10 don't-miss tax breaks
Ways to reduce your tax bill and maybe even get some money back.
NEW YORK (CNNMoney.com) -- As annual rites go, sweating over your 1040 is one of the most taxing, no pun intended.
So to make the venture a little more palatable -- and maybe even profitable -- we asked Thomas Riley, president of the New York State Society of Certified Public Accountants, and Mark Luscombe, principal federal tax analyst for tax information publisher CCH, to help us draw up a tickler list of valuable (and in some cases new) tax breaks worth remembering before signing off on your federal and state tax returns.
Get back your phone tax
Thanks to the recent repeal of a 3 percent long-distance excise telephone tax, you have a refund coming to you on your 2006 tax return whether you itemize or not.
The one-time refund covers the 3 percent tax that you've paid from March 1, 2003 to July 31, 2006. If you don't feel like combing through old bills to tally your total, the IRS will let you claim a standard amount based on your exemptions:
Take credit for being efficient
Tax year 2006 is the first for which you can get a tax break for making your home more energy efficient.
You can take a 30 percent credit up to $2,000 for the cost of solar water heating or photovoltaic equipment in your home. You can get a 10 percent credit up to $500 for insulation and heat-reducing metal roofs, and up to $200 for energy-efficient windows. Labor costs, though, don't count.
Write off the nanny
If you work full-time and pay for the care of a dependent (e.g., a young child, elderly parent or disabled adult child or spouse), you may be able to get a credit for the amount you spend.
Depending on your income, you're allowed to get a credit for between 20 percent and 35 percent of up to $3,000 in expenses for one dependent or $6,000 for two or more. (Please see correction at end of article.)
You may only take the credit on the amount of your expenses that exceeds what you put into a tax-deductible flexible-spending plan at work.
So if you have two small kids, pay $6,000 for their care and defer $5,000 from your paycheck into your plan at work, you may only take the dependent care credit on $1,000 of your expenses, since you're already getting a tax break on the first $5,000.
If you don't put money into a plan at work, you may take a credit on all of your care expenses up to the $3,000 limit for one dependent or $6,000 for two or more, assuming your income qualifies.
Get money back for saving
Saving for retirement can result in a lower tax bill in more ways than one. If your AGI is $25,000 or less ($50,000 or less for married couples), you may take up to a 50 percent credit on as much as $2,000 in contributions made to qualified retirement savings plans, such as 401(k)s, 403(b)s and traditional and Roth IRAs. The closer you are to the income ceilings, the lower your credit will be.
That credit is on top of the deduction on your income that you get for making contributions to a 401(k), 403(b) or deductible IRA.
A break for self-employed savers
If you're self-employed, you may contribute up to 25 percent of your self-employment income (gross income minus expenses) to a SEP (Simplified Employee Pension) and deduct the full amount.
You're allowed to create and contribute to this IRA-type plan up to the due date of your return -- which, with extensions, can be as late as Oct. 15, 2007.
Deduct Money Magazine
Among the miscellaneous deductions you may be eligible to take:
Miscellaneous deductions may be claimed if combined they exceed 2 percent of your adjusted gross income (AGI) and you itemize on your return. But only the amount above 2 percent of your AGI is deductible.
Pick your state tax
You may either deduct your state and local income taxes on your federal return or the state and local sales taxes you paid, whichever is higher. If you don't have all your receipts, you can use the Optional State Sales Tax Tables in IRS Publication 600.
(The sales tax deduction is claimed by entering "ST" on line 5 of Schedule A.)
Save on tuition
You can take a deduction for qualified higher education expenses whether you itemize or not. It may be taken on up to $4,000 in tuition and fees if your adjusted gross income is $65,000 or less ($130,000 for joint filers). If your AGI is higher ($80,000 or less for single filers; $160,000 or less for married couples), you may deduct up to $2,000.
The tuition deduction may not be taken for expenses for which you are claiming an education credit (e.g., the HOPE or Lifetime Learning credits).
Real estate tax deduction
If you bought property and reimbursed the seller for the portion of property taxes he paid for the year, you may deduct that amount on your return, unless you're subject to AMT, which disallows property tax deductions.
(This deduction is entered on Schedule A.)
Save on 529 savings
Some states offer an income tax deduction to residents for contributions they make to a 529 plan. To see if yours does, visit SavingForCollege.com.
This article is an expanded version of the original that appeared in the March issue of Money Magazine.
Correction: Originally this article incorrectly stated that you can take a dependent care credit on up to $3,000 or $6,000 in expenses above what you put into your company's flexible spending account. In fact, you're allowed to get a credit for between 20 percent and 35 percent of up to $3,000 in expenses for one dependent or $6,000 for two or more.