Tax Tips Blog

Tax credits cut your actual tax - dollar for dollar. There are way more tax credits available then most taxpayers are aware exist. The following is a general overview of some of the tax credits that are available to you. Tax credits generally come with complex guidelines, so if you do think you may qualify for one or more, please consult your tax professional to make sure you claim it properly.

• Adoption Tax Credit - You may be entitled to take a credit for some (or all) of your “reasonable and necessary” expenses related to adopting an eligible child. This credit is subject to a dollar limit and an income limit.
• Child Tax Credit - You may be able to claim up to $1,000 for each qualifying child. This credit is limited based on your filing status, modified adjusted gross income, the amount of regular and alternative minimum tax you owe.

• Dependent Care Tax Credit -If you paid someone to care for your child or dependent so you could work or look for work, you may be able to claim up to $3,000 for one child (or dependent) or $6,000 for more than one child (or dependent). This credit is a percentage of the dependent care expenses that you incurred. The percentage varies depending on your income.

• Disabled Access Tax Credit - Eligible small businesses who incurred expenses in order to comply with the American Disabilities Act may be able to claim a tax credit of up to $5,000.

• Earned Income Tax Credit - If you have “earned income” (income from working), and you meet certain other requirements you may be able to claim a credit. This credit is limited based on the amount of your investment income, earned income and modified adjusted gross income.

• Elderly and Disabled Tax Credit - If you are age 65 or older at the end of the year or you are retired on permanent and total disability, you may be eligible for this credit. This credit is limited by your adjusted gross income and your nontaxable income.

• Employer Provided Child Care - Eligible companies may be entitled to a credit for certain of the costs involved in acquiring, constructing, rehabilitating or expanding their property to meet guidelines for a qualified child care facility for their employees.

• Foreign Tax Credit - This credit is available to eligible taxpayers who invest in foreign taxable income, but do not get the benefit of itemizing their deductions. This credit is generally limited to the amount of income tax you paid or was accrued to a foreign country or a U.S. possession that qualified for this credit.

• Hope Scholarship Credit - This credit is available for eligible taxpayers who have an eligible student, in their first year or two of undergraduate education, who was enrolled at least half-time for at least once academic period at an eligible school leading to a degree or certificate. This credit is limited by the taxpayers adjusted gross income and the net amount of qualified educational expenses paid.

• Lifetime Learning Tax Credit - If there are any students in your family, you may be eligible to claim this credit. This credit is based on qualified tuition and related expenses from eligible institutions.

• Low-Income Housing Tax Credit - If you have invested in low-income housing and have met other Federal guidelines you may be eligible for a tax credit of up to 9 cents for every dollar you spent on the housing for up to 10 years.

• Rehabilitation Credit -If you have renovated, restored or reconstructed a historical building or a building placed in service before 1939, you may be eligible to take a credit for part of the costs that you incurred.

• Retirement Savings Contribution Credit - If you are over the age of 18, not a student and have, what the IRS refers to as “low or moderate” adjusted gross income, and contribute to a retirement plan you may be eligible for as much as $1,000 of the amount you contributed to your retirement as a credit against the taxes you pay.

• Telephone Excise Tax Refund. Although not really a credit, I thought I’d add it to this list. For 2006, individual and business taxpayers will be able to request a refund if they paid the federal excise tax on long-distance or bundled service. You can read more about it here.

I wrote earlier about everyone being able to receive a refund for the amount of Federal Excise Tax they previously paid, plus interest, on your long distance bills (including cell phone bills) Since March 1, 2003. Today the IRS announced standard amounts individuals are allowed to claim as a refund. Here are the standard amounts for individuals:

• 1 exemption claimed on your 2006 return = $30 refund
• 2 exemptions claimed on your 2006 return = $40 refund
• 3 exemptions claimed on your 2006 return = $50 refund
• 4 or more exemption claimed on your 2006 return = $60 refund

The IRS believes this method and amount is “fair and reasonable”. I won’t comment on whether or not I believe these standard amounts are “reasonable and fair”, but I will say that using the standard amount will be easier than adding up the amount from old phone bills. However, if you think that you paid more Federal Excise Taxes March 1, 2003 through July 31, 2006 then the IRS is willing to give you; you are free to add up what you paid and request that amount as a refund. I am glad to hear that the IRS will be creating a special short form, Form 1040EZ-T, for those who otherwise would not need to file a tax return. Not only that, but the IRS is also considering establishing an easier way for businesses and nonprofits to claim this refund. As of right now, they need to go through all their old phone bills and add up the amount they actually paid. For more information please visit the IRS website.

A car salesman told my client that if she purchased the Honda Accord Hybrid instead of a new Honda Accord, she would recoup the additional sticker price by the end of the year. She asked me how this worked. I explained that he was probably referring to the Alternative Motor Vehicle Credit and for the Accord Hybrid AT w/updated calibration that amount is $1,300.

The difference between the sticker of the 2006 Honda Accord Hybrid and the 2006 Honda Accord is $3,700, so the salesman is assuming her tax situation is such that she will be able to claim the credit AND that she will save $2,400 in gas between now and the end of the year. That equates to a monthly gas savings of $200. I summarized some of the more relevant information, assuming that she would trade-in her car, in the following table:

As you can see I added in the Honda Civic (regular gas version) for good measure. Excluded from the above table are the annual maintenance costs of the different vehicles, the respective long term values of all the vehicles and the driver’s personal preferences, all of which are factors to be considered, when purchasing a car. The table shows that there is no way my client is going to recoup the difference in the sticker price by the end of the year. If fact, my client would have to drive 10,000 miles per month to see a $200/month savings in gas. And she will have to incur the additional monthly cash outlay for her new loan, which was never considered by the salesman.

If my client is serious about saving money, and wants to buy a Honda, she should consider the 2006 Honda Civic. If her personal preferences tell her that she’ll be more comfortable in an Accord her monthly payments will be about $45 less than the Hybrid version, but she will not be eligible for the Alternative Motor Vehicle Credit.

Even if she does purchase a Hybrid vehicle, although she may be eligible to receive the Alternative Motor Vehicle Credit, depending on the rest of her tax situation she may not be able to claim it. This is often true with tax deductions and credits - something that salesmen never seem to mention when they are trying to sell you something.

The credit does reduce your regular income tax liability, but not below zero. If you are eligible for multiple tax credits, the hybrid vehicle credit is taken last after all the other credits (child care tax credit, retirement savings credit, etc.) have been taken. Any tax liability left over by these reductions will be the maximum dollar limit of your hybrid vehicle credit. If your hybrid vehicle credit exceeds your maximum dollar limit, the excess is not refundable, and is lost forever. And any amount of credit actually received may have to be recaptured if you sell your hybrid before the end of it’s useful life. I’ve only discussed the Honda Accord Hybrid and how that compares to the Honda Accord and Honda Civic; however, the Alternative Motor Vehicle Credit is available, in different amounts, for many different vehicles - including a truck! Hybrid vehicles are trendy and environmentally friendly, but they may not be as economical as you think. To read more on the Alternative Motor Vehicle Credit visit the IRS.

www.GLGcpa.com

If you had to pay alternative minimum tax (AMT) due to deferral (timing) adjustment items, you are entitled to a minimum tax credit (MTC) which you can claim in a year that your regular tax is greater than your AMT. The MTC prevents the double taxation of income and the disallowance of deductions due to the relationship between the regular tax structure and AMT structure. The MTC has an unlimited carryforward period. Deferral adjustment items are usually the result of having a different basis (usually your cost less depreciation or commission plus improvements or other items) under the regular tax system than the AMT system. Deferral adjustment items can either increase or decrease alternative minimum taxable income (AMTI) and include:

• Depreciation after 1986
• Exercise of Incentive Stock Options (ISO)
• Gain or Loss on the sale of property
• Loss Limitations (limited due to at-risk rules and basis rules)
• Passive Activities
• Long-Term Contracts
• Intangible Drilling Costs (IDC)
• Circulation costs
• Electing large partnerships
• Mining Costs (other than oil and gas)
• Estates and Trusts
• Research and Experimental Costs

It is very important to keep track of both your regular tax basis in these items as well as your AMT basis, such that you do not overpay your taxes or miss out on the MTC. There are other items, called AMT exclusion items which include claiming a large number of exemptions, the standard deduction, interest from private activity bonds or large itemized deductions that can cause you to have to pay AMT, but you don’t get to claim MTC for these items. Most taxpayers have a combination of deferral adjustment items and AMT exclusion items. This is an area of the tax code which is very complex and best left to your tax adviser to determine the exact amount of MTC you are entitled to receive.

Beginning August 1, 2006 everyone who has long distance service will enjoy a lower telephone bill. Not only that, but the IRS will refund you for the amount of Federal Excise Tax you paid, plus interest, on your long distance bills (including cell phone bills) Since March 1, 2003. The current rate is 3% of the charges billed for these services. Taxpayers may request a refund on their 2006 income tax return (filed in 2007). The IRS has promised to announce a “safe harbor method” that individuals may use to figure out the amount of refund they are due so they don’t have to dig through their old phone bills and compute it, but they have yet to do so. The IRS has also promised that their simplified method will be “simple and fair”. As for other entities (C-Corporations, S-Corporations, Multiple Member LLCs, Partnerships, Non-profits, Estate & Trusts) they will have to spend some time going through their old telephone bills and computing the amount of Federal Excise Tax they paid for nontaxable service and keep the documentation just in case the IRS wants to verify it. I have already notified my clients so they can start this tedious task and have it completed in time for filing. As of right now, the only way to get this refund is to file a 2006 Federal Income Tax return. Even if you are not required to file a Federal Income Tax return you will have to, if you want the money you are due for being forced to overpay your telephone taxes. If you wish to read more about this you can read IRS Notice 2006-50.

Are you considering making improvements to your home this summer? If you make your home more energy efficient you may be eligible for a tax credit up to $500. The IRS has issued a new energy tax credit for individuals who make their existing home more energy efficient anytime from January 1, 2006 through December 31, 2007. To qualify for the credit, whatever you purchase must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in your primary residence. Make sure you keep copies of all your receipts with the rest of your tax records. The following items are eligible:

• Insulation systems that reduce heat loss/gain
• Exterior windows (including skylights)
• Exterior doors
• Metal roofs (meeting applicable Energy Star requirements).

For more information, talk to your tax accountant or read IRS notice