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You may be able to take advantage of certain tax breaks enacted in the final days of 2006. Claiming deductions for state and local sales tax, higher education tuition and fees, and educator expenses will require special handling if you file a paper income tax return for 2006.

IRS E-file and Free File tax software is being updated to include the provisions of the new tax law. E-file software automatically places your tax information in the correct locations on the return; so you will not have to worry about making any special notations on your e-filed return in order to claim these deductions.

But if you choose to file a paper income tax return you must use Form 1040 rather than Form 1040A. Because the tax forms were printed before the new law was signed, there will not be separate lines for these deductions and you will have to follow a few special instructions.

• State and Local General Sales Tax Deduction:
  The deduction for state and local general sales taxes can be claimed on Schedule A (Form 1040), line 5, “State and local income taxes.” Enter “ST” on the dotted line to the left of line 5 to indicate you are claiming the general sales tax deduction instead of the deduction for state and local income tax.
• Higher Education Tuition and Fees Deduction:
  The deduction for tuition and fees can be claimed on Form 1040, line 35, “Domestic production activities deduction.” Enter “T” in the space to the left of that line entry if claiming the tuition and fees deduction, or “B” if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering “B,” taxpayers must attach a breakdown showing the amounts claimed for each deduction.
• Educator Expense Adjustment to Income:
  Teachers and other educators (including classroom aides, counselors, and principals) can deduct as much as $250 that they spent to purchase classroom supplies last year. The deduction for educator expenses can be claimed on Form 1040, line 23, “Archer MSA Deduction.” Enter “E” on the dotted line to the left of that line entry if claiming educator expenses, or “B” if claiming both an Archer MSA deduction and the deduction for educator expenses on Form 1040. If entering “B,” taxpayers must attach a breakdown showing the amounts claimed for each deduction.

For more information about these and other tax law changes visit the IRS Web site at IRS.gov. For detailed information about the sales tax deduction consult IRS Publication 600.

Links:

• Recently Enacted Tax Law Extends State Sales Tax Deduction
• Special Steps Needed for Paper 1040 Filers to Claim Late Tax Changes
• State and local sales tax deduction on Schedule A, line 5
• Higher education tuition and fees deduction on Form 1040, line 35
• Educator expense deduction on Form 1040, line 23
• IRS Publication 600 (PDF 328.3K)
• What’s Hot in Tax Forms and Publications

Taxpayers who pay someone to do their taxes should choose a preparer wisely. If you choose to use a paid tax preparer, it is important that you find a qualified tax professional. Taxpayers are ultimately responsible for everything on their return even when it’s prepared by someone else
 
The most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions, and other items.  By doing so, they have your best interest in mind and are trying to help you avoid penalties, interest, or additional taxes that could result from later IRS contacts.  
 
While most tax return preparers are professional and honest, taxpayers can use the following tips to choose a preparer who will offer the best service for their tax preparation needs.

• Ask about service fees.  Avoid preparers who claim they can obtain larger refunds than other preparers, or those who guarantee results or base fees on a percentage of the amount of the refund.
     
• Plan Ahead. Choose a preparer you will be able to contact after the return is filed and one that will be responsive to your needs.   
• Get References. Ask questions and get references from clients who have used the tax professional before.  Were they satisfied with the service received?   
• Research. Check to see if the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs or the state’s bar association for attorneys. Find out if the preparer belongs to a professional organization that requires its members to pursue continuing education and also holds them accountable to a code of ethics.  
• Determine if the preparer’s credentials meet your needs. Are they an Enrolled Agent, Certified Public Accountant or Tax Attorney? Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Other return preparers may represent taxpayers only in audits regarding a return they signed as a preparer.

Report suspected tax fraud and abusive tax preparers to the IRS on Form 3949-A, Information Referral, or by sending a letter to Internal Revenue Service, Fresno, CA 93888.  Download Form 3949-A from IRS.gov or order by mail at 1-800-829-3676.
Links:

• Form 3949-A Information Referral (PDF 94K)
• Where Do You Report Suspected Fraud Activity?

The standard deduction amounts are based on your filing status and are subject to inflation adjustments each year. For 2006, they are:

Single  $5,150
Married Filing Jointly  $10,300
Head of Household  $7,550
Married Filing Separately  $5,150

• Some taxpayers have different standard deductions. The standard deduction is more for taxpayers age 65 or older and for those who are blind. It is generally less for those who can be claimed as a dependent on some other taxpayer’s return.
• Limited itemized deductions. Your itemized deductions may be limited if your adjusted gross income is more than $150,500 or $75,250 for Married Filing Separately. This limit applies to all itemized deductions except medical and dental expenses, casualty and theft losses, gambling losses, and investment interest.
• Stipulations for Married Filing Separately. When a married couple files separate returns and one spouse itemizes deductions, the other spouse must also itemize and cannot claim the standard deduction.
• Some taxpayers are not eligible for the standard deduction. They include nonresident aliens, dual-status aliens, and individuals who file returns for periods of less than 12 months.
• Forms to use. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.

Links:

• Publication 17, Your Federal Income Tax (PDF 2.3MB)
• Instructions for Schedule A, Itemized Deductions (PDF 77K)

The three forms used for filing individual federal income tax returns are Form 1040EZ, Form 1040A, and Form 1040. If you are filing a federal income tax return on paper, use the simplest form you can. Using the simplest allowable form will reduce the chance of an error that may cost you money or delay the processing of your return.

1040EZ You may qualify to use Form 1040EZ, the simplest form, if:

• Your taxable income is below $100,000
• Your filing status is Single or Married Filing Jointly
• You are under age 65
• You are not claiming any dependents
• Your interest income is $1,500 or less

1040A You may be able to use Form 1040A if:

• Your taxable income is below $100,000
• You have capital gain distributions
• You claim certain tax credits
• You claim deductions for IRA contributions or student loan interest

1040 If you cannot use either a 1040EZ or 1040A, you probably need to use Form 1040. You must file form 1040 if:

• Your taxable income is $100,000 or more
• You claim itemized deductions
• You are reporting self-employment income
• You are reporting income from sale of property
• You are claiming the educator expense or higher education tuition and fees
 
Choosing the correct tax form could mean money in your pocket. Check your tax instructions carefully. Publication 17, Your Federal Income Tax (For Individuals), is a helpful guide to preparing your federal tax forms. It is available on the IRS Web site at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).

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Links:

• Form 1040EZ, Individual Income Tax Return (PDF 105K )
• Form 1040A, Individual Income Tax Return (PDF 138K)
• Form 1040, Individual Income Tax Return (PDF 181K)
• Publication 17, Your Federal Income Tax
• Publication 17, Your Federal Income Tax (PDF 2.3MB)

Your federal tax filing status is based on your marital and family situation. It is an important factor in determining whether you must file a return, your standard deduction and your correct amount of tax.

Your marital status on the last day of the year determines your status for the entire year. If more than one filing status applies to you, you may choose the one that gives you the lowest tax obligation.
 
There are five filing status options:

1. Single. Generally, if you are unmarried, divorced or legally separated according to  your state law, your filing status is Single.

2. Married Filing Jointly.  If you are married, you and your spouse may file a joint return. If your spouse died during the year and you did not remarry, you may still file a joint return with that spouse for the year of death.

3. Married Filing Separately.  Married taxpayers may elect to file separate returns. 

4. Head of Household.  You must be unmarried and paid more than half the cost of maintaining a home for you and a qualifying person.

5. Qualifying Widow(er) with Dependent Child. If your spouse died during 2004 or 2005, you have a qualifying child and meet certain other conditions; you may be able to choose this filing status.

For more information about filing status see publication 501, Exemptions, Standard Deduction, and Filing Information available on the IRS website at IRS.gov or by calling 1-800-TAXFORM (1-800-829-3676).

You must file a tax return if your income is above a certain level. The amount varies depending on filing status, age and the type of income you receive. 

For example, a married couple under age 65 generally is not required to file until their joint income reaches $16,900. However self-employed individuals generally must file a tax return if their net income from self employment exceeds $400.

Check the “individuals” section of the IRS Web site at IRS.gov or consult the instructions for form 1040, 1040A or 1040EZ for specific details that may affect your need to file a tax return with IRS this year.

Even if you do not have to file, you should file to get money back if Federal Income Tax was withheld from your pay, or you qualify for any of the following:

• Earned Income Tax Credit. The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, and may be returned in the form of a refund.

• Telephone Tax Refund.  The telephone tax refund is a one-time payment available on your 2006 federal income tax return, designed to refund previously collected long-distance federal excise taxes. It is available to anyone who paid long-distance taxes on landline, cell phone or Voice over Internet Protocol (VoIP) service.

• Additional Child Tax Credit. This credit may be available to you if you have three or more qualifying children or if you have one or two qualifying children and earned income that exceeds $11,300. The Additional Child Tax Credit may give you a refund even if you do not owe any tax.

• Health Coverage Tax Credit.  Limited to certain individuals who are receiving certain Trade Adjustment Assistance, Alternative Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation.

For more information about filing requirements and your eligibility to receive tax credits, visit the IRS Web site at IRS.gov.

Links:

• Forms and Publications
• Earned Income Tax Credit
• Telephone Tax Refund

Earlier is better when it comes to working on your taxes. Taxpayers are encouraged to get a head start on tax preparation, especially since early filers avoid the last minute rush and get their refunds sooner. 

Here are seven easy ways to get a good jump on your taxes long before the April deadline is here:

1. Gather your records in advance. Make sure you have all the records you need, including W-2s and 1099s. Don’t forget to save a copy for your files.

2. Get the right forms. They’re available around the clock on the IRS Web site, IRS.gov.

3. Take your time. Don’t forget to leave room for a coffee break when filling out your tax return as rushing can mean making a mistake.

4. Double-check your math and verify all Social Security numbers. These are among the most common errors found on tax returns. Taking care will reduce your chance of hearing from the IRS and speed up your refund.

5. Get the fastest refund. When you file early, you receive your refund faster. When you choose direct deposit, you receive your refund sooner than waiting for a check.

6. E-filing is easy. E-filing catches math problems, provides confirmation your return has been received and gives you a faster refund.

7. Don’t panic. If you have a problem or a question, remember the IRS is there to help. Try the IRS Web site at IRS.gov or call the IRS customer service number at 1-800-829-1040.
 

Links:

• Forms and Publications
• E-filing 

If you receive certain types of income, you may get a Form 1099 for use with your federal tax return.  Form 1099 is an information return provided by the payer of the income. You should receive your Form 1099-series information returns by January 31, 2007.  The payer deadline to mail Form 1099-series is January 31, 2007.

If you have not received an expected Form 1099 within a few days after that, contact the payer, to secure the missing information.  If you still do not receive the form by February 15th, call the IRS for assistance at 800-829-1040.

In some cases, you may obtain the information that would be on the Form 1099 from other sources. For example, your bank may put a summary of the interest paid during the year on the December or January statement for your savings or checking account. If you are able to get the accurate information needed to complete your tax return, you do not have to wait for the Form 1099 to arrive.

Form 1099-series is not a required attachment to your return, except when you receive a Form 1099-R, or Form 1099-INT that shows federal income tax withheld. You will not usually attach a 1099-series form to your return, except when you receive a Form 1099-R that shows income tax withheld. You should keep a copy of all the 1099s that you receive with your tax records for the year. There are several different forms in this series, including:

• Form 1099–B, Proceeds From Broker and Barter Exchange Transactions
• Form 1099–DIV, Dividends and Distributions
• Form 1099–INT, Interest Income
• Form 1099–MISC, Miscellaneous Income

• Form 1099–OID, Original Issue Discount
• Form 1099–R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
• Form SSA–1099, Social Security Benefit Statement

If you file your return and later receive a Form 1099 for income that you did not fully include on that return, you should report the income and take credit for any federal income tax withheld by filing Form 1040X, Amended U.S. Individual Income Tax Return. Form 1040X and instructions are available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
 

Links:

• Form 1040X, Amended U.S. Individual Income Tax Return (PDF 123K)
• Instructions for Form 1040X (PDF 43K)
• Forms and Publications

The EITC is for people who work, but have lower incomes. If you qualify, it could be worth up to $4,500 this year. So you could pay less federal tax or even get a refund. That’s money you can use to make a difference in your life.

Did you know that in Tax Year 2005, over 22 million taxpayers received $41.4 billion dollars in EITC – making the credit a great investment in the lives of those who claim it? However, the IRS estimates 20 to 25% percent of people who qualify for the credit do not claim it. At the same time, there are millions of Americans who have claimed the credit in error, many of whom simply don’t understand the criteria.

This year, it’s even easier to determine whether you qualify for the EITC. The EITC Assistant, an interactive tool available on IRS.gov, removes the guesswork from eligibility rules. Just answer a few simple questions about yourself, your children, your living situation and your income to find out if you qualify and to estimate the amount of your EITC. You will see the results of your responses right away.

The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age and residency requirements. Additionally, you must file a tax return to claim the credit.

If you were employed for at least part of 2006, you may be eligible for the EITC based on these general requirements:

• You earned less than $12,120 ($14,120 if married filing jointly) and did not have an any qualifying children
• You earned less than $32,001 ($34,001 if married filing jointly) and have one qualifying child
• You earned less than $36,348 ($38,348 if married filing jointly) and have more than one qualifying child

In addition you must meet a few basic rules:

• You must have a valid Social Security Number
• You must have earned income from employment or from self-employment.
• Your filing status cannot be married, filing separately.
• You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
• You cannot be a qualifying child of another person.
• If you do not have a qualifying child, you must:
  • be age 25 but under 65 at the end of the year,
  • live in the United States for more than half the year, and
  • not qualify as a dependent of another person
• You cannot file Form 2555 or 2555-EZ (related to foreign earn income)

Members of the military can elect to include their nontaxable combat pay in earned income for the earned income credit. If you make the election, you must include in earned income all nontaxable combat pay you received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, then each of you can make your own election. The amount of your nontaxable combat pay should be shown on your Form W-2 in box 12 with code Q.

For more information about the EITC, go to IRS.gov or see Publication 596, Earned Income Credit, which contains eligibility criteria and instructions for claiming the tax credit. Copies of the publication are available in English and Spanish and can be found on IRS.gov or by calling 800-TAX-FORM (800-829-3676). Free help and tax preparation is available at our Volunteer Income Tax Assistance sites or contact your tax preparer for more details. 
Links:

• EITC Assistant
• Earned Income Tax Credit
• Publication 596, Earned Income Credit (EIC) (PDF 373K)
• Free File
• Tax Topic 601, Earned Income Credit
• AARP Tax-Aide
• EITC Public Service Announcement (MP3)