above Web site.
Beginning Jan. 1, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) increased to 44.5 cents per mile (up from 40.5 cents) for business miles driven. The rate is 18 cents per mile for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations — other than activities related to hurricane relief.
Some good news: The IRS announced there will be no change in the interest rates for the calendar quarter that began Jan. 1. The interest rates remain as follows: 7 percent for overpayments (6 percent in the case of a corporation); 7 percent for underpayments; 9 percent for large corporate underpayments; and 4.5 percent for the portion of a corporate overpayment exceeding $10,000.
Again, in the words of Benjamin Franklin, “Certainty? In this world nothing is certain but death and taxes.”
But also, “The Constitution only guarantees the American people the right to pursue happiness. You have to catch it yourself.”
Happy catching in the New Year.
© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.