Congress extends the Sales Tax Deduction for 2006
This extension plus the 2 prior Tax Acts passed by Congress in 2006 may affect your tax planning strategy.  This is a brief overview of tax-saving ideas that may help you save on your taxes.

Sales Tax Deduction.  For 2004 and 2005, taxpayers who itemized deductions were eligible to take a deduction for sales tax based on their income level and number of exemptions (or save receipts throughout the year). This deduction was extended by Congress in December, 2006 for two years. Sales tax paid on motor vehicles, aircraft, home purchase or home building products were allowed in addition to the base amount.

Additional Tax Breaks that have been extended.  Also extended for 2006 are: the $250 out-of pocket expense deduction for teachers, a tax deduction of up to $4,000 on higher education costs, and a tax credit for hiring those who have difficulties finding jobs.

Special One-Time Tax Credit.  For 2006, there is a one-time federal excise tax refund credit. This credit is to refund taxpayers for long distance excise tax that has been assessed on phone bills. The credit amount varies based on filing status and is a refundable credit.

Residence Credits for Energy Efficient Improvements.  For 2006 or 2007, there are two new tax credits available for energy efficient improvements made to your home:

1.   Non-business Energy Property Credit:

• 10% of what you pay for qualified energy efficiency improvements, such as certain energy efficient insulation, windows, doors and roofs, plus
• 100% of what you pay for qualified residential energy property, such as energy efficient heat pumps, hot water heaters or boilers, and advanced main air circulating fans on your principal residence (no vacation homes)
• Up to $500 lifetime amount

2.   Residential Energy Efficient Property Credit of 30% of expenditures for the following:

• qualified solar water heating equipment (maximum credit of $2,000),
• qualified electricity generating solar photo voltaic property (maximum credit of $2,000),
• qualified fuel cell property (maximum credit of $500 for each .5 kilowatt of capacity).

The credit for fuel cell property is only available for your principal residence, however the two solar credits apply to any residence (including vacation homes). Manufacturers will provide certification that the property qualifies for these credits.

Clothing and Household Item Charitable Deductions.  Donations of used clothing and household items including furniture and furnishings, electronics, appliances, linens, and similar items made after 8/17/2006 must be in “good” or better condition to be deductible. We suggest keeping a list and a photo (to help establish the item’s condition) of the donated items. You can still deduct individual items that appraise for more than $500 even if they are not in “good condition.” if you to have a qualified written appraisal, which must be attached to your tax return.

Don’t Forget the Alternative Minimum Tax.  The increasingly burdensome alternative minimum tax (AMT) can be triggered if you recognize large capital gains, deduct a large amount of miscellaneous itemized deductions or state and local taxes, claim a high number of personal exemptions, or exercise incentive stock options.

Use Your Section 179 Deduction to the Fullest Extent Possible.  For 2006, businesses can deduct up to $108,000 of equipment, furniture, and other tangible property, subject to a phase-out rule when qualified property purchases exceed $430,000. This is a powerful benefit for business owners and it can be claimed for property placed in service anytime during the tax year, including the last day.

Hybrid Vehicle Credit or Alternative Fuel Motor Vehicle (AFMV) Credit.  The IRS is constantly updating the list of qualifying vehicles and the amount of these credits. The hybrid credits can be up to $3,400 and the AFMV credits up to $4,000 per vehicle.

529 Plan Benefits Now Permanent.  The Pension Act of 2006 made permanent the current ultra-favorable federal income tax treatment of Section 529 plans used to finance college education costs that were scheduled to sunset in 2010. This eliminates the concern that funds distributed after 2010, when many 529 plan beneficiaries will be in college, could be taxed. It’s time to reconsider 529 Plans.

Defer Income and Accelerate Deductions.  In most cases, it’s wise to postpone income into 2007 or accelerate deductions from future years into 2006. Cash-basis proprietors should consider delaying year-end billings or accelerating business expenditures. If you itemize, consider paying charitable donations and medical expenses in 2006 rather than 2007, if possible.

Tax Free IRA Distributions for Charity.  Taxpayers over age 70 can claim tax-free treatment of a transfer directly from a traditional IRA to a tax-exempt charity. 

Lower Tax Rates On Capital Gains.  Long-term capital gains and qualifying dividends are subject to tax rates of 5% or 15%.  Given tax rates as high as 35% for other types of income, this is quite a break. To be eligible for the lower 5% or 15% tax rate, a capital asset must be held for more than one year.

IRA Contributions.  Don’t forget to make your traditional or Roth IRA contributions before the due date (April 16, 2007) of your tax return. For 2006, IRA contributions generally can be up to the lesser of (1) $4,000 ($5,000 if over age 50) or (2) 100% of wages and/or self-employed income. 

These are just a few ideas for you.  There are many others that may apply to your unique situation. Taking time to review your 2006 tax situation may allow you to take advantage of year-end tax planning strategies.

— Stapp Financial Planning, PLLC

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