Are you taking advantage of all the tax credits and deductions available to you? Perhaps not, given that tax information gets tougher to wade through every year, says Darrel Shinn, a certified tax professional in Alexandria, Va. "We've had 13 tax law changes since 2001," he says, "and in 2005 alone there were five tax law changes."
No wonder you might miss some credits and deductions you qualify for. We'll look at some of these below, but first a clarification: A tax credit and a tax deduction are not the same.
"A tax credit is almost always better than a tax deduction," explains Cindy Hockenberry, EA, a tax information analyst with the National Association of Tax Professionals, Appleton, Wis. A tax credit reduces your tax liability dollar for dollar, while a tax deduction only reduces the amount you pay taxes on.
For instance, a $100 tax credit entitles you to knock $100 right off your tax bill. With a $100 tax deduction, you subtract $100 from your taxable income. Thus, if you're in the 28% tax bracket, a $100 tax deduction results in $28 in tax savings.
The federal government's Energy Policy Act of 2005 created energy-related tax credits, effective Jan. 1, 2006. That's good news, but ...
"Talk about complicated," Hockenberry says. "They managed to take a relatively simple concept and make it so convoluted that you're just scratching your head."
The tax credits are for:
Some of the credits are extremely modest. For instance, you can take only a $200 maximum tax credit for Energy Star-labeled windows. "When you're thinking in terms of spending $10,000 on new windows," Hockenberry points out, "a $200 savings sometimes doesn't even cover the sales tax."
What's more, a consumer's total credit per tax year for all home energy improvements combined (those listed above but not including solar systems and fuel cells) is capped at $500. Solar panels and solar water heating systems each have a credit for up to 30% of the cost of the system, up to $2,000 for each. For fuel cells, the credit is up to 30% of the cost, up to $500 per 0.5 kilowatt of capacity.
The tax credits on hybrid vehicles range up to $3,400, depending on a vehicle's weight and fuel economy. "But there's a caveat," Hockenberry says, "that once the vehicle manufacturer sells its 60,000th vehicle, the tax credit is reduced, but not until the second quarter after the quarter in which they sold the 60,000th vehicle."
She offers this example: Toyota sold its 60,000th Prius in May 2006. May is in the second quarter of the year. So the first quarter after that quarter is the third quarter, which ended Sept. 30. Anyone buying a Prius after Sept. 30 would get half the original tax credit ($1,575 instead of $3,150). The credit drops further in ensuing quarters.
The above information gives just a taste of what the energy credits are about. Products must meet specified efficiency requirements. To learn more, see:
Say you give a lot of clothes, furniture, and other household items to the Salvation Army. The receipt you get will acknowledge your donations, but show no dollar value. But on the Salvation Army Web site, you'll find a valuation guide for determining the fair market value of donated items. By investing a little time to tally up your donations, you'll create the documentation you need to get the deduction you deserve. Other charities may have similar guides.
On the other hand, people forget to include some expenses: hearing aids, eyeglasses, contact lenses, crutches, canes, other equipment for disabled individuals, travel to get medical care, uninsured medical and dental expenses, health insurance premiums, and more.
Sometimes you can plan ahead to get the most out of this deduction. For instance, ordinarily Shinn's health expenses wouldn't hit the 7.5% mark. But one year he paid for a hearing aid, his wife's health insurance premiums, regular medical expenses--and then he paid in advance for some dental work. He was able to take a tax deduction. "I wouldn't have been able to qualify," he notes, "if I hadn't done a little planning."
To learn more about all of the above credits and deductions, go to the IRS (Internal Revenue Service) Web site. Enter the appropriate term in the search box. For additional help, see a tax professional.
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