| | 2006 Tax Return Filing Issues |
| | Published - October 15, 2007 |
| | The 2006 individual income tax return filing season continues to be plagued with doubt and uncertainty. As noted in last months column, the Internal Revenue Service has not changed the 2006 tax forms to reflect the last minute December 2006 tax legislation, and obtaining an intelligent answer to a question from the Internal Revenue Service 800 telephone number or their website has proved to be difficult, if not impossible
Filing Deadline For Your 2006 Tax Return
The normal deadline for filing your annual U.S. Federal individual income tax return is April 15. When April 15 falls on a Saturday or Sunday, as it does in 2007, the due date is extended to the first weekday thereafter which would be April 16, 2007. However, since April 16, 2007 is an official holiday in the District of Columbia, the 2006 filing deadline for the entire country has now been extended until April 17, 2007.
United States citizens residing outside the United States on April 15 have an automatic extension of time until June 15 in which to file their tax return without incurring a penalty for late filing. This two month extension of time in which to file your tax return does not extend the time in which you have to pay any tax due with your 2006 tax return. If you are going to owe tax with your 2006 tax return, you will need to pay the tax due by April 17, 2007 by filing Form 4868 and attaching your check.
Form 2555-Foreign Earned Income and Housing Exclusion
In January 2007 the Treasury Department indicated that it was reviewing it’s November 2006 guidance with respect to the maximum housing allowance that would be allowed for different countries and that it might change the housing amounts for certain countries in early 2007. The instructions to the Form 2555 on the Internal Revenue Service website continue to contain a “caution” stating that the Internal Revenue Service expects to issue guidance in early 2007 changing the housing expenses limits based on geographic differences in foreign housing costs. To date, no such guidance has been issued and a telephone call to the Treasury Department to ascertain was working on this project was fruitless. If you are going to prepare your own 2006 tax return to meet the April 17 filing date, you will need to do so using the information currently available, and then continually monitor the Internal Revenue Service website to ascertain if you need to file an amended 2006 tax return later in 2007.
Penalty for Underpayment of Estimated Tax
As reported in lat month’s column, the Tax Increase Prevention and Reconciliation Act of June 2006 which 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. In mid February, the Internal Revenue Service finally announced a waiver of the underpayment of estimated tax penalty for US citizens living abroad whose underpayment was caused by the June 2006 change in the tax law.
This waiver is only available to individuals who file a Form 2555 with their timely filed 2006 U.S. individual income tax return.
Federal Telephone Excise Tax Credit
If you were billed after February 28, 2003 and before August 1, 2006 for the federal excise tax on long distance or bundled service, you may be able to claim a credit for the tax paid. The credit is based on family size in 2006 and ranges from $30 to $60. Alternatively, if you have kept your old telephone bills, you can claim a credit for the actual excise taxes paid by filing Form 8913 with your tax return.
However, if you have lived outside the United States during the above period, it is doubtful that you paid this excise tax and you are not eligible for claiming this credit.
While the Internal Revenue Service has only been processing 2006 tax returns for about 3 weeks, this credit is now considered the number one abuse on tax returns filed to date. Individuals are requesting thousands of dollars of credits and the Internal Revenue Service has already taken action against individuals falsely claiming this credit.
Roth IRA’s
Another scheme that has come to the attention of the Internal Revenue Service is individual’s contributing undervalued stock to a Roth IRA. As any qualified distributions from an IRA after age 59 ½ are tax free, certain individuals have determined that this is a good scheme for avoiding capital gains taxes today, and receiving a tax free distribution at a later date.
Conservation Easement Credits
Many individuals are looking for a way to reduce the amount of Federal and State income taxes that they pay. Recently, promoters have been setting up partnerships, to own and sell state conservation easement credits and federal rehabilitation credits in order to generate tax losses. While this type of investment appears to be legitimate, the Internal Revenue Service has announced that these entities are not valid and that the losses are not deductible.
2007 Tax Bill
Despite the change in the make up of the Congress, a tax bill that has President Bush’s approval is wending its way through Congress. The bill would make permanent the 2001 tax law changes that are due to expire in 2011. It would also give the Internal Revenue Service $600,000,000 more to increase audits. The bill would replace tax free employer paid medical insurance with a standard deduction for medical premiums paid. The bill will also require investment brokers to report on the Form 1099 the cost basis of the stock sold as well as the sales price.
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