Getting Your Return to the IRS

For years, TaxCut recommended that first-class mail was usually the best way to get your return to the IRS. Now, though, we wholeheartedly endorse electronic filing. Last year, more than 66 million of your fellow suffers filed electronically, including nearly than 17 million who did so from their home computers with using TaxCut or a similar program.

You can't hook up directly to the government's computers to send your return to the IRS. You have to use a middleman. But we make that easy and filing electronically makes sure your return can't be lost in the mail—you'll get an acknowledgment that the IRS received your forms—and should get you your refund a few weeks faster than if you use the mail. TaxCut can handle electronic filing of your return, of course.

If you choose to use the mail instead, should you take the precaution of sending the completed forms by certified mail, with return receipt requested? For most taxpayers, that's a needless hassle and expense. It is extremely rare for a return to be lost in the mail and even if yours is misplaced or destroyed, the chances are good that the IRS will believe that you filed on time if you have a copy of the signed and dated return. If you have a refund coming, there's no penalty for filing late anyway.

However, if you owe a substantial amount of extra tax or are making an election that the law says has to be made by the due date, using certified mail—which provides you with a receipt showing when the letter was mailed—may make sense. The penalties for late filing rise with the amount of tax owed with your return, so the more money potentially at stake, the more peace of mind is purchased by using certified mail is worth. And, note this: a receipt from a private delivery service, including DHL Worldwide Express, Federal Express and UPS, will be now be accepted by the IRS as proof that your return was filed on time.

Quick Tour of the Tax Forms. Destination: Ways to Cut Your Taxes
Form 1040

You may have more choice in determining your filing status than you think. If you are single or separated from your spouse for the last six months of the tax year, you may qualify as a head of household. That gives you a bigger standard deduction than allowed on a single return: $7,550 versus $5,150 for 2006. That alone saves $600 if you're in the 25% bracket. In addition, more income is taxed in the lower tax brackets. Head of household filing status requires that you provide a home for someone in addition to yourself. This is usually a child or a parent. It's most often used by divorced taxpayers.

Related Topic
Filing Status

If your spouse died during 2006 you can still file a joint return that lets you take advantage of the lowest tax rates. If your spouse died in 2004 or 2005, you can't file a joint return for 2006. However, if you have a dependent child, you can probably file as a qualifying widow or widower. This filing status also allows you to use the joint-return standard deduction and joint-return rates.

Related Topic
Qualifying Widow(er) with Dependent Child

Each one you claim reduces your taxable income by $3,300, saving $825 in the 25% bracket. A person doesn't have to be related to you to be your dependent. You may be able to claim someone who lives with you if you provide more than half of his or her support. The law requires that you provide the Social Security number for any dependent you claim. Bad news for some: If you can be claimed as a dependent on someone else's return — like your parents' — you can't claim a personal exemption. That costs $330 in the 10% bracket or $495 in the 15% bracket. Also, if your adjusted gross income exceeds certain levels — $225750 on 2006 joint returns, for example, and $150,500 on single returns — the tax-saving value of exemptions is gradually phased out as income rises.

Related Topic
Exemptions

If you report a lot of taxable income here, it may be a sign that you should consider tax-free bonds or mutual funds. A 4% tax-free yield is worth almost as much as a 5.3% taxable return if you're in the 25% bracket and more than 6.1% if you're in the 35% bracket. And, that doesn't count any possible state tax savings.

Related Topic
Interest Income

Don't assume a state income tax refund is taxable just because you — and the IRS — get a 1099-G form from your state reporting how much you got. Actually, these refunds are tax-free for most taxpayers. That includes you if you did not itemize deductions on your 2005 federal return or if you itemized and deducted state sales tax instead of state income tax. Even if you did itemize and you deducted your state income tax, part of the state refund may not be taxable. Our Interview for tax refunds will ensure that you don't report any more of your refund than you have to.

Be happy you have TaxCut to handle this line. After you answer the interview questions about the sales of stocks, bonds and other assets, and mutual fund distributions, we'll automatically complete Schedule D and apply the appropriate tax rates to your short- and long-term capital gains. Short-term gains — which are taxed just like salary, in your top tax bracket — result from the sale of assets owned one year or less. Long-term gains — which are taxed at a flat 15% rate, except for taxpayers in the 10% or 15% bracket, whose gains are taxed at just 5% — result from the sale of property owned more than one year.

Be sure to revive any capital losses you couldn't use in 2005. The law won't let you deduct more than $3,000 of net capital losses in any year. If that rule means you had leftover losses in 2005, they can cut your taxes now. Once you report carryover losses to TaxCut, we'll use them to offset 2006 capital gains on Schedule D, and then use any excess to deduct up to $3,000 more against other income.

Related Topic
Capital Gains

The rules here are more complicated than ever, thanks to the arrival of the Roth IRA. Unlike payouts from traditional IRAs—which are almost always fully taxable unless you roll over the money to a new traditional IRA—payouts from Roth IRAs can be tax-free if certain rules are met. For example, at any age you can withdraw the total of your annual contributions tax- and penalty-free. If you took money from any kind of IRA during 2006, go through our interview to make sure you report the minimum allowable amount as taxable income. 

Here's another reason to pat yourself on the back for using TaxCut: Figuring what part of your social security benefits is taxable can be a real pain. Depending on your income, either 100% of your benefits are tax-free or up to 50% of the benefits can be taxed or up to 85% of the benefits can be taxed. If your modified adjusted gross income is less than $25,000 on a single return or $32,000 on a joint return, all your benefits are safe. If your income is over $34,000 on a single or $44,000 on a joint return, up to 85% of the benefits are vulnerable. When income falls between those amounts, no more than half of your benefits can be taxed. By the way, for purposes of this calculation AGI  includes tax-exempt interest income plus half of your social security benefits. TaxCut will handle the calculations for you.

Related Topic
Social Security Benefits

Although the IRS might like a shot at every dollar that passes through your hands, there are limits. Things not to report here: inheritances, life insurance benefits or new-car rebates. All are tax-free. The following are some but not all of the examples of taxable other income: Lottery or other gambling winnings, the value of prizes, and jury fees.

Related Topic
Income - Other Sources

Armed Forces Reservists and National Guard members may now deduct travel expenses incurred to attend monthly drills. To qualify, the meetings must be more than 100 miles away from home and you must involve an overnight stay. This is an "above the line" deduction. This means you get the benefit whether or not you itemize or take the standard deduction.

This is just the second year for this money-saver. HSAs are special tax-favored savings accounts that are tied to high-deductible health insurance policies. If you have a qualifying policy — either through your employer or on your own — you deduct qualifying contribution to the account here. Earnings inside the HSA are tax-deferred, just like in an IRA, and withdrawals are tax-free if used to pay qualifying medical bills.

Whether or not you itemize your deductions, you could get a big break here if you moved during 2006 to take a new job. To earn the deduction, the move must be in connection with taking a job at a new location and the new job has to be at least 50 miles farther from your old home than your old job was. Making this write-off available to those who use the standard deduction is especially important to new graduates who move to take their first job. If you are moving to take your first job, the 50 mile test applies to the distance from your old home to your new job location.

Related Topic
Moving Expenses

To ease the pain of the self-employment tax, the self-employed get to deduct half of what they pay. The tax — the equivalent of the Social Security and Medicare taxes paid by employees and employers — is 15.3% of the first $94,200 of 2006 self-employment income and 2.9% of income over $94,200. For every $1,000 paid, the 50% deduction saves $125 if you're in the 25% bracket. TaxCut automatically claims this deduction for you based on the information you provide about your self-employment income.

Related Topic
Schedule SE

Here's another chance for a last-minute tax break. If you had self-employment income during 2006, you can shelter part of it inside a Keogh plan, Simplified Employee Pension (SEP) or a SIMPLE plan. Contributions to any of these accounts—basically up to $10,000 of self-employment income into a SIMPLE plan ($12,500 for those over age 50) or up to $44,000 for a SEP or Keogh—can be made as late as the filing deadline and still earn a 2006 write-off. Although Keogh and SIMPLE plans had to be opened during 2006 to qualify for a 2006 deduction, you can open a SEP right up to April 16, 2007, and still get credit for a 2006 contribution. (The deadline is the 16th in 2007, one day later than usual because April 15 falls on a Sunday.) You can open these plans at banks, brokerage firms and mutual funds. This line is also where you deduct contributions to an Individual 401(k) plan, another super retirement savings tax shelter for those with self-employment income.

Qualifying self-employed persons can now deduct 100% of what they pay for medical insurance. Qualifying taxpayers can deduct the full cost of health insurance for themselves and their families as an adjustment to income. That's valuable because, otherwise, the cost is added to other medical expenses as an itemized deduction. The problem with that is you get to deduct only the amount by which all your medical expenses exceed 7.5% of your adjusted gross income.

The IRA holds out the hope for a retroactive tax break. If you qualify to deduct contributions, deposits made to a traditional IRA right up to April 16, 2007, can be deducted on your 2006 return. For 2006 returns, taxpayers under age 50 can contribute up to $4,000 to an IRA; those 50 and older by the end of 2005 can contribute $5,000. A $4,000 deduction saves you $1,000 in tax if you're in the 25% bracket. Contributions to traditional IRAs are fully deductible if you don't have a retirement plan at work or, if you do, if your income for the year is under $50,000 on a single return or $75,000 on a joint return. Above those income levels, if you have a plan at work, your contributions are only partly deductible. TaxCut will give you the biggest allowable deduction. Even if only one spouse works, husband and wife can each deposit up to $4,000 in an IRA ($5,000 for each one age 50 or older). Until recently, if the working spouse was denied a deduction because he or she was covered by a company plan and income was too high, the non-working spouse was automatically denied a deduction for the spousal IRA contribution, too. Now, though, a contribution to a spousal account can be fully deducted as long as AGI on the joint return is under $150,000, even if the working spouse is covered by a retirement plan. A partial deduction is allowed until income hits $160,000.

Although you can have both a traditional and a Roth IRA, the maximum you can contribute for 2006 is $4,000 ($5,000 for those 50 and older), regardless of how many accounts you have. For 2007, the standard IRA deduction limit will remain at $4,000 as will the $1,000 "catch up" contribution for those 50 and older will rise to $1,000, for a maximum contribution of $5,000 for those 50 and older.

This year you can deduct up to $2,500 of interest on student loans here, even if you don't itemize deductions.  The maximum deduction diminishes gradually as AGI moves from $50,000 to $65,000 on an individual return and from $105,000 to $135,000 on a joint return. The deduction is for interest on almost any loans (not just federal student loans) taken to pay qualified higher education expenses (including room and board) for yourself, your spouse or your dependent who is at least a half-time student. But you can’t deduct interest on loans from relatives or from company retirement plans.

If you served on a jury, your employer may have continued your full salary but in return demanded that you to turn over the jury fees. The law requires you to report the jury fees as income. Therefore, you need to claim a deduction here to protect yourself from being taxed on money that really only passed through your hands. Our Interview for Other Income leads you through the steps you need to take to capture this deduction.

Related Topic
Income — Other Sources

Don't feel cheated if you claim the standard deduction. After all, it saves you the hassle of itemizing your deductions. Besides saving you time, the standard deduction saves you money. The only reason to use it is if your qualifying expenses for the year are less than the standard deduction for your filing status. In other words, you're getting credit for more than you actually spent on deductible expenses. About two-thirds of all returns filed claim the standard deduction.

The Hope credit and the Lifetime Learning credit can put quite a dent in your tax bill if you have kids in college. The Hope credit is worth up to $1,650 for each qualifying student in the first two years of college or vocational school. The Lifetime Learning credit is worth up to $2,000 a year for expenses for students beyond sophomore year, including the cost of classes parents take. Although you can't claim both credits for the same student, you can claim a Hope credit for each qualifying student and a Lifetime Learning credit for qualifying expenses for a different student. Triplets who are freshmen and their brother who is a junior could earn you $6,950 in tax credits. Both the Hope and Lifetime Learning credits are phased out as AGI ranges between $45,000 and $55,000 on an individual return and between $90,000 and $110,000 on a joint return.

YIf you pay foreign income tax thru earned or investment income you may be able to take a foreign tax credit. If you own shares in a mutual fund that invests in foreign securities. If your 1099-DIV from the fund shows that foreign taxes were paid on your behalf, for example, you can treat that amount as an itemized deduction or claim this credit. The credit is almost always worth more, since a credit offsets your tax liability dollar for dollar. TaxCut will compute the credit — and automatically complete the Form 1116 if necessary.

Related Topics
Foreign Tax Credit

This money-saver is an incentive for low- and middle-income taxpayers to save for their retirement. In addition to deducting contributions to an IRA or putting pre-tax money into a company plan like a 401(k), this new credit will now effectively refund between 10% and 50% of up to $2,000 of contributions each year. The 50% credit applies to taxpayers whose income is under $30,000 on a joint return or under $15,000 on a single return. The credit disappears completely when income passes $50,000 on a joint return or $25,000 on a single return. If you qualify for the credit, TaxCut will calculate the maximum allowable amount.

The Child Tax Credit is still $1,000 per child for 2006. You get a $1,000 credit for every dependent child under age 17 at the end of 2006 if, that is, your income isn't "too high." Like so many tax breaks, this one disappears as income rises above certain limits. The phase-out begins when AGI passes $110,000 on a joint return and $75,000 on single return or head of household returns.

This is Congress's financial helping hand for parents who take on the high costs connected with adoption. Starting this year, the credit rebates to you in tax savings up to $10,960 of qualifying expenses, including adoption fees, court costs, attorneys' fees, travel expenses and other adoption costs. To qualify, the child must be under age 18, unless he or she is physically or mentally handicapped. If you adopted a special needs child, the credit is $10,960 even if you spent less. This break phases out for taxpayers with AGIs between $164,410 and $204,410.

There's a bunch of penalties for taxpayers who break the retirement plan rules. But don't jump to the conclusion that you're guilty of an early withdrawal if, say, you took money before age 59 1/2. It's okay to take money from a company retirement plan as early as the year you reach age 55, if you get the money after you leave the job. And, you can get traditional IRA money at any time, without penalty, if the payout is part of a string of annual payments based on your life expectancy. The penalty is also waived if you use IRA money to pay medical bills that exceed 7.5% of your adjusted gross income or to buy medical insurance during a period of extended unemployment.  "Early" IRA withdrawals are also now penalty-free if the money is used to pay college expenses for yourself, your spouse or you child or grandchild, and up to $10,000 can be withdrawn penalty-free to buy a first home for yourself, your children or grandchildren or even your parents. One of the toughest penalties is reserved for taxpayers who fail to take the minimum required amount from an IRA after reaching age 70-1/2. The penalty claims 50% of the amount you should have withdrawn, but didn't. But note this: if you have a good excuse, the IRS can waive the penalty. Our interview will determine if you qualify for exceptions to the penalties.

Related Topics
IRA and Retirement Plan Penalties

Memory jogger: Rather than claim a refund due on your 2005 return, did you have the IRS apply the amount to your 2006 tax bill? Remember to take credit for that payment here, along with any quarterly estimated tax payments you made. Our Interview asks you about this so you can't forget.

Related Topics
Schedule SE
Underpayment of Estimated Tax

Did you have more than one job in 2006? Did the combined pay exceed $94,200? If you answered yes to both questions, too much social security tax was withheld from your paychecks. Although the 1.45% Medicare tax applies to all of your wages, the 6.2% social security tax was supposed to stop when 2006 wages exceeded $94,200. However, if you have more than one job, each employer withholds the tax up to the maximum amount. To even things out, you get a credit. The credit is the difference between what you paid in social security taxes and $5,840, which is the maximum amount anyone was supposed to pay in 2006. Based on the information you entered from your W-2 forms, TaxCut computes this credit automatically. The credit shows up in the payment section of your Form 1040.

IIf you have a refund coming, we suggest you tell the IRS to send your money directly to your checking or savings account. This can save you time and hassle. You should get your money at least a few days sooner than if you have to wait for a check. In addition, there's no chance that an electronic deposit can be lost in the mail or stolen on the way to the bank. The only downside is you have to check with your bank or wait for a statement to know your money has arrived.

If you owe $1,000 or more beyond what you've paid via withholding and tax payments—and the amount due is more than 10% of your tax bill for the year—the IRS will assume you also owe a penalty for failing to pay enough during 2006. But there are exceptions to the penalty. You're spared, for example, if you paid in as much during 2006 as you actually owed for 2005, regardless of how much you really owe for 2006. (An exception: If your adjusted gross income was over $150,000 in 2005, you must pay 110% of what you owed last year to avoid the penalty.) Be sure to go through the Interview for the underpayment penalty so the program can determine if you qualify for one of the exceptions.

Related Topics
Underpayment of Estimated Tax

Reporting A Child's Interest And Dividends (Form 8814)

Form 8814 is designed to let you avoid having to include a through Form 8615 with your return. The complex 8615 is designed to enforce the "kiddie tax" rules that apply the parents' tax rate to the investment income of children under age 18. If your child's only income is from interest and dividends — and the total is less than $8,500 — you can report the income on your own return. You don't just add all of your child's income to your own. The first $850 is tax-free and the next $850 is taxed at the child's rate, probably 10% for 2006. Beware that for some high-income taxpayers, this shortcut could result in a slightly higher federal tax on the child's income and, regardless of your income, could raise your family's state tax bill. Since TaxCut can quickly prepare separate returns for your children, that's probably the best way to go.

Related Topic
Parent Reports Child's Income

Itemized Deductions (Schedule A)

Although medical expenses are deductible, most taxpayers don't get to deduct them. This is due to the little catch that allows the write-off only for expenses that exceed 7 1/2% of adjusted gross income. When figuring whether your medical costs exceed the threshold, don't overlook the cost of getting to the doctor. In addition to local trips, the cost of traveling to see out-of-town specialists and at least part of the cost of lodging when you're out of town to get medical care count toward the 7.5%. If you have the option of using a medical care reimbursement account at work, doing so effectively lets you get around this restriction. With a reimbursement account, you pay your medical bills with pre-tax dollars, which has the same tax-saving  impact as deducting every dollar that you pay. In a recent change of heart, the IRS says the cost of nonprescription medicines can be paid with pre-tax reimbursement account money, even though such costs still don't count toward the deduction.

Related Topic
Medical and Dental Expenses

If you bought a home during 2006, you may deserve a bigger deduction than you think. If the seller paid real estate taxes in advance for a period during which you actually owned the home, you can include that amount in your deduction—whether or not you reimbursed the seller for the taxes. Have your settlement sheet handy as you go through the Interview.

Depending on where you live, you may be able to write off part of what you pay for auto license tags as a personal property tax on line 8. Any part of the fee based on the value of your car is deductible. This helps residents in about one-third of the states. If you're not sure, call your state department of motor vehicles.

It's likely that all the interest paid on a mortgage secured by your home is deductible. If you bought a home during 2006, points you paid to get the mortgage should be included on the 1098 form you received from the lender. If so, those points—including points paid by the seller on your behalf—are deducted along with the interest you paid on the mortgage during the year.

In the year you buy a home, you may pay more deductible interest than shows up on the year-end statement from the lender. Your settlement sheet should indicate whether you reimbursed the seller for interest paid during the time you actually owned the house. If so, you get to deduct that amount. Also, if the seller took back a mortgage that is secured by the house, the interest you are paying on that loan is deductible, too, even though it was not reported to you on a Form 1098. You do, however, have to report the name and Social Security number of the person you're paying, so the IRS can be sure he or she is reporting and paying taxes on the interest income.

You can claim the interest portion of a December mortgage payment mailed during the final days of the year, even if it doesn't show up on the lender's year-end statement. As long as the check was in the mail by December 31, you get a 2006 deduction—even if the check wasn't cashed until 2007.

Points you paid to obtain a mortgage on your principal residence are deductible in full the year you pay them. This big expense — each point is equal to 1% of the loan amount — should be reported on the 1098 form you received from your lender. If so, TaxCut will pick them up in the part of the interview about the 1098. In some cases, though, points don't show up on the 1098. But that doesn't mean they're not deductible. You just have to report them separately. This includes any points you are writing off over the life of your mortgage (as may be the case if you refinanced your home mortgage) and, perhaps, points that a seller paid on your behalf at closing. Such points are deductible by the buyer. That's right: By the buyer. Note: if you refinanced a mortgage in 2006 that you had refinanced in an earlier year, you may be able to deduct here all the points on the first refinancing that have not yet been deducted. You write off points on a refinancing over the life of the loan and the life of that first refinancing ended when you paid off the note with the new refinancing. (Beware, however, that the IRS says that if you refinanced with the same lender who held the already-refinanced note, any undeducted points are rolled into the points on the newest loan and deducted over the life of that loan.)

Despite a widespread belief that only mortgage interest is deductible, the law still allows investors to deduct interest on loans used to make investments. Unfortunately, there's a catch: Such interest is deductible only to the extent of your investment income. And, when totaling up investment income for purposes of this limit, you can't count capital gains that get special treatment under the law. And dividends that qualify for the sweet, 15% tax rate don't count as investment income for purposes of this deduction, either. Congress doesn't want to let you deduct investment interest in the 28% or 35% bracket if your gains and dividends are being taxed at only 15%. When you tell TaxCut how much investment interest you paid, the program will calculate the maximum possible deduction.

For a gift of $250 or more, you must have a receipt from the charity to back up such a deduction. This applies to a single gift — of cash or property — of more than $250. If you gave your church 50 $25 contributions during the year, for a total of $1,250, you don't need receipts. Your canceled checks are good enough. If you don't have a receipt you need, ask for it now. You're supposed to have it at the time you file your return . . . not only if you happen to get audited. For noncash donations made after August 17, 2006, no deduction is allowed for most gifts of clothing and household items unless the property is in good used condition or better.

Expenses Related to Charitable Activities

Make sure your generosity during 2006 pays off as much as possible by rounding up all of your write-offs. The big contributions—which translate to the big deductions—are hard to overlook: what you give your church or synagogue or alma mater. But little expenses from your good-deed-doing can also mount up. Whether it's out-of-pocket contributions to a bell-ringer or what you pay for supplies while you're doing charitable work, if the money is going to help a qualifying charitable organization, you get a deduction. If you drive your own car while doing volunteer work, you can deduct 14 cents a mile. If your charitable work takes you out of town overnight—as the official delegate to a church meeting, for example—you can deduct the cost of transportation and the cost of your meals and lodging.

Stock or Mutual Funds

There's a special break if you donated property—such as stock or mutual fund shares—to charity. If you owned the asset for more than a year, you get to write off its value on the day that you made the gift, not what you originally paid for it. You don't have to pay tax on the appreciation while you owned the stock, either. Take advantage of this break now if you donated appreciated property last year, and keep it in mind in the future. Whenever you make substantial contributions, consider using appreciated property instead of cash. This makes sense even if you really want to keep the stock in your portfolio. You can donate the shares you own and use the cash you would have given to buy replacement shares on the open market. The advantage is that you'll owe tax only on profit that accrues after you repurchase the shares.

Related Topic
Charitable Contributions

Although you get no tax benefit unless these expenses add up to more than 2% of your adjusted gross income, there are so many possibilities that you may be able to vault over the threshold. Include job-related car and education expenses, union and professional dues, the cost of small tools and special work clothes, and job-hunting costs (including the cost of travel). Investment-related costs such as safe-deposit box rental and IRA custodial fees you paid directly count, too, as does what you paid in 2006 for tax preparation help, including the cost of TaxCut. If you bought this program in 2007, don't assume you're out of luck. Think back to last year. Did you buy TaxCut for last year's return in 2006? If so, add its cost to your 2006 miscellaneous expenses.

Interest And Dividends (Schedule B)

The price you paid for bonds purchased in 2006 may have included an amount for interest accrued while the previous owner held the bonds. You don't have to pay tax on that amount, even if it was paid to you as an interest payment in 2006. You do have to report the full amount of interest, though. How do you avoid being taxed on too much? You get to subtract out the "accrued interest." We'll take care of that once you answer the questions in the Interview.

Also, note that the 1099 forms you receive from brokers and mutual funds should break out the dividend income you received in 2006 that qualifies for the special 15% rate for qualified dividend income. We'll ask you about that in the interview to make sure you get the full benefit of this break.

Capital Gains or Losses (Schedule D)

Although Congress has cut the tax rates for investment profits, the Schedule D where you report asset sales is still one of the most complicated forms faced by ordinary taxpayers. You needn't be intimidated, though, because you have TaxCut to handle all the arithmetic calisthenics  for you. We're proud of the masterful job the program does to disguise all the complexity, while making sure you get full advantage of the lowest capital gains tax rates in years. Just answer the questions in the interview and all the mathematical gymnastics is performed in the background.

Related Topic
Capital Gains

This is a major threat if you redeemed shares during 2006. The fund will tell you how much you received when you sold shares, but it's up to your records to show your cost or other "tax basis." You subtract that from the amount received to figure whether you have a gain or a loss. Unfortunately, TaxCut can't figure your "basis" for you; you have to rely on your records for that. Remember this: If you reinvested dividends over the years, your basis includes the amount you reinvested. Many taxpayers apparently overlook this fact and overpay the tax. If your records are incomplete, call the fund—most have toll-free numbers—and ask for help. Investing a little extra time on this point can really pay off. Most mutual funds now track an investors "average basis" in the fund, which can come in very handy. If you redeemed 100 shares and your average basis is $25, for example, you know your basis for the shares sold is $2,500.

If you sold assets that you inherited, you deserve a very special tax break. Inherited property enjoys a "stepped-up" basis, that is, your basis is generally increased to the value of the property when the previous owner died. (In some cases, the property's value six months after the previous owner died or when it was sold, if earlier, is used.) The tax on any appreciation during his or her lifetime is forgiven. You're taxed only on appreciation after you inherit the asset. And if the asset has declined in value since you inherited it, you may claim a tax-saving loss deduction even though you're clearly financially ahead. (Retirement plans, including IRAs and 401(k)s don't enjoy this step-up. Such assets are taxed to the new owner just as they would have been taxed to the person who died.) The gain or loss from the sale of inherited property is automatically considered long-term, regardless of how long you owned the property before selling it.

Do you pay someone to look after a child age 12 or younger while you work? If, so this credit can cut your tax bill by several hundred dollars. Note that if your son or daughter turned 13 during 2006, what you paid for care up until his or her birthday counts toward the credit. TaxCut will gather the information necessary to get the maximum credit. The 20% to 35% credit—the size of the credit shrinks as your income grows—now applies to up to $3,000 if you pay for the care of one child and up to $6,000 if you pay for the care of two or more. If you used a flexible spending plan or child care reimbursement plan at work to pay your child care bills with pre-tax dollars, you may need to claim a child care credit this year, too. If you participate in a flex plan, but spend more than $5,000 for the care of two or more children, you deserve a credit on up to $1,000. If you did use a reimbursement account to pay for child-care during 2006, be sure to go through the interview section on the child-care credit so we can make sure you get the tax savings you deserve.

Congress has increased the amount of otherwise depreciable costs that business owners can deduct immediately. Known as "expensing", this lets you deduct the full cost of up to $108,000 of new business equipment and furniture on this year's return, rather than depreciating it gradually over a number of years.

Related Topic
Depreciation

Lump-Sum Distribution (Form 4972)

If you were born before January 2, 1936, and received a lump-sum distribution from a retirement plan during 2006, you might qualify for 10-year averaging, a special tax break that can significantly cut the tax due on the pay out. If the distribution was less than $70,000, averaging makes part of the distribution tax-free. If you rolled over the money into an individual retirement account, you can't use averaging. But the IRA rollover has its own special appeal: no tax is due until you withdraw your money from the IRA. If you didn't roll over the money, however, be sure to check out averaging.

Related Topic
Lump-Sum Distributions