New Tax Laws To Be Aware Of

Telephone Tax Credit

One of the most welcome tax changes comes not from Congress but from the Internal Revenue Service, which decided last year to stop collecting the 3 percent federal telephone excise tax. That charge on long-distance calls originated in 1898 to help pay for U.S involvement in the Spanish-American War. While that war ended after just three years, the tax continued to show up on phone bills.

Unfortunately, despite the phone tax's long history, the rebate is only for taxes paid on long-distance service after Feb. 28, 2003, and before Aug. 1, 2006. Still, every taxpayer is eligible to get cash back, without having to prove that they actually had phone service during the applicable rebate months.

Even better, you don't have to dig out your old phone bills, presuming you still have them, to come up with the amount you paid years ago. The IRS has calculated average phone tax costs based on the total number of taxpayer exemptions. If you claim one exemption you'll get $30 back; the refund is $40 for two exemptions, $50 for three exemptions and $60 for four or more exemptions.

To get the refund, simply enter your applicable amount on the new line found on all three individual 1040 forms. If you don't have to file a return this year, the IRS has a special form for you, the 1040EZ-T, that you can use to get back your phone tax money. And if you do happen to have all your old phone bills and they show taxes greater than the IRS-figured amount, you can get that larger refund by filing Form 8913.

Multiple Direct Deposit Option

If the phone rebate bumps up your refund amount, the IRS is making it easier for you to save instead of spend that money. You can now have your tax refund divided and directly deposited into up to three accounts.

Simply decide how much you want to go into each account, be it one for checking, an IRA or even a health savings account, and include the account and bank routing numbers on Form 8888. There's no minimum deposit requirement. If you are getting back $100 and want to put $80 in your retirement plan, $15 in your medical account and $5 in checking, the IRS will follow your instructions.

Just make sure you correctly enter the account numbers on the form. William Perez, of Perez Tax Associates in San Francisco, says the multiple account and bank numbers could get confusing and a misplaced numeral could pose big refund trouble.

Tougher Donation Rules

Tax breaks for charitable gifts provide rewards for both donors and their favorite nonprofit groups. In 2006, however, lawmakers decided some taxpayers had been pushing the goodwill envelope a bit too far.

So beginning on Aug. 18, any donated clothing or household goods must be in good or better condition. If the IRS determines it's not, or in official terms finds the items were of "minimal monetary value," the IRS can disallow the deduction.

The change was prompted by IRS suspicion that many taxpayers claimed excessive value for items that should have gone to the garbage dump instead of the charity box. The groundwork for this change was laid a couple of years ago when the IRS clamped down on valuations of donated autos.

And in 2007, the IRS is getting tougher on donation documentation. Previously, you had to get a receipt or other acknowledgement from a charity if you gave $250 or more. Now, for a monetary gift of any amount, you've got to have "a bank record or a written communication" from the charity detailing the group's name and the date and amount of the gift.

A canceled check is fine. If you charge a contribution, your credit card statement should be sufficient. Many charities also already provide a receipt for all monetary gifts, regardless of the amount.

"The most often asked question now," says LeValley, "is: How do I account for the cash I drop in the church collection plate each week?

"Think about making periodic pledges to your house of worship, usually larger donations on a quarterly basis. It might be easier to keep records that way."

Kiddie Tax Tightened

In order to save for their child's college costs, some parents open accounts in the child's name. Not only does this designate the fund for the youngster's use, but it also had the tax advantage of having the earnings taxed at the youth's usually lower rate. That changed in 2006.

 In an effort to raise money to pay for other federal programs, Congress changed the child investment earnings rules, popularly known as the kiddie tax, last May. The change, however, was made retroactive to all transactions since Jan. 1, 2006.

Previously, when an account was held in a child's name, any earnings exceeding an annual threshold amount ($1,700 in 2006) were taxed at the parents' highest marginal tax rate. But when the child turned 14, his or her usually lower tax rates applied. Now, however, the cutoff age is 18, meaning the higher adult tax rates apply for four additional years.

"Your highest marginal rate will be applied to the investment income of your children," says LeValley. "So if you're in the 25 (percent) or 30 percent marginal rate, that's what will apply to the investment income instead of the 15 percent capital gains rate."

In essence, families who had utilized this tax strategy now lose not only the lower capital gains rates that would normally have applied to most long-term investment transactions, but also the benefit of the child's lower rates for any short-term profits. The excess child's investment income is essentially taxed at his or her parents' much higher tax rates.