TELEPHONE EXCISE TAX REFUND


The IRS has decided to discontinue the “telephone Excise Tax”. Ya, you are saying that you did not know that they were collecting this tax? Well it all started in the year 1898. Yes that is correct, 1898, 108 years ago.

You see, it was originally a “luxury” tax that our good friends the Federal Government imposed just after Alexander Graham Bell invented the telephone. (Those crafty Feds really know how to tax). It was actually a tax on the rich which never was removed even when we poor slobs got our own telephones.

So, they are going to pay us back for all of the Federal Excise Tax that was charged from February 28, 2003 and August 1, 2006. Get all of those phone bills out and add up the tax you paid. Oh, ya, it is only the federal excise tax.

You say you did not save all of those phone bills? Boy are you out of luck, well not really. Our good friends at the IRS are letting us take a standard refund amount based upon how many exemptions we are claiming in 2006.

If you have one exemption, meaning you file single, you get $30, two gets you $40, three gets you $50 and four or more gets you $60.

This applies to all phone bills. Cell phones, home phones and business phones. But the most any one tax return can get is the amount above. This refund is even available to those that don’t itemize there expenses.

What if you do not need to file a tax return? No problem, the IRS has a form for you to file. Anyone that had a phone bill gets some free cash.

The final question you might be asking is, what about all that money that they got over the past 108 years? Sorry, you only get your $30 to $60 bucks. Oh, ya, if you have eight kids you might think about getting a divorce for this year so that you can file and get $120. On second thought it might cost more to file that paperwork. 

Holding on to those tax records

Maintaining tax records and receipts that corroborate what is claimed on your tax return can be a time consuming task. However, maintaining proper tax records is critical should the IRS later audit your return. Tax records are your first line of defense against the challenge of an audit.

What are the basics? While it is important that your tax records be accurate, the IRS generally does not require any particular form of recordkeeping. One of the best records that can be used to substantiate a particular expense is a canceled check. You should keep all canceled checks that relate to any items that you need or think you will need to prepare any tax return. You should also retain any receipts, sales slips and invoices that refer to items that might be included on your return.

These records include records of expenses that can be claimed as itemized deductions. Thus, you should keep records of any unreimbursed medical and dental expenses, including receipts showing the dates you paid them and receipts for transportation primarily for medical care. You should also retain canceled checks verifying the payments of any federal or state estimated tax payments, real estate and personal property taxes, as well as charitable contributions. If you perform services for a charity, be sure to keep records showing your out-of-pocket expenses.

In addition to keeping information that can be used to support deductions on your tax return, you will also need to maintain records that will substantiate the income reported on your return. This includes Forms W-2 indicating your wages and income tax withholdings from employment and Forms 1099 showing compensation earned as an independent contractor. You should also keep other Forms 1099 showing interest, dividends and other types of income, as well as financial statements you receive from any brokerage houses. It is also important that you keep copies of your tax returns and all related schedules and attachments.

A question clients always ask is how long they need to keep these records. In short, you need to keep them for as long as the IRS can potentially challenge you on a particular item claimed on your return. This time frame is generally 3 years from the date you file your income tax return, or, if later, 2 years from the time you pay the tax.

Sometimes, this time limit can be extended to 6 years and there is no limit of time for the IRS to bring an action against someone who has filed a false or fraudulent return.

In some cases, you should keep records longer than the regular IRS examination periods. You should definitely hold on to any records to indicate your basis in property, as basis is the yardstick for measuring taxable capital gain or loss. Basis includes the amount you paid for property and any major improvements made to it. You will also want to permanently retain certain documents, such as, trust documents, partnership agreements, wills, divorce decrees, leases, etc.

Although many homeowners may no longer need to keep track of basis for selling their principal residences due to the 1997 Taxpayer Relief Act’s exclusion of $250,000 of gain from the sale of a principal residence ($500,000 for married taxpayers), most homeowners of higher-priced homes should maintain their records carefully in order to minimize their tax, in case inflation should push the gain upon eventual sale above the threshold amounts.

The kinds of expenses you should maintain are those that increase the tax basis on your home. These fall into two categories: those incurred at the time of original purchase and those improvements made over time that substantially add value to your home or prolong its life. Acquisition costs can include inspection fees, legal fees, appraisal fees, and title search costs. Some of the improvements that will reduce your gain include a new roof, bathroom and kitchen renovations, heating equipment, window replacements and landscaping.

Expenses that keep your home in good repair usually won’t reduce your gain unless they are part of an extensive remodeling or renovation plan.

Good recordkeeping is the first step to sound tax planning. The sooner you begin organizing your tax data, the better off you’ll be. All the careful tax planning that you have done will be for naught if you cannot produce the appropriate records at tax-filing or upon subsequent IRS examination.

What To Do If You Receive an IRS Notice

"Before you take off to El Salvadore"

IRS TAX TIP 2006-72

It’s a moment many taxpayers dread. A letter arrives from the IRS — and it’s not a refund check. Don’t panic; many of these letters can be dealt with simply and painlessly.

Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry. You should review the correspondence and compare it with the information on your return.

• Agree? If you agree with the correction to your account, no reply is necessary unless a payment is due.

• Disagree? If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

• Questions? Most correspondence can be handled without calling or visiting an IRS office, if you follow the instructions in the letter or notice. However, if you have questions, call the telephone number in the upper right-hand corner of the notice or call the IRS at 1-800-829-1040. Have a copy of your tax return and the correspondence available when you call so your account can be readily accessed.

Sometimes, the IRS sends a second letter or notice requesting additional information or providing additional information to you. Be sure to keep copies of any correspondence with your records.

For more information about IRS notices and bills, see Publication 594, Understanding the Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax. Both publications are available at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).

Links:

Publication 594, Understanding the Collection Process (PDF 129K)
Publication 17, Your Federal Income Tax (PDF 2,072K)
Tax Topic 651, Notices — What to Do

Copied from IRS website www.irs.gov

Pension Protection Act of 2006

On August 3, 2006, Congress passed the pension Protection Act of 2006 (H.R. 4) . President Bush signed the legislation into law on Thursday, August 17, 2006. Below is a summary of the major provisions.

Tax Provisions.

The bill makes permanent (or until Congress passes some more laws) the provisions from the Economic Growth and Tax Relief Reconciliation Act of 2001 related to individual retirement accounts and pensions.

Increase in annual contribution limit for IRA's

Increase in the contribution limits on 401(k) plans

Catch-up contributions for people age 50 and over

Tax credit for pension start-up costs

Treatment of elective deferrals as after-tax Roth contributions

Makes permanent the savers tax credit aimed at lower income taxpayers

Provides for increased flexibility and favorable tax treatment of annuity and life insurance contracts with a long-term care insurance option.

Provides for direct deposit of tax refunds into IRA's

Waives the 10 percent early withdrawal penalty for distributions to public safety employees over 50 who may retire early. (For all you cops up north this is your chance to retire.)

Waives the early withdrawal penalties on distributions from an IRA or pension plan taken by members of the National Guard and Reserves called to active duty.

Permanently extends Section 529 qualified tuition programs

Charitable Provisions

Provides for tax=-free distributions from IRA's for charitable purposes

Provides a basis adjustment to stock of S corporation contributing property

Extends the charitable deduction for contributions of book inventory

There are several other major changes that you can find if you wish. This bill is 393 pages long and makes good reading. You can look it up on the internet under:

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:h4enr.txt.pdf

Call us if you have any questions at 800-723-7093