Reduce Your 2007 Tax Time Stress

It’s hard to believe, but 2006 is rapidly coming to a close and, by all accounts, it has been a dramatic year. Between events in the middle and far east, oil and gas prices and just the normal pressures of day-to-day life, it’s probably safe to say that this year has put a great deal of stress on all of us.

In this short space, you won’t find any solutions to geopolitical and economic events that are too complex for even the most sophisticated world governments, but perhaps a little reminder of how to minimize your 2006 tax bite will help you deal with the inevitable stress of tax time in 2007.

What’s New?

This year has seen its share of tax law changes; some that will affect future years and some that will take effect in 2006. Additionally, some new laws enacted in prior years will take effect in 2006. Let’s first look at what’s new for 2006:

Earned Income Credit (EIC): At first glance, you might wonder why you want to read about the earned income credit. The simple answer is that the credit may apply anytime you have more than one qualifying child and your adjusted gross income is less than $36,348 ($38,348 if you are married filing jointly), depending on how your year went, you may be eligible for the credit. There is even a provision that allows certain people with no children to qualify for the EIC.

Example: you meet the filing requirements and own a business that usually nets earned income of $100,000, but this has been a terrible year and you expect to clear only $25,000. Additionally, you have substantial investments that yield no annual income and, therefore, have less than $2,800 in investment income. You may not feel that you are entitled to an earned income credit if you are fairly well off, but tax law doesn’t look at your savings, only your income.

There are various income limitations you must meet, depending on your filing status, but the bottom line is not to automatically assume you don’t qualify.

Electric and Clean-fuel Vehicles: The list of vehicles that qualify for the credit for electric or clean-fuel vehicles has expanded. As of July 11, 2006 there were approximately 32 vehicles the IRS had certified as eligible for a credit of anywhere from $250 to $2,600. Key points to remember are: 1.) the vehicle must be placed in service after December 31, 2005 and before December 31, 2010 and 2.) only the original purchaser of a new vehicle will qualify for the credit.

A word of caution - don’t buy a vehicle just to get a tax credit. Compare the qualifying vehicle’s purchase price with a similar one that does not qualify for the credit. Sometimes, simple economics will tell you to buy the car that doesn’t qualify for a credit. For example, the national base price of one popular automobile that comes in both a qualifying and non-qualifying model is $25,900 for the hybrid and $19,320 for the standard version, according to Edmunds. The allowable credit for the vehicle is $1,300, which means the hybrid costs an extra $5,280. At a savings in gasoline cost per mile of approximately 4.2 cents ($2.50 average per gallon of gas), you would have to drive approximately 126,000 miles to recoup the cost difference.

On the other hand, if you are interested in minimizing your car’s negative impact on the environment, a hybrid vehicle may be a good alternative.