If you are going to file an amended return it is best to consult with a tax advisor.
Riverwoods, IL (Vocus) January 8, 2007
If you thought that the instructions for assembling a holiday gadget in December were daunting, just wait until you tackle the Form 1040 at tax time, according to CCH, a Wolters Kluwer business and a leading provider of tax and accounting information, software and services (http://www.CCHGroup.com ). Thanks to last-minute tax changes enacted as part of the Tax Relief and Health Care Act of 2006, you may find the instructions for the Form 1040 tax return more challenging than ever. The Act, which includes $45.1 billion in tax benefits and adds over 200 changes to the tax code, means that millions of Americans can save money on their taxes for 2006 and beyond, but only if they know where to look. That's because this year's tax forms and first round of instructions were printed well before the president signed the bill into law on December 20, 2006.
"There is no such thing as a recall on a tax form -- at least not so far," said David Bergstein, CPA, an analyst for CCH CompleteTax (http://www.completetax.com ), an online tax program for the do-it-yourself tax filer. "But this may be the last straw for some of the more than 20 million Americans that still file their returns manually."
For the rest of the individual filers who either file using an online or software-based tax program, or rely on a professional tax preparer, it shouldn't be that difficult as the complexity is left up to the program or the preparer to sort out.
"The online tax program should walk you through a series of questions and, based on your answers, it will make the required calculations and populate the appropriate lines on the necessary forms," said Bergstein, adding that, similarly, a tax preparer will generally provide you with a question-and-answer organizer form to fill out so that he or she can gather most if not all of the relevant information necessary to be able to properly prepare your tax return.
That said, individuals should be aware of what the general tax law changes are that could affect their tax situation, for good or bad, and have an idea of how this will be reported on their tax return. So, among the changes that will require special treatment as taxpayers fill out or review their Form 1040 are changes allowing a deduction for state and local sales tax, a higher education tuition deduction and teacher's classroom expense deduction.
Additionally, the IRS is offering a one-time refund to taxpayers for telephone excise taxes charged between 2003 and 2006. The refund is claimed on the Form 1040 and a special 1040 has been created for individuals who are not required to file a tax return.
Below, CCH provides an overview of these tax law changes and where taxpayers should claim the credit or deduction on their 2006 Form 1040 and accompanying forms.
Claiming Extended Deductions on Form 1040
State and Local Sales Tax Deduction
Under the American Jobs Creation Act of 2004, taxpayers were allowed to deduct either state and local income taxes or state and local sales taxes as an itemized deduction on their federal tax return. This deduction proved extremely popular among residents of the nine states that do not have a broad-base income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming), thus its reinstatement as part of the Tax Relief and Health Care Act of 2006.
Taxpayers can calculate their deduction by saving their actual receipts or they can use the Optional State Sales Tax Tables in IRS publication 600. Taxpayers choosing to take the state and local sales tax deduction must claim it on Schedule A, by entering the letters "ST" on line 5 of Schedule A, which they should then file along with their Form 1040.
In the printed instructions for Schedule A, which is used for figuring out your deductions, it states that you can no longer deduct state and local general sales taxes instead of state and local income tax. However, the instructions were printed before the Tax Relief and Health Care Act of 2006 extended the sales tax deduction.
"This could be confusing because it appears in the 'what's new for 2006' section of the instructions, so some individuals may interpret it as being most current," said Bergstein. "The section also notes, however, that at the time the instructions were going to press, Congress was considering legislation to extend the deduction."
Higher Education Tuition Deduction
The above-the-line deduction for higher education tuition has been extended through 2007, as well. For both 2006 and 2007, a $4,000 above-the-line deduction is available each year to joint filers with adjusted gross incomes (AGI) of $130,000 or less ($65,000 or less for single filers). Joint filers making more than $130,000 but not exceeding $160,000 (more than $65,000 but not exceeding $80,000 for single filers) can take a $2,000 deduction in each 2006 and 2007. The deduction only applies to higher education tuition and qualifying fees, and any taxpayer taking the above-the-line higher education tuition deduction cannot also claim the Hope credit (a credit of up to $1,650 for qualifying taxpayers) or Lifetime Learning credit (a credit of up to $2,000 per tax return for qualifying taxpayers) for the same student.
To claim the higher education deduction, a taxpayer needs to use line 35 of the Form 1040, which is designated for the domestic production activities deduction. Taxpayers claiming the higher education deduction should include the letter "T" on this line. Taxpayers claiming both the education deduction and the domestic production activities deduction, should include the letter "B" on line 35 and attach a separate statement explaining both deductions.
Teacher's Classroom Expense Deduction
While a $250 deduction may not be a lot considering how much some teachers spend of their own money on classroom supplies, it does at least help and recognizes that teachers are providing this support. This deduction, which was claimed by more than 3 million educators in 2005 was set to expire at the end of 2005, but has now been extended for 2006 and 2007. Educators who work at least 900 hours during the school year with students in kindergarten through grade 12 can take the deduction.
To claim the deduction, taxpayers need to use line 23 of the Form 1040, which is designated for the Archer MSA deduction. Taxpayers claiming the educator deduction should include the letter "E" on this line. Taxpayers claming both the educator deduction and the Archer MSA deduction, should include the letter "B" on line 23 and attach a separate statement explaining both deductions.
Telephone Excise Tax Reprieve: Even for Those Who Don't File a Tax Return
In May 2006, the IRS announced that amounts paid for time-only (instead of distance) toll telephone service are not subject to excise tax. All taxpayers who paid this tax are eligible for refunds for the tax paid on services billed after February 28, 2003 and before August 1, 2006.
Taxpayers have two options for calculating their refund. The first is to request a refund based on the actual excise tax paid during this time period subject to IRS limitations, but this is only an option for taxpayers who have kept their telephone bills and can, therefore, prove how much they've paid. The other option is to claim a "standard amount" refund. The standard amount is based on the number of personal exemptions claimed ($30 for one exemption, $40 for two, $50 for three and $60 for four or more).
Taxpayers claim the refund on line 71 -- Credit for federal telephone excise tax paid -- of the 2006 Form 1040. Those claiming the standard amount need only fill in line 71, while those requesting refund of the actual amount will need to attach Form 8913 -- Credit for federal telephone excise tax paid -- showing the calculation. Businesses claiming a refund must also use this form.
Taxpayers not required to file a tax return can use a new form -- Form 1040EZ-T -- to claim the standard amount refund.
Making Amends: What to Do If You Missed a Deduction or Refund
Taxpayers using online tax software or professional tax preparers have little chance of missing any of the deductions or refunds they're owed. However, for the die-hard pencil and paper set, there is always the option of filing an amended return if they do overlook any of the new deductions.
In fact, forgotten deductions are among the most common reasons for filing Form 1040X.
"Taxpayers can file an amended return to correct a mistake or to claim a refund. The Form 1040X must be received within three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later," said Bergstein. "If you are going to file an amended return it is best to consult with a tax advisor."
About CCH CompleteTax
CCH CompleteTax, an online tax preparation and e-filing service for the do-it-yourself taxpayer, continues to set the standard when it comes to making online tax prep and e-filing easy, efficient and affordable. CompleteTax offers comprehensive support to help taxpayers through each step and allows them to prepare and e-file a federal income tax return for just $25.95 and a state income tax return for $12.95. Taxpayers can try before they buy, as CompleteTax does not require payment until a return is ready to be e-filed or printed and mailed.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com), is a leading provider of tax and accounting law information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.
Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has annual revenues (2005) of €3.4 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit http://www.wolterskluwer.com.
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