VISTA, Calif. – Most individuals use the calendar year as their tax year. Thanksgiving is the critical time to review one’s personal income tax burden and implement final tax savings strategies.
In the 2006 tax year, federal income tax rates range from 10 percent to 35 percent. There is no state income tax in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. For other states, income tax rates range from 0.5 percent to 9.3 percent.
Some income for Indians is exempt from federal or state taxes. Those include income from fishing rights, allotted land (held in trust), and land claims settlement and judgments. The income of Indians who live on their own reservations is subject to federal, but not state, taxes.
Even though earnings and tribal distributions are subject to income taxes, many business- and job-related expenses can be used to reduce taxes.
In general, there are two ways to reduce taxes. Each dollar of tax credit can be used to offset each dollar of taxes. Each dollar of tax deduction may offset up to 35 cents of taxable income, which is then subject to taxes.
Tax credits work like instant rebates. Federal and state government use tax credits to induce employment, consumption and investment.
Earned income credit can be refunded, even if the taxpayer does not owe any tax. It is available to low-income taxpayers who work. In 2006, the adjusted gross income threshold is $11,750 or below for taxpayers who file as a single, or $13,750 for those who are married and filing a joint return. The threshold is $31,030 if the taxpayer has one qualifying child and $35,263 if the taxpayer has more than one qualifying child. See Internal Revenue Service publication 596 for details.
There are tax credits for purchasing energy-efficient materials and vehicles. For example, a consumer can receive up to a $200 credit for using certain energy-efficient exterior windows or 10 percent, up to $500, for certain insulation, exterior doors or pigmented metal roofs. For the purchase of a hybrid vehicle, the federal tax credit can be up to $500. More information can be obtained from www.energy.gov/taxbreaks.htm.
There are tax credits for businesses that hire workers from economically distressed communities. The communities are identified by the U.S. Department of Housing and Urban Development. Annual wages cannot exceed $15,000, and the maximum credit is $3,000 per employee.
Businesses that hire Temporary Assistance for Needy Families recipients may also receive tax credits. The maximum credit is $3,500 for first year and $5,000 for second year. See IRS publication 954 for details.
College students or their parents may qualify for the Hope Scholarship Credit or Lifelong Learning Credit.
The Indian employment tax credit expired nearly a year ago, on Dec. 31, 2005. House Bill 597 has been introduced in Congress to make this permanent.
Tax deductions offset taxable income. IRS codes provide standard deductions for different filing statuses. A single taxpayer’s standard deduction is $5,150. The rate for married taxpayers filing jointly is $10,300. Heads of households may claim $7,550.
Many investments and purchases may qualify for tax deductions, such as contributions into qualified retirement plans and health savings accounts. An exception is Roth IRA or Roth 401(k) contributions. An additional benefit of saving using tax–qualified plans is tax-free growth. No taxes are due from income and capital gains from these accounts until money is withdrawn.
Other tax-advantaged savings accounts, such as Coverdell Education Account and 529 college savings plan, provide no current deduction. Instead they provide tax-free growth and withdrawals.
Certain interest payments are deductible. Homeowners can deduct mortgage interest, but not credit card or car loan interest. Investors can deduct margin loan interest to the extent of investment income received.
Health insurance premiums, medical expenses, student loan interest, sales tax and state income tax are often deductible.
Charitable contributions to 501(c)3 organizations are also deductible. Recipients include churches, federally recognized tribes and other nonprofit organizations. Amounts given in cash are always recognized on their face value. But items such as art, real estate and jewelry should be formally appraised. An exception is used cars. When they are given away, the tax deduction is based upon actual price received on resale.
Many investments, purchases and charitable activities can provide deductions, though they are subject to further limitations. Qualified businesses can fully deduction the entire purchase of equipment, up to $108,000.
Either the state income tax or sales tax, whichever is higher, is also deductible on the federal return. For Indians who are not subject to state income tax, it pays to keep a tally.
Court-ordered spousal support is directly deductible, but child support is not.
Employees can deduct unreimbursed expenses for travel, supplies purchased and 50 percent of meals consumed for business purposes. Car expenses can also be claimed by people who work two or more jobs.
For individual taxpayers, IRS schedule A provides a good overview of the most commonly available deductions. With returns of up to 44 percent on the dollar, tax savings is the first step in a sound financial plan. It pays to keep a good record of activities and receipts in order to work effectively with a tax professional and in case of an audit.