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Last minute tax deduction changes are adding confusion to 2006 returns (part 2)

December 21, 2006

Continued from…

For the sales taxes issue which Congress brought back to life as a condition that permits US taxpayers who itemize to deduct their state and local sales taxes, rather than state and local income tax. For Florida residents and those who live other states such as Texas, Washington and other states without state taxing, this is of great service. However, it is not limited to people who file in these states so be sure to look into this because it is accessible to all US taxpayers – no matter which state they live in. According to the IRS well over 11 million tax filers used this deduction last year – so it is a big one.

Now, if you are planning on using this deduction, you are theoretically responsible for putting it on Schedule A of your 1040 on line 5 - even though the line says state and local income taxes. So, you would put the letters ST on the line to the left of line 5 that will then show that you are claiming this deduction for sales taxes instead of state and local income taxes. Keep in mind – you are not allowed to deduct both.

It can be hard to determine how much to deduct here. You are allowed to deduct your actual sales taxes. Stellar records are a necessity here. Otherwise, you could use IRS tables along with what you paid in sales taxes for certain big ticket purchases you made in 2006. We highly recommend you check Publication 600 for help with this area.

As far as the educator deduction in concerned, there are millions of US teachers and other professionals in the educational industry that will be affected by the one of the new deductions. These professionals and elementary and secondary schools are now qualified to deduct up to two hundred fifty dollars from their own out of pocket classroom spending for the 2006 tax year. There were nearly three and a half million educators that used this deduction last year.

If you want to claim this deduction this year, you do it on line 23 of your 1040 tax form. Even though the line reads differently – this is where you add the deduction (remember the IRS printed these forms before Bush signed the legislature yesterday). The line will state Archer MSA Deduction – but you still add the deduction here. The old line info regards medical savings accounts. So, instead, you will put an E on the line to the left of that line entry if you wish to claim this deduction only. Or you will post a B should you wish to add this deduction plus the Archer MSA one. Keep in mind, if you put B – you must add a break down to your return that completely shows the amounts claimed for both of these deductions you are taking. It only sounds confusing, but…

Should you file electronically; the confusion will be eliminated here for you. This change only affects those of you debt free article readers that file with pencil and paper forms. To do so, check out the IRS’s Free File. It lets you e-file your return at no cost to you and you will get your money faster too (if you are expecting a return that is). However, this is only available to those who file $52,000 worth of earnings or less. The IRS site has updated all of the changes so you should consider e-filing if you earn under that amount stated above.

Lastly, we have to let you know that the IRS says that it will not be capable processing returns claiming these 3 updated deductions until the beginning of February 2007.

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