Year End Tax Deduction

Consider this last-minute tax move before Dec 31st. If you live in one of seven states with no state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming) and you're already planning on making a big holiday purchase, such as a car, boat or flat-screen television, make sure to do so before Dec 31st. Why? The state sales-tax deduction for people who live in these states could provide significant tax-savings. Here are some numbers... If you are in the 28% tax bracket (a medium tax range) and your state sales tax rate is 7%:

• Purchase Price: $1,000 Sales Tax: $70 Estimated Tax Savings: $19.60
• Purchase Price: $15,000 Sales Tax: $1,050 Estimated Tax Savings: $294
• Purchase Price: $25,000 Sales Tax: $1,750 Estimated Tax Savings: $490
• Purchase Price: $60,000 Sales Tax: $4,200 Estimated Tax Savings: $1,176

All of this assumes that you already qualify to itemize your deductions - you already or are very close to filing a Schedule A.

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Alternative Motor Vehicle Credit

If you purchased a hybrid vehicle in 2006, you not only helped the planet, but you'll be rewarded with a tax break. The Alternative Motor Vehicle Credit applies to brand new cars and trucks that are certified for credit by the IRS.

If you bought your hybrid on or after Jan. 1, 2006, you can get a tax credit. Depending on the fuel economy of the vehicle, your credit will range from $400 to $3,400.

When you bought the car, the car manufacturer should have told you what the alternative motor vehicle tax credit would be exactly. You can also obtain a certification from the car maker that lists the 16 elements required for the tax credit.

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Deducting State & Local Taxes

You can elect to deduct either:

1. state and local income taxes or
2. state or local general sales taxes on your federal tax return.

The State and Local General Sales Tax Deduction Worksheet in the 2006 Form 1040 instruction booklet will help you determine your sales tax deduction amount in lieu of saving receipts throughout the year. You also may be able to add the state and local general sales tax paid on certain specified items, such as:

• A motor vehicle, but only up to the amount of tax paid at the general sales tax rate, and
• An aircraft, boat, a home (including mobile or prefabricated), or substantial addition to or major renovation of a home, if the tax rate is the same as the general sales tax rate.

While this deduction will mainly benefit taxpayers with a state or local sales tax but no income tax, it may give a larger deduction to any taxpayer who paid more in sales taxes than income taxes. For example, you may have bought a new car, boosting your sales tax total, or claimed tax credits, lowering your state income tax.

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Qualified Tuition Plan (QTP)

There are no income limits on the amount of large gift, tax-free contributions made to a qualified tuition program. These plans allow you to either: 1) prepay a designated beneficiary’s future qualified higher education expense; or 2) establish a savings plan from which educational expenses can be paid. States can sponsor savings plans and prepayment plans. Qualified costs for higher education include books, supplies, tuition, fees, and eligible room and board expenses. Contributions are not deductible on federal tax returns, however.

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State Tax Hints

Here are some fun facts about various state taxes:

• Did you know that all but seven states impose income taxes?
• Just about every state imposes a sales tax on items a business sells. Each state has different rules for collection and exemptions. Usually the seller is responsible for collecting and paying state sales tax whether it has been collected from the buyer or not.
• A use tax is a tax on goods that you purchased out of state that were brought into your state without paying sales tax.
• Whenever a business changes hands, your state, county, or city may impose a transfer tax on the buyer, seller, or both called a "business transfer tax."
• Some states and local governments impose an annual tax on the value of the personal (non-real estate) property used in the business, such as vehicles and equipment. And, most states or localities impose an annual tax on real estate, whether it is used for business or personal purpose.
• There is a federal moratorium on states’ imposing taxes on Internet transactions. The states are putting a lot of pressure on Congress to allow them to tax transactions over the Internet that are now escaping the state sales tax nets when goods are shipped out of state.
• All states with income taxes have a payroll taxes, deduction and collection system similar to the federal system.
• New York is one of a growing number of states that tax you if you work from home in another state if the main business location is in New York.
• There are myriad state and local licenses that a business must secure. Whatever they are called, these fees are really just taxes.
• As an employer, you can be responsible for withholding state income taxes on your nonresident employees’ income for their home states. Recently, a small incorporated consulting business owner came to me with a plan to open satellite offices in two surrounding states. After learning that he would have to learn and deal with three sets of state payroll, corp and other tax rules, he decided against.
• Most states, as well as the fed, tax the value of all of your assets (including biz) when they become part of your estate upon death.

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States A-K: Tax Information

Many states offer tax services to help taxpayers throughout the tax season. To help you with your state tax filing, we have broken down the states. Check on your individual state and see what they offer for your tax filing needs. For personal income tax return filing, the following information applies to various states as listed:

• Alabama – They provide an IRS acknowledgement of receiving your tax return, and offer direct deposit for e-filers only.
• Alaska – has no personal income tax, therefore no tax return is due.
• Arizona – offers direct deposit for both e-filers and paper filers. They also use the IRS Acknowledgement System.
• Arkansas – offers direct deposit for e-filers only. They also are part of the IRS Acknowledgement System.
• California – Direct deposit is offered for both e-filers and paper filers.
• Colorado – offers direct deposit for both e-filers and paper-return filers; uses IRS Acknowledgement system.
• Connecticut – uses IRS Acknowledgement system; offers direct deposit for both e-filers and paper-return filers.
• Delaware – uses IRS Acknowledgement system, offers direct deposit for both e-filers and paper-return filers.
• District of Columbia – provides fed/state online filing
• Florida – no personal income tax
• Georgia – provides fed/state tax services; state only online tax filing.
• Hawaii – provides direct deposit for both e-filers and paper-return filers; uses IRS Acknowledgement System.
• Idaho – uses IRS Acknowledgement System; direct deposit for both e-filers and paper-return filers
• Illinois – provides online fed/state tax return filing; they have their own acknowledgement system; direct deposit for both e-filers and paper-return filers.
• Indiana – direct deposit offered for both e-filers and paper-return filers; uses IRS Acknowledgement System.
• Iowa – direct deposit for e-filers only; uses IRS Acknowledgement System;
• Kansas – provides online fed/state tax return filing; direct deposit offered with e-filing; uses IRS Acknowledgement System.
• Kentucky – direct deposit offered with e-filing; uses IRS Acknowledgement System.

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States L-W: Tax Information

As a continuation of the above states, the following information is available to help you during your state tax preparation. Check your individual state and see what services they offer.

• Louisiana – uses IRS Acknowledgement System; has direct deposit for e-filers only. Has May 15 due date for all returns.
• Maine – direct deposit for both e-filers and paper-return filers; has an in-house Acknowledgement server.
• Maryland – direct deposit for both e-filers and paper-return filers; uses IRS Acknowledgement System.
• Massachusetts – offers direct deposit for e-filers and paper-return filers; has their own Acknowledgement system.
• Michigan – uses IRS Acknowledgement System; direct deposit offered for both e-filers and paper-filled returns. If a taxpayer owes taxes, a personal income tax filer must mail their payment with a payment voucher form.
• Minnesota – direct deposit offered for both e-filers and paper-filed returns; has their own acknowledgement system and transmission service.
• Mississippi – provides state online filing.
• Missouri – direct deposit for e-filers; uses IRS Acknowledgment System.
• Montana – provides state online filing.
• Nebraska – direct deposit offered both both e-filers and offline filers; uses IRS Acknowledgement System.
• Nevada – No individual income tax.
• New Hampshire – No individual income tax on wages, only on interest and dividends.
• New Jersey – direct deposit for both e-filers and paper return filers; uses IRS Acknowledgement System.
• New Mexico – direct deposit available for both e-filers and paper-return filers; uses independent acknowledgment system.
• New York – direct deposit offered for both e-filing and paper-return filing; uses IRS Acknowledgement System.
• North Carolina – direct deposit is offered for e-filers only; uses IRS Acknowledgement System.
• North Dakota – direct deposit offered for both e-filers and paper-return filers; uses IRS Acknowledgement System.
• Ohio – direct deposit is available for e-filers only; independent acknowledgement system.
• Oklahoma – direct deposit is available for e-filers and paper-return filers; uses IRS Acknowledgement System.
• Oregon – direct deposit offers for e-filers and paper-return filers; uses IRS Acknowledgement System.
• Pennsylvania – direct deposit offered for e-filers only; uses IRS Acknowledgement System.
• Rhode Island – direct deposit offered for e-filers only; uses IRS Acknowledgement System
• South Carolina – direct deposit offered for e-filers only; uses IRS Acknowledgement System
• South Dakota – no personal income tax.
• Tennessee – State does not have income tax on wages. Requires taxpayers file interest and dividends on income tax only.
• Texas – No personal income tax
• Utah – direct deposit offered for both e-filers and paper

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