You and I should be aware of important changes to the tax law before we complete our 2006 federal and California state income tax forms. Those changes will likely affect our California state tax returns too. It may be time to consult with a California tax attorney on this or other tax matters.
For more information, you may visit the IRS website at http://www.irs.gov/. Also, you can check out Publication 553, Highlights of 2006 Tax Changes, and your Form 1040 instruction book. The California Franchise Tax Board has its useful information posted at http://ftb.ca.gov/.
Here are some changes that may affect your tax return:
Expanded tax savings for retirement plans. 401(k) and 403(b) plans can now create a qualified Roth contribution program.
New rules on donations to charity. Clothing and household items donated to charity after Aug. 17, 2006, must be in good used condition or better to be deductible.
Retirement contributions from tax free combat pay. When figuring how much to contribute to a Roth or traditional IRA, military members serving in Iraq, Afghanistan and other combat zone localities can now count tax-free combat pay.
Military reservists not subject to early distribution tax. The 10% early-distribution tax on payments from retirement plans will not apply to reservists called to active duty.
Tax free transfers from IRA’s to charity. For tax years 2006 and 2007, if you are age 70 ½ or over, you can directly transfer tax-free up to $100,000 per year to an eligible charity from your IRA.
“Kiddie” Tax Age Change. The “kiddie” tax used to apply only to children under 14. Now, your children under 18 with taxable investment income may need to pay at their parents’ higher marginal rates.
New energy-saving tax credits. A 10% credit can now be claimed for various energy-saving improvements made to your main residence. There is also a 30% credit for the cost of energy-saving property such as photovoltaic cells.
Two other changes may affect the amount of your refund or the way in which you choose to receive your refund. They are:
Telephone Excise Tax Refund. You will be able to request a refund if you paid the federal excise tax on long-distance or bundled service.
New Split Refund Option. You can now split your refunds among up to three accounts held by up to 3 U.S. financial institutions, such as banks, mutual funds, brokerage firms or credit unions.