A trickier tax season

By U.S. News & World Report

Talk about complications. Even the deadline for filing tax returns this year has been messed up.

Adding to the confusion are reinstated deductions with no obvious place on the return to claim them, a rebate on a telephone excise tax that many people are failing to claim and an attack on tax-dodging parents who were schooling their children in the art of tax avoidance.

What deadline?

It wasn't until after tax booklets with a filing deadline of Monday, April 16, were printed that the Internal Revenue Service saw the problem.

That day is Emancipation Day in the District of Columbia -- and because of the holiday in the nation's capital, everyone gets an extra day to settle up.

Uncle Sam's mistake

The Treasury collected a 3% excise tax on long-distance phone calls for years, only to admit last year that the fee was no longer valid. The government is rebating part of the tax incurred from March 2003 through July 2006.

The easy path is to accept a standard amount of $30 to $60, based on the number of personal and dependent exemptions on your 2006 return. No proof of calls on a land line or cell phone is necessary unless you opt to plow through records, and in some cases special calculations, to claim the actual tax paid.

People who don't usually file a return because they have no net taxable income, perhaps because of untaxed Social Security benefits and limited other income, can file a 1040EZ-T form just for the rebate.

Hide and seek

By the time Congress extended three expired tax deductions, the 2006 tax forms had been printed without provision for them. People who claim the deductions must enter them on lines labeled for other items. Updated tax software can do it automatically, but otherwise it means finessing an incomplete form. The deductions:

• One of up to $4,000 for college tuition, an alternative for some people who aren't eligible for the Hope or Lifetime Learning education credits. You can claim it on the 1040's line 35 and note it by appending the letter "T."
• One for state and local sales tax, which can be claimed as an itemized deduction instead of deducting state and local income tax. People who pay little or no state income tax or have incurred a lot of sales tax on big-ticket items may benefit. It is claimed on Schedule A's line 5 with the notation "ST."
• One for up to $250 on classroom supplies that teachers who dig into their own pockets can deduct. It is entered on the 1040's line 23, adding the letter "E."

No kidding

Congress last May upped the fight against parents who avoid tax by shifting assets to their children. Before last year, a so-called kiddie tax treated part of the capital gains and other investment income of children under 14 as taxable at a parent's higher tax rate if the income topped a specified amount -- $1,700 for 2006 and 2007. Now the potential extra bite applies through age 17, with the change made effective at the start of 2006. "Children who had outgrown the kiddie tax may now be within its reach again," says Bob Scharin, a tax analyst at publisher RIA.

Income under the cap still typically faces low tax, but once that level is reached, advisers suggest focusing more of a youngster's portfolio on tax-deferred long-term growth and tax-free municipal bonds and limiting taxable dividends and other income.

Conserving energy and tax

Saving cash at the gas pump with a fuel-efficient car can also trim income tax. Starting with 2006, buyers of hybrids can get a tax credit that saves $1 of tax for every $1 of credit. (That's better than a tax deduction, which reduces only the amount of income on which tax is figured.)

The credit, from $250 to $3,150, depends on the make and model of car and when it was bought. One twist is that a model's initial credit phases down and eventually vanishes on future sales once an auto maker's overall hybrid deliveries top 60,000, something already happening for Toyota and Lexus models.

Another green incentive is a credit of up to $500 for part of the cost of improving your home's energy efficiency by upgrading heating and cooling, windows and doors and insulation. The items must be certified by the maker as qualifying, and the maximum $500 credit applies to 2006 and 2007 combined.

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