For openers: Your personal exemptions–one for your-self and for each dependent–go to $3,300. The standard deduction rises to $5,150 for singles, $10,300 for couples filing jointly and $7,550 for heads of household. In general, you’re a household head if you’re single or legally separated with a young child at home.
A winner for greens: This year and next, you can cut your taxes and your energy bills at the same time. Install something–almost anything–that saves oil, gas or electricity in your home and you’ll chop some dollars directly off your tax bill. Credits range from 30 percent of the cost of solar panels or fuel cells ($2,000 maximum credit for each) to 10 percent on insulation (max: $500). For what qualifies, see energytaxincentives.org . States offer incentives, too.
Retired teacher Dale Prouty, 59, and his wife, Joan, 50, of Hudson Falls, N.Y., hit the jackpot this year. Not only did they install solar panels for heat and hot water, but they’re using the sun to generate their own electricity. That adds up to tax credits worth $4,000 from the Feds and $3,750 from the state, plus a $16,000 state grant to help offset the cost. Joan expects to earn back their investment in five to eight years, and sooner if energy prices rise. Planner Bruce Sneed, 45, of Woodbridge, Va., spent Thanksgiving insulating his attic. He’ll earn back his costs in three months, he says.
A loser for kids: If you’ve shifted savings into your minor children’s names, listen up: you’ve lost some of the tax shelter you expected to have. Formerly, these accounts were taxed in your bracket until the kids reached 14. After that, the kids’ own, lower rate applied. This year, however, the law changed. The earnings are taxed in your bracket until the children reach 18. That’s messing up a lot of parents’ plans.
Take the Shaos of Sunnyvale, Calif.–Ted, 44, and Debbie, 47. They both work for Hewlett-Packard and have been buying its shares through payroll deduction for more than 20 years. On the advice of Menlo Park planner Julie Schatz, they started giving the stock to their children, Keri, 16, and Derek, 13, intending that the kids should sell it and diversify. That’s still the strategy for Derek. But they’ve decided to sell only part of Keri’s stock, gambling that the price will hold between now and the time she qualifies for the tax break, at 18.
For serious saving: You can drop a bundle into a 401(k) or similar plan. For those under 50, the max goes to $15,000 this year (up $1,000 from 2005); it jumps to $20,000 (up $2,000) for people 50 and older.
That’s perfect for ex-dairy farmers Donald Butler, 55, and his wife, Gwenne, 52. This year they sold their herd (“We wanted to have a life,” Gwenne says). They’ll put $20,000 each into 401(k)s, saving $18,216 in taxes. Their planner, Marjorie Randles of Argyle, N.Y., sees another plus: when their daughter goes to college, the 401(k)s won’t show on their federal financial-aid form.
The most you can give to any one person, gift-tax free, has risen to $12,000 from $11,000 last year. Couples can give twice that amount.
When you donate used clothes or furniture, you can take a deduction only if it’s in good condition. That might seem obvious, but Congress suspects that some good citizens have been writing off dead TVs and torn underwear. Christine Nyirjesy Bragale of Goodwill Industries says she hopes the law will encourage “an even higher quality of donations.” If you’re audited, you’ll have to show that the items were “good” (maybe take pictures).
Older people can now make charitable contributions directly from their individual retirement accounts. Normally, all withdrawals from traditional IRAs are taxable as ordinary income. After the age of 70 1/2, however, you can avoid the tax by telling your IRA to send the money to charity instead. The donation counts as part of your required IRA withdrawal, up to $100,000.
Ruth Rauch and her husband, Eric, a retired minister, heard about this from their planner, Kathleen Rehl, of Land O’ Lakes, Fla. Ruth has to take $8,561 from her IRA this year. She’ll give $5,500 to Grace Lutheran Church in Tampa, taking the remaining $3,061 as income. IRA trustees should be set up to handle this. Just be sure that the check is written to the charity. If it’s written to you, it’s taxable.
A talker’s delight: The government is giving back money it wrongly collected in long-distance telephone excise taxes. The refund applies to calls by landline, cell phone or Internet from March 1, 2003, through July 31, 2006. You can check your phone bills and claim the amount you paid. Or accept a fixed sum ($30 to $60), depending on the number of exemptions you have.
Paying taxes by credit card: On the downside, you pay up to 3 percent in “convenience” charges. On the upside, you pick up frequent-flier miles. Planner Jeffrey Eisfelder, 32, of Los Angeles, gets double miles on his United Airlines Visa card. For a filing charge of $1,500, he copped two first-class tickets to Hawaii this year. It’s worth it, he says, only if you’ll pay the credit-card bill in full. If you pay in installments, the interest payments could knock you out.
