Sunday, February 25, 2007

2006 Tax Return Draft - The Good, The Bad and The Ugly

I completed the first draft of our 2006 tax return today. As with every tax season, I learn something new about our tax code. Here's the good, the bad and the ugly.

The Good

No tax on 2005 state tax refund. Since I triggered the AMT tax for 2005, it turns out my 2005 state tax refund is NOT taxable income. This is because I would have still triggered the AMT tax with state taxes reduced by the refund amount.

No AMT tax for 2006. I don't quite understand the reasons yet. But I am happy nevertheless. For those of you unfamiliar with the acronym AMT, it stands for Alternative Minimum Tax. For more details on the AMT, see my post An AMT Tax Benefit - Really.

The Telephone Excise Tax Credit. With three people in our family, we qualify for a $50 tax credit. I am going to take the standard credit. However, based on what I've been reading, if you have multiple cell phones, or made significant amounts of long distance calls, it may be worth doing a calculation based on your actual usage

The Bad

Not all 1099s have been received. I still am missing one 1099 and one K-1. It probably won't change my taxes much, but it keeps me from doing the final version.

Still don't qualify for some great tax deductions or credits. I was hoping that new criteria for 2006 would allow us to qualify for all of the following: deductible IRAs, Roth IRAs, child tax credit, Roth IRA conversions, and retirement plan contribution credit.

Until I feel I am wealthy, I think I should qualify for these deductions and credits:-)

The Ugly

We need to pay more taxes, since we underpaid by about 15% Since coming back from an overseas assignment, I have been trying to get our withheld taxes to be +/- $200 of the amount owed. Last year we overpaid by 50% due to an adoption tax credit. This year we will need to add about 20% to what has already been withheld.

This year I have a reasonable excuse. About 11% of our income was due to capital gains for stock sales or dividend/interest, which do not have tax withholding.

Since more than last year's tax liability was withheld, we won't receive any penalties for underpayment. Needless to say, I will be filing my return on the last possible due date, April 17, 2007, to delay as long as possible the final tax payment, which I guess could be considered good:-)

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

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