Advice06

One-Time Tax Refund Available to Long-Distance Telephone
Customers

This year, telephone customers can request a one-time refund of taxes they paid on
long-distance and bundled telephone service. Individuals, businesses and tax-
exempt organizations can request this refund as a credit on their 2006 federal
income tax returns.
The refund covers the three-percent tax paid on long-distance and bundled service
billed after Feb. 28, 2003 and before Aug. 1, 2006. Several recent federal court
decisions held that the tax does not apply to long-distance service as it is billed
today. For that reason, the government stopped collecting the tax on service billed
after July 2006 and authorized refunds of the taxes billed during the previous 41
months.

Taxpayers can base their refund requests on the actual amount of tax paid. To do
this, they must fill out Form 8913, Credit for Federal Telephone Excise Tax Paid.
Individuals and businesses should attach it to their regular 2006 income-tax returns.
Tax-exempt organizations should attach it to Form 990-T.
But many people don’t want to dig through 41 months of old phone bills or lack the
records they need to figure the actual amount of tax paid. For that reason, the
government created a standard amount that individuals can use to request the
telephone excise tax refund. The amount is based on the number of personal and
dependency exemptions an individual is eligible to claim on their tax returns. The
standard amounts are:

1 exemption — $30;
2 exemptions — $40;
3 exemptions — $50;
4 exemptions — $60.

For millions of people not required to file a regular income-tax return, the IRS has
created a special short form for requesting the telephone excise tax refund. It is Form
1040EZ-T and is used exclusively for this purpose. Form 1040EZ-T can also be filed
electronically for free via the Free File link on IRS.gov beginning in mid-January.
Form 1040EZ-T can be used to request a refund with either the actual amount of tax
paid or the standard amount. Those choosing actual amounts must attach Form
8913.

Restrictions on Charitable Contributions

Cash contributions:
All cash contributions made in tax years beginning after August 17, 2006, to any
qualified charity must be supported by a dated bank record or a dated receipt. The
tax year for most individual taxpayers begins on January 1.

Clothing and household items:
Beginning with contributions made after August 17, 2006, no deduction is allowed for
most contributions of clothing and household items unless the donated property is in
good used condition or better.

Earned Income Credit Amounts Increase

Earned income amount:
The maximum amount of income you can earn and still get the credit is higher for
2006 than it is for 2005. You may be able to take the credit for 2006 if:

You have more than one qualifying child and you earn less than $36,348
($38,348 if married filing jointly),
You have one qualifying child and you earn less than $32,001 ($34,001 if
married filing jointly), or
You do not have a qualifying child and you earn less than $12,120 ($14,120 if
married filing jointly).

The maximum amount of adjusted gross income (AGI) you can have and still get the
credit has also increased. You may be able to take the credit if your AGI is less than
the amount in the above list that applies to you.

Investment income amount:
The maximum amount of investment income you can have in 2006 and still get the
credit increases to $2,800.

Electric and Alternative Motor Vehicles

For 2006, the list of vehicles that are qualified hybrid vehicles for the Alternative
Motor Vehicle Credit has been expanded. The tax credit for hybrid vehicles applies
for vehicles purchased on or after January 1, 2006, and could be as much as $3,400
for those who purchase the most fuel-efficient vehicles.

Exemption Amount Increased

The amount you can deduct for each exemption has increased from $3,200 in 2005
to $3,300 in 2006.

You may lose part of the benefit of your exemptions if your adjusted gross income is
above a certain amount. The amount at which the phase-out begins depends on
your filing status. For 2006, the phase-out begins at:

$112,875 for married persons filing separately,
$150,500 for single individuals,
$188,150 for heads of household, and
$225,750 for married filing jointly or qualifying widow(er)s.

If your adjusted gross income is above the amount for your filing status, use the
Deduction for Exemptions Worksheet in the Form 1040 instructions to figure the
amount you can deduct for exemptions.

Income Limits Increased for Hope and Lifetime Learning
Credits

For 2006, the amount of your Hope or lifetime learning credit is phased out
(gradually reduced) if your modified adjusted gross income (MAGI) is between
$45,000 and $55,000 ($90,000 and $110,000 if you file a joint return). You cannot
claim an education credit if your MAGI is $55,000 or more ($110,000 or more if you
file a joint return). This is an increase from the 2005 limits of $43,000 and $53,000
($87,000 and $107,000 if filing a joint return). For more information, see chapters 2
and 3 in Publication 970, Tax Benefits for Education.

Limit on Itemized Deductions Increases

If your adjusted gross income is above a certain amount, you may lose part of your
itemized deductions. In 2006, this amount is increased to $150,500 ($75,250 if
married filing separately). In 2005, the amount was $145,950 ($72,975 if married
filing separately). Beginning in 2006, the amount by which these itemized deductions
are reduced is only 2/3 of the amount of the reduction that otherwise would have
applied. See the Instructions for Schedule A (Form 1040), line 28, for more
information on figuring the amount you can deduct.

Social Security and Medicare Taxes

For 2006, the employer and employee will continue to pay:

6.2% each for social security tax (old-age, survivors, and disability insurance),
and
1.45% each for Medicare tax (hospital insurance).

Wage limits: For social security tax, the maximum amount of 2006 wages subject to
the tax has increased from $90,000 to $94,200. For Medicare tax, all covered 2006
wages are subject to the tax.

New Option to Split Refunds Between Bank Accounts

Beginning in 2007, a new refund option is available for filers of Form 1040, Form
1040A, Form 1040EZ, Form 1040NR, Form 1040NR-EZ, Form 1040-PR, and Form
1040-SS.
Filers of these tax forms for 2006 will be able to elect to have their federal income tax
refund automatically deposited into two or three accounts at a bank or other financial
institution (such as a mutual fund, brokerage firm, or credit union). Individuals
electing this split refund option must file Form 8888, Direct Deposit of Refund to More
Than One Account, which will be available by the end of 2006.

Standard Deduction Amount Increased

The standard deduction for taxpayers who do not itemize deductions on Schedule A
of Form 1040 is, in most cases, higher for 2006 than it was for 2005. The amount
depends on your filing status, whether you are 65 or older or blind, and whether an
exemption can be claimed for you by another taxpayer.

The basic standard deduction amounts for 2006 are:

Head of household — $7,550
Married filing jointly and qualifying widow(er)s — $10,300
Married taxpayers filing separately — $5,150
Single — $5,150

The standard deduction amount for an individual who may be claimed as a
dependent by another taxpayer may not exceed the greater of $850 or the sum of
$300 and the individual's earned income.

Standard Mileage Rates

For tax years beginning in 2006, the allowable deductions for the standard mileage
rate are as follows:

Business miles: The standard mileage rate for the cost of operating your car
changes to 44.5 cents a mile for all business miles driven.
Charitable services: The standard mileage rate allowed for use of your car
when you use your car to provide charitable services to a charitable
organization is 14 cents a mile.
Charitable services: Hurricane Katrina relief services. If you used your
vehicle in giving services to a charitable organization to provide relief related
to Hurricane Katrina, the standard mileage rate allowed for use of your car is
32 cents a mile.
Medical reasons: The standard mileage rate allowed for use of your car for
medical reasons is 18 cents a mile.
Moving: The standard mileage rate for determining moving expenses is 18
cents a mile.

Tax Law Changes for 2006

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