Prepare for Big Tax Breaks

As 2006 winds down, plan for some big tax breaks.

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When you're at the movies, it's OK to skip the coming attractions. But previewing your upcoming tax return is another matter. Checking out what's new can allow tax-saving maneuvers in the final months of 2006. And there can be novel twists, such as a new mea culpa from Uncle Sam that's worth up to $60.

Phony charge. Giving in to taxpayer challenges in court, the Treasury has conceded it erroneously collected a 3 percent excise tax on long-distance phone calls. Now it will refund some of that back to March 2003.

Individuals who accept a standard amount won't have to dig up bills or even show they called long distance. The 2006 tax return will have a line to claim a rebate ranging from $30 to $60. The least goes to people with one exemption on 2006's return, the most to those with at least four-for example, a married couple with two kids.

People who don't file a return because they have no taxable income can use Form 1040EZ-T to get the rebate.

Living green. Making your home energy efficient this year or next can yield a tax credit of up to $500 for upgrading such items as insulation, windows and doors, and heating and cooling systems.

The credit covers only a small portion of expenditures, and the $500 applies to 2006 and 2007 combined. But each dollar of credit saves a dollar of tax, so it's worth claiming if your items are certified by the maker as qualifying. Also available are larger credits for using solar energy. The IRS has an online summary.

Buyers of hybrid cars can get a tax credit between a few hundred dollars and over $3,000, depending on the model. The IRS issues updates on the credits-search "hybrid" at or get a recent summary.

The credit applies to purchases in 2006 and later, but waiting could limit the saving since the credit will begin to phase out after a manufacturer reaches 60,000 in hybrid sales-a pressing issue with popular Toyotas.

Larger nest eggs. Planning to max out a 401(k)? You may need to deduct more from your paycheck. The cap on employee deposits for 2006 is $15,000, up $1,000 from 2005-people 50 or older can deposit an extra $5,000 this year, up from $4,000 last year.

The ceiling on IRA deposits for 2006 is $4,000, the same as for 2005. But people 50 or older can deposit an extra $1,000, up from $500.

Self-employed people with SEP retirement accounts or certain Keogh plans may be able to put away as much as $44,000, up from $42,000.

Family ties. Minor children with investments could face higher tax unless dividends, capital gains, and other taxable income is curtailed in favor of deferred income, tax-exempt interest, and long-term growth.

An expansion of the kiddie tax is at fault. That provision can slice a minor's income not at the child's typically low tax rate but at a parent's usually higher one. Before this year it applied to children under age 14, but now it applies through 17.

Relief: The kiddie tax doesn't kick in for 2006 until investment income tops $1,700.

Waiting for Congress. Unless expired deductions are restored, some 2005 benefits will not be an option for 2006.

People who pay little or no state income tax won't be able to deduct state and local sales tax instead-an alternative that may also benefit people who incur hefty sales tax on an auto or other pricey item.

Also dead for now: a $250 deduction teachers could take for buying classroom items and a deduction of up to $4,000 for college tuition that some taxpayers found easier to qualify for than the Hope and Lifetime Learning tax credits.

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