Let the countdown to tax time begin.
There's just over a month left before taxes are due on April 17. "Good Morning America's" financial contributor Mellody Hobson shared information about new deductions that can save you money.
Going Green Can Save You Some Green.
"If you made certain improvements to your home in 2006 to increase energy efficiency -- such as adding insulation to reduce heat loss or changing exterior windows and doors, among other things -- you may be eligible for a tax credit of up to $500," Hobson explained.
"Five hundred dollars is the maximum total amount for both 2006 and 2007, so if you did not make any improvements in 2006, consider doing so in 2007 to take advantage of this limited-time credit."
You can also take additional deductions if you bought a hybrid car.
"If you purchased a new hybrid gas-electric car or truck in 2006, you are eligible for a tax credit of up to $3,400. The amount of the credit depends on the make and fuel economy of the vehicle purchased," Hobson said. "For example, if you purchased a 2006 Ford Escape four-wheel drive hybrid, you could take a credit of $1,950."
Hobson warned that the tax credit will soon phase out.
"Early hybrid vehicle owners are those who will benefit the most because this tax credit will phase out once a manufacturer has sold a total of 60,000 hybrid vehicles, regardless of model," she said. "Once the cap is reached, the credit will begin to phase out during the second calendar quarter after the quarter in which the company sells its 60,000th hybrid."
How the Hybrid Phase-Out Works
Here's how the hybrid phase-out works: Toyota reached sales of 60,000 hybrid vehicles in the second calendar quarter of 2006, so the credit for hybrid vehicles manufactured by Toyota began to phase out as of Oct. 1, 2006.
What does this mean? If you purchased a 2006 Toyota Prius between Jan. 1, 2006 and Sept. 30, 2006, you would be eligible for a full credit of $3,150.
If you purchased the vehicle between Oct. 1, 2006 and March 31, 2007, the credit amount drops 50 percent to $1,575.
If you purchased the vehicle between April 1, 2007, and Sept. 30, 2007, the credit amount drops another 50 percent (or to 25 percent of the original credit amount) to $787.50. Any Toyota hybrid vehicle purchased on Oct. 1, 2007 or after is no longer eligible for a credit.
Sales Tax, Retirement Deductions
Hobson talked about important deductions concerning income and sales tax.
"Thanks to the tax relief and health care act of 2006, signed into law on Dec. 20, 2006, you can still choose to deduct either the amount you paid in state income taxes or the amount paid in state and local sales tax -- whichever is higher," she said.
This is hugely important for those lucky taxpayers who live where there is no state income tax -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. You'll have to itemize, but the savings are well worth it.
If you're saving for retirement, you can get "credit" with the IRS for putting away money for your golden years.
"It's a way to encourage middle and lower income taxpayers to put money away for retirement, and eligible taxpayers can take a credit of up to 50 percent of the first $2,000 invested in their IRA or other qualifying retirement plan," Hobson explained. "That means a maximum credit of $1,000 for single filers who make up to $25,000 and $2,000 for joint filers who make up to $50,000."
New Rules on Charitable Donations
There are new rules on charitable donations of goods, and the process is not as simple as it used to be. Both rules affect noncash donations made on or after Aug. 17, 2006.
First, there are now standards your donations must meet before you can take them off your taxes. They must be in "good used condition or better," and deductions for small items of "minimal monetary value" may be denied. So, think again before you try to take deductions for donated socks and other small items.
Second, for donations of items worth $5,000 or more, you'll need to get the item appraised and include that paperwork with your return. If you didn't obtain appraisals for everything you donated in 2006 and the total value exceeds $5,000, separate the different types of goods into categories, such as clothing and furniture, which may bring your totals for each group to below $5,000 so you won't need the appraisal.
Going forward, Hobson suggested that charitably minded people get signed, itemized receipts to make sure their donations are eligible for tax credit.
"You need documentation. Make a detailed list of all the items you donate. Most charities like Goodwill or the Salvation Army will provide a receipt with an agreed upon value of your contribution," she said. "Make sure the receipt says something along the lines of 'These clothing and household items are in good condition, in compliance with IRS rules.' Get it dated and signed by the person who takes your donation. And if you're donating big ticket items such as a car, get it appraised and take a picture of it as an extra piece of documentation."
Telephone Excise Tax Refund Reminder
Hobson also reminded people to take advantage of the telephone excise tax refund.
"If you made any long distance calls or had a bundled telephone plan between Feb. 28, 2003 and Aug. 1, 2006, you are eligible to be refunded for the amount of federal excise taxes paid," she said. "This is a one-time credit on your 2006 federal income tax return and the average amount to be refunded is between $30 and $60."