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Tax news you can use

 

Tax laws keep changing, but don't be the last to know about them. Here's the latest filing scoop.

10 new tax laws you need to know
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6. Accounting for car contributions
Suspecting that automobile donors inflated the price of their gifts to charity, and thus overstated the associated tax deductions, Congress last year mandated tougher vehicle-donation rules.

Now when you give an auto (or boat or other motorized vehicle) to a charity, you can no longer automatically claim its fair market value as your deduction if that amount is more than $500. Instead, your deduction is limited to the actual amount the charity received when it sold the auto.

There are some exceptions that would allow you to claim the fair market amount. If, for instance, the charity uses the car, say, to deliver meals to homebound individuals, or sells it at a bargain price to a needy person, you then can claim the fair market value.

The key is to find out from the charity exactly what is planned for your donation. You'll also have to get written acknowledgement of your gift, with the price noted, and attach it to your tax return. In the past, you simply had to hold onto such receipts in case the IRS later questioned the gift.

7. Environmentally friendly auto tax breaks
The tax deduction for buying a clean-fuel car was supposed to drop to $500 last year. The law was changed, however, maintaining the deduction at the $2,000 level for 2005 returns. If you bought one of these vehicles, be sure to claim your deduction for it on the long Form 1040.

The news for environmentally conscious drivers gets even better for 2006.

Purchase a clean-fuel vehicle this year and you'll get a more-valuable tax credit, ranging from $250 to $3,400. The exact amount will be based on a complicated formula involving the vehicle's fuel economy and its total expected lifetime fuel savings. The IRS is working with auto manufacturers to certify specific autos, such as the popular hybrids, and calculate precise credit amounts.

One drawback of the credit is that its full value applies only to the first 60,000 eligible vehicles each automaker produces. That means credits for especially popular hybrid cars or trucks could be quickly gone. If you don't get one of the initial models, you'll receive a reduced credit.

8. Uniform definition of a child
There are several tax breaks that pertain to children. Taxpayers often found the different requirements to claim each break was confusing. So the IRS developed a uniform definition of a child for tax purposes.

In essence, says Luscombe, where the IRS found a broader definition of a child in any tax break, it applied it to all of the child-related benefits.

"While the standardization was generally supposed to be helpful, and it is more generous than it had been, they also changed some of the tests, and that could pose problems for some filers," says Luscombe.

The biggest hurdle is that what had been primarily a support test now is primarily a relationship test. This has led to some people who previously were able to claim child-related tax breaks losing those benefits.

-- Posted: Jan. 23, 2006
 
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