| | 2007 Tax Law Changes |
| | Published - October 15, 2007 |
| | The Tax Increase Prevention and Reconciliation Act of June 2006 limited the amount of foreign housing exclusion that can be elected by US citizens and resident aliens living outside the United States. The Tax Relief and Health Care Act of 2006 that was enacted on December 20, 2006 brought back tax cuts and credits such as the sales tax deduction retroactive to January 1, 2006.
Given that the Internal Revenue Service started to print 2006 tax forms in the fall of 2006, this last minute tax legislation has created chaos. Currently, the Internal Revenue Service not accepting electronic tax filings as they are frantically reprogramming their computers for these last minute tax changes. And as the Internal Revenue Service has not changed the tax forms to reflect the last minute legislation, preparing one’s own tax return is going to be an adventure. This column will review some of the problems that a tax preparer will encounter.
Form 2555-Foreign Earned Income and Housing Exclusion
From 1982 to 2005 the foreign housing exclusion had the same base amount for all taxpayers. In 2006, the foreign housing exclusion will differ by individual, solely dependent on where you live. In prior years, the foreign housing exclusion was computed on page 3 of Form 2555. For 2006 the instructions to Form 2555 indicate that the foreign housing exclusion should be computed on a worksheet. The instructions also contain a “caution” stating that the Internal Revenue Service expects to issue guidance in early 2007 listing the housing expenses limits based on geographic differences in foreign housing costs. To date, no such guidance has been issued and a visit to the Internal Revenue Service was fruitless. The person in charge of the office was unaware of any such guidance, did not know who in the Internal Revenue Service was working on this project, and was unable to provide a telephone number to talk to a knowledgeable person. If you are going to prepare your own 2006 tax return you will need to be a daily visitor to the IRS website, www.irs.gov, to obtain the “guidance” when and if it does appear.
Penalty for Underpayment of Estimated Tax
The Tax Increase Prevention and Reconciliation Act of June 2006 limited the amount of foreign housing exclusion that can be elected by US citizens and resident aliens living outside the United States significantly increased the amount of 2006 income tax that individuals in Bermuda will pay. However, as most individuals had already made their 2006 1st and 2nd quarter estimated tax payments, they were now in an underpayment position with respect to 2006. Initially, the Internal Revenue Service stated that they were aware of this problem and would issue “guidance” later in the year. To date, no “guidance” has been issued.
Form 1040 and Schedule A
When the Internal Revenue Service designed the 2006 tax forms, rather than change all the line numbers to account for the tax deductions and credits that had expired, they changes the captions on those lines to accommodate little known deductions. The task of taking the newly reinstated deductions and credits is further complicated by the fact that the instructions likely state that these deductions and credits are no longer available. So if you are preparing your own tax return, you will need to fully understand what the reinstated deductions and credits are, and then diligently pursue the Internal Revenue Service website to ascertain how to claim them. But do not expect an easy solution.
Sales Tax Deduction
The December 2006 tax legislation reinstated the sales tax deduction. The deduction can be claimed by using the sales tax tables in IRS Publication 600 and by entering the letters “ST” and the amount on line 5 of Schedule A. Are the instructions to do this easily found? No. The instructions to do so are only found in IRS Publication 600. So you need to know what you are looking for and you will need to diligently search to find it.
Teacher’s Education Expense Deduction
Teacher’s can again claim a $250 deduction for out of pocket expenses for classroom supplies, provided that they work at least 900 hours in a school with students in grades K-12. The deduction is taken by including the amount on line 23 of Form 1040 and writing in the letter “E”. As this line is also being used to claim the Archer Medical Savings Account, if both deductions are being claimed then the letter “B” should be used and a separate schedule attached.
Telephone Excise Tax Refund
Excise taxes paid on telephone calls made between February 28, 2003 and August 1, 2006 can be claimed as a credit on line 71 of Form 1040 and by attaching Form 8913. If you have not kept all of your old phone bills, a standard refund can be claimed based on the number of exemptions on your 2006 tax return. The refund is based on $30 for 1 exemption, $40 for 2 exemptions, $50 for 3 exemptions, and $60 for 4 or more exemptions. The IRS expects a lot of cheating to take place with this refund. If you have been living outside the United States for the above period and using a local telephone service, you are obviously not entitled to this refund.
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