Episode 56: Be thankful they don't take it all

Because I don't have nearly enough to do, I've spent way too much time learning about US federal income taxes. (Some of it I learned the hard way, but that's another story.) As a public service to my tax-paying readers, below are a few tips which might help you survive between now and April 15.

For example, did you know that the reimbursement for business miles was raised after September 1, 2005? The rate is 48.5 cents a mile "for all business miles driven between Sept. 1 and Dec. 31, 2005. This is an increase of 8 cents from the 40.5 cent rate in effect for the first eight months of 2005, as set forth in Rev. Proc. 2004-64." (Read it, it's a hoot.)

Note the Sept. 1 date above – remember the hurricanes last fall? Remember how gasoline prices went up a tad? Congress, in its infinite mercy, saw fit to provide us with a bit of a break on mileage reimbursement. The bad news is that the rate for 2006 has been set at 44.5 cents a mile. What Congress giveth, Congress taketh away.

Congress also flooded the victims of Katrina and Rita with a raft of benefits, blowing them away with such goodies as compensation for casualty and theft losses, extended tax filing deadlines, and more. And since so many of the people affected were underprivileged anyway, this is working very well for them.

The government has also changed the definition of a child.

Now, you and I might define a child in terms of infants, rug rats, ankle biters, or der kinder. The IRS thinks of them in terms of deductions and exemptions. To qualify for these highly prized perks, you must be sure your offspring can pass a relationship test, a residency test, a support test, and age test.

The progeny must be yours, either by blood or adoption. The youngster cannot have provided more than half of his or her support during the year. The spawn must live with you for more than half of the tax year – although you don't have to keep them in the same room with you.

The little nipper must be under 13 for the credit for child and dependent care expenses. For the child tax credit, the little darling must be under 17. And for the dependency exemption, the kid must be under age 19, or under 24 if a student. They have to be over age 7 to start smoking.

The IRS also says "The child generally must also be a U.S. citizen, U.S. national, or a resident of the United States, Canada, or Mexico."

It might interest you to know that U.S. citizens are automatically U.S. nationals and don't have to pass any tests to achieve such status. U.S. nationals also include some individuals who are not U.S. citizens, including citizens of U.S. possessions such as American Samoa, the Northern Marianas Islands, and Utah.

Now, let's say you are unmarried and living with someone with a child that is not related to you. For the past umpteen years, you've been able to claim that child because you provide all of the child's support. For tax year 2005, you can no longer claim that child. These new rules have resulted in numerous unpleasantries at tax preparation offices all over the land.

In other tax news, you'll be happy to know that all of the pay our troops receive while in a war zone is excluded from gross income for tax purposes. What's more, if any soldiers are "hospitalized as a result if injuries sustained in a war zone," that income is also excluded, subject to a two year limitation. (We don't want to go overboard with entitlements.)

As we all know, nothing is certain except death and taxes. But did you know that your taxes must be filed even after your death? We're not talking about the estate or "death" tax here; this is just the plain old income tax. The IRS puts it this way:

"A personal representative (fiduciary) is responsible for filing certain tax returns for a person who has died, and for the decedent's estate. The personal representative may be required to file the final income tax return of the decedent and any returns not filed for preceding years, the income tax return for the estate, and the estate tax return."

This "final return" should have the "decedent's" name and date of death written across the top of the return. The decedent is not required to sign the return and probably won't need a refund, should there be one. However, if taxes are due, you would hope that any decent decedent would have provided for that in the estate. Dead people can be so inconsiderate.

There's even more good news for those who don't itemize. The standard deduction for someone filing single has been raised from a paltry $4850 to a robust $5000. Married filing jointly has also gone up from $9700 to $10,000.

If you have already filed your tax return, here's a few tax planning tips for next year:

1. Try to reduce your income and increase the taxes you have withheld as much as possible. Those lucky ducks with little or no income really get some nice tax breaks.

2. Another popular strategy is to do the opposite of #1 above.

3. If you are in business, buy lots of equipment and software, even if you don't need it or can't afford it. You can write all that stuff off, so it's like free!

4. Have lots of kids (see definition of a child above) and send them all to college. The tax advantages are enormous.

5. Get a lot older as soon as possible. The standard deduction for head of household for those aged 65 or over has jumped from $11,450 to $11,750.

6. Be a U.S. national.

The main thing to remember is that the IRS is a sweetheart of a government agency. If you have any difficulty paying your taxes, or if you are going to be late, don’t worry. They'll gladly cut you a break. Relax.