1-19-07
New Stuff for 2006 Tax Returns
Income tax law and the related rules always change from year to year. The only question is how extensively, and when.
“When” may seem a bit odd as a tax question. But consider the giant lump of coal Congress dropped into the Internal Revenue Service’s Christmas stocking last Dec. 9 by passing the “Tax Relief and Health Care Act of 2006.” (I just love the sound-bite-friendly names attached to these bills.) All sorts of special tax provisions that had expired at the end of 2005 were now extended for 2006 and, in many cases, years beyond that.
Great, except for two things. First, people like to know what the rules are so they can plan actions around them. Second, the design of 2006 tax forms had been finalized months earlier and sent both to the printers and software developers. Millions of pages had been printed, software was already in retail channels and tax books were being published – all without these extended provisions.
There’s no putting the genie back in the bottle. You can’t redo the financial decisions you made last winter expecting a different set of tax rules. And the IRS announced that no 2006 forms will be revised. Instead, the special deductions (which most are) will just have to be wedged in based on supplementary instructions that the IRS will disseminate any way they can.
Be careful. I am certain many people will miss taking deductions to which they are otherwise entitled because of this.
What’s Not on the Forms
Many of the newly-extended provisions are narrow, or even ultra-narrow, in their application, such as the simplified alternative research credit, the credit for qualified zone academy bonds and the suspension of the net income limit on percentage depletion from marginal oil and gas wells. I am sure someone, somewhere, is all excited about each of those, but I am equally sure none of those someones are PerformInk readers.
While I regret to inform you that the legislation contained no special provisions for artists, you may well benefit from some of the broader provisions that will not appear on the tax forms.
The first is an itemized deduction for sales taxes. Before 1986, sales taxes were deductible in addition to property taxes and state and local income taxes. They reappeared two years ago as a deduction that could be taken instead of (not in addition to) the income taxes. Many people saw this as a politically-motivated gift to voters in the few states that lack state income taxes – mostly red ones, including President Bush’s home state of Texas.
The sales tax deduction is generally taken from IRS-published tables, which take into account current year income and household size. But for many people, state income tax payments reflect the prior year’s income. A self-employed person, for example, who makes quarterly estimated payments can generally make them equal to the prior year’s tax and pay the balance in April. If that person had a terrible 2005, and a really good 2006, the sales tax deduction could well be higher than his Illinois income tax. Of course, the same result would occur if one simply failed to make 2006 quarterly state tax payments, but I don’t want to encourage bad behavior.
Another newly-extended provision allows educators (kindergarten through grade 12) to take an “off the top” deduction for up to $250 of expenses for books, supplies and the like. It is not a big deduction, and certainly not a solution to inadequate school funding which requires teachers to pay for their own stuff. Still, those who can take it will save at least $33 in taxes.
A bigger “off the top” deduction that was extended is the one for higher education expenses (tuition, mostly). This one is a little tricky, because these same expenses could be used for the Lifetime Learning Credit, but not both. Both the deduction and the LLC have income limitations, and phaseouts – different ones of course. Generally, a deduction is more beneficial to higher-income tax payers, but the phaseouts mean you have to figure it both ways to know which is best.
Provided, of course, that you know the deduction has been reinstated. You could rely on software to optimize the results, but only if you didn’t buy the early release or didn’t download an update if you did. Ugh.
Stuff that Will Be on the Forms, or At Least in the Explanations
Maybe the new Congress will finally fix the alternative minimum tax, but for now another annual patch has been applied to try to find a balance between harassing the middle class and losing tax revenue.
One thing that’s both cool and potentially a problem involves direct deposit of tax refunds. Since 1996, you have been able to have a tax refund deposited directly into your bank account rather than having a check mailed to you. That’s “account” – singular. Starting with the 2006 tax year, you can have it divided among as many as three accounts, including for the first time an IRA.
The potential problem arises when the 2006 refund is being used to make the 2006 IRA contribution. That contribution must be made by April 16, 2007, a deadline that cannot be extended. Direct deposit refunds are usually made in two weeks or so, but things can go wrong. Tax return processing can be delayed, or the wrong routing number placed on your form. If that happens, and the deadline is missed, you’re screwed.
And reversing a recent trend, the cents-per-mile rate for deducting automobile expenses changed only once last year. It’s 44.5c per mile for 2006, and 48.5c for 2007.
Not Trendy, But Always in Fashion
Each year, I offer my free “Checklist of Potentially Deductible Items” for those in the arts. Just write, call or e-mail my office, and we’ll be pleased to send you one.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.