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Some years, doing your taxes is like playing Trivial Pursuit: The more arcane questions you can answer about deductible expenses, the more you'll save. This year, however, filling out your return is more like playing hide-and-seek.
Congress enacted a number of tax changes for 2006 so late that the tax forms had already been printed. As a result, the IRS had to find creative ways for you to claim certain deductions.
For example, let's say your income is too high to qualify for either the Hope Scholarship or the Lifetime Learning tax credit (that means adjusted gross income of more than $110,000 for married couples filing jointly or $55,000 for everyone else). You still may be able to deduct up to $4,000 of qualified college or other post-high school tuition and fees. But there's no line for this on Form 1040.
What to do? Locate line 35, labeled "domestic production activities deduction," write t in the blank space to the left, and enter your write-off (we're not kidding).
The instructions are just as cryptic if you deduct state sales tax rather than state income tax -- a tactic that makes sense if you live in a state with no income tax, such as Florida or Texas, or if you live elsewhere and your sales-tax deduction exceeds your state income-tax deduction (that's the case with some retirees).
To help you calculate your deduction, the IRS provides tables with standard sales-tax amounts based on income, family size and state of residence. (There's also a new online sales-tax calculator at www.irs.gov.) You can add the tax on big-ticket items, such as cars, boats and mobile homes, to the standard amount, or you can tally all of your actual sales-tax receipts, if that results in a larger deduction.
Where do you fill in the amount? Find line 5 on Schedule A (itemized deductions), labeled "state income taxes," and write st for sales tax.
Teachers and classroom aides can deduct up to $250 for out-of-pocket purchases of school supplies, regardless of whether they itemize. The real test is finding out how to claim the break. Hint: Go to line 23 on Form 1040, which says "Archer MSA Deduction," and write e.
You're stuck with this scavenger hunt only if you file a paper tax form. So if you haven't made the leap to electronic preparation, this may be the year to give it a try. Just make sure you install all the program updates when you buy tax-preparation software, such as TurboTax, which includes tax advice from Kiplinger's. If you're among the 95 million taxpayers who have a household income of $52,000 or less, you can prepare and file your return free at www.irs.gov.
Green credits. You say you bought an energy-efficient hybrid vehicle in 2006? Then you may be able to claim a credit of up to $3,400, depending on the car's make and model. But only buyers of the first 60,000 vehicles sold by each manufacturer after January 1, 2006, are entitled to the full credit, and Toyota and Lexus hybrids hit the ceiling last summer. Your credit on a Toyota Prius sold before October 1, for example, is $3,150. But if you waited until the fourth quarter to buy your car, your credit is half that amount, or $1,575.
When you're filing your return, don't drive yourself crazy searching for a line labeled "hybrid credit" or something similar. You won't find it. Instead, calculate the credit on Form 8910 and enter it on line 55c of Form 1040.
At that point, however, your new car may collide with the alternative minimum tax. Evan Fusco bought a hybrid Toyota Highlander in early 2006, but he will lose some, and possibly all, of the $2,600 credit he expected. Evan and his wife, Tamara, who are both doctors and live in Nixa, Mo., with their three young children, have been subject to the AMT for the past few years. And -- you guessed it -- just like deductions for dependents and state income taxes, the hybrid-car credit doesn't count against the AMT.
In the AMT's weird parallel universe, taxpayers like the Fuscos have to calculate their taxes twice and pay whichever is higher -- the regular tax or the AMT. For those on the cusp of the AMT, the hybrid-car credit can be a Catch-22. If, say, your regular tax bill before applying the credit is $200 more than your AMT levy, your hybrid-car credit maxes out at $200. Attempt to apply the full credit and you'll be pushed into the AMT zone.
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