Changes to consider when filing your 2006 taxes

Tax Facts for 2006 filing and 2007 planning

As you're sitting down to do your 2006 taxes this spring, here are a couple of changes you'll want to note. This information will also come in  handy for future  tax planning.

Charitable Donations Because the IRS suspected that many taxpayers claimed excessive value for items that should have gone to the garbage dump instead of the charity box, as of Aug. 18, 2006, any donated clothing or household goods must be in good or better condition.

And beginning in 2007, if you don't have written documentation for any cash gift, you can't claim a deduction. This includes the cash dropped in the offering plate at your preferred place of worship. 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.

For seniors over 70 1/2, you can give up to $100,000 directly from your IRA to a qualified charity and it's not counted as taxable income. But the option is only available with a traditional or Roth IRA and it's only in effect for the 2006 and 2007 tax years.

Kiddie Tax
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.

Telephone tax credit
The Internal Revenue Service decided last year to stop collecting the 3 percent federal telephone excise tax -- a 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.

The rebate is only for taxes paid on longdistance service after Feb. 28, 2003, and before Aug. 1, 2006 and every taxpayer is eligible to get cash back, without having to prove that you actually had phone service during the applicable rebate months.

If you don't want to go through all your old phone bills, 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.

Capital Gains and Dividends
The lower capital gains tax and tax on certain qualified dividends were scheduled to expire at the end of 2008. The new law will extend that through 2010. So, if you're in the 10 percent or 15 percent income tax bracket, you'll pay 5 percent on capital gains from now until 2008 and 0 percent from 2008 to 2010.

For those in tax brackets above 15 percent, the capital gains tax rate will stay at 15 percent until 2011.

This presents some appealing options for transferring wealth to individuals in lower tax brackets. Parents may be able to gift appreciated stocks to their children or grandchildren who will then be able to sell the securities and pay a much lower capital gains tax.

This also reduces parents' or grandparents' overall estate, which may be beneficial from an estate tax standpoint.

Energy-saving home improvements
The energy bill that took effect Jan. 1, 2006 provides relatively small tax incentives for simple upgrades, such as the new windows or added insulation, but more generous credits if you added solar water, heat or power systems to your house.

If you didn't get the improvements in by the Dec. 31 deadline to claim the credit this year, you get another chance by completing the work this year; a couple credits also carry over into 2008. Just make sure you file the long Form 1040, along with  Form 5695, to get the corresponding tax credit.

Removal of restrictions on conversionsto Roth IRA
Starting in 2010, you can convert your traditional IRA to a Roth IRA, regardless of your income level. Currently, only taxpayers with adjusted gross incomes of $100,000 or less can make this conversion.

The amount you transfer will be included in your gross income, so you'll have to pay taxes on it, but you can spread the taxes out over two years if you make the rollover in 2010.

This traditional-to-Roth conversion can benefit you in at least two important ways. First, qualified withdrawals from a Roth IRA are not taxable. And second, you won't have to start taking distributions from your Roth IRA at age 70 1/2, as you must with a traditional IRA and a 401(k).

Mortgage insurance tax deductible in 2007
Congress approved a measure that makes all mortgage insurance premium payments deductible for homeowners with adjusted gross household incomes of $100,000 or less. It applies to all new mortgage originations in 2007 only (unless renewed by Congress).

`Write in' deductions
Deductions for state sales taxes, educators' classroom expenses and college tuition and fees were resurrected at the very end of the 2006 congressional session. However, because they were reinstated after the IRS printed the 2006 forms, you'll have to make some special notations, especially if you file paper forms instead of using tax software.

You must itemize to claim the sales tax deduction, and if you also paid state income tax, you must decide which of those state levies to claim. Both educationrelated deductions, however, are available to anyone, regardless of whether you itemize or take the standard deduction amount.

Multiple direct deposit option
You can now have your tax refund divided and directly deposited into up to three accounts regardless of the amount (i.e. $100 to your checking, $210 to your savings and $330 to your retirement account).