Don't expect an early tax refund this year

Talking to my car insurance agent last week gave me some insight into tax time. That's a good time for people who will get money back from the Internal Revenue Service and want to file quickly. It's not a good time for people who must dig out all their receipts for purchases that are deductible so they don't have to pay so much income tax.

But wait! Some people who had been getting their refund in January will be put on hold when they file their tax return for 2007. The IRS said last Thursday that "more then 3 million people will have to wait until February to get their tax refunds because of Congress' late fix to the alternative minimum tax."

I'm thinking, "What the heck is alternative minimum tax?" So I looked it up on the Internet. AMT was introduced by the Tax Reform Act of 1969. There is an AMT for those who owe personal income tax, and another for corporations owing corporate income tax. At its inception, it was intended to target 155 very wealthy families who used deductions to avoid paying any federal income tax.

The AMT sets a minimum tax rate of either 26 or 28 percent (depending on the amount of the taxpayer's "alternative minimum taxable income," as adjusted) on some taxpayers so that they cannot use certain types of deductions to lower their tax. By contrast, the rate for a corporation is 20 percent.

According to the IRS, Congress put a one-year freeze on growth of AMT earlier in December, shielding many middle- and upper-middle income taxpayers from exposure to the tax. But the late action means the IRS won't be able to start processing five AMT-related forms until February, delaying potential refunds for some until that month.

As many as 13.5 million people will have to wait until Feb. 11 to start filing with the five AMT-related forms, but the IRS said that filing patterns show only between 3 million and 4 million of those people file during the early tax season. The IRS was able to reprogram its computers to begin accepting seven other AMT-related forms when the tax season opens in early January.

The IRS has created a special section on its Web site, irs.gov, with updated copies of AMT forms.

The AMT disallows certain deductions and credits. It was not adjusted for inflation; as a result, over the years it has hit a growing number of middle-income taxpayers. More than 4 million were subject to it in the 2006 tax year. Without the congressional fix, more than 20 million families would have been faced with an extra $2,000 tax hit on average.

How's that for timing? I'm sure folks who plan to file and get their refund in early January are fuming. Yes, the Congressional action will save millions of families tax dollars. Why not do the deed earlier in the year, so people who have money coming back can get it as they have in previous years? All in all, I guess it's worth waiting for.

While we're on the subject of taxes, I'll run through a few changes for the 2006 tax year:

Signed into law in August, the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) provided for temporary ramp-up in annual IRA (individual retirement account) and 401(k) contribution limits and the so-called "catch up" provision for people age 50 and older. These provisions are now permanent.

The tax-free status of qualified tuition plans, or so-called "529 plans," is now permanent.

Also made permanent is the EGTRRA provision allowing job changers to transfer 401(k) and similar plan balances without cashing out.

The 2006 act allows nonspouse beneficiaries of certain qualified retirement plans, including 401(k)'s, to get inherited-IRA treatment.

Until the end of 2007, individuals age 70 1/2 or older could donate up to $100,000 to charity directly from their IRA, avoiding taxes on the distribution.

It's not all good news on charitable deductions, though. Congress is getting more particular on donations of cash and especially goods. Cash donations must have a bona fide receipt. Goods must be in "good condition" starting in 2007.

Also, the IRS recently announced 2007 inflation adjustments to tax rates, income ceilings and other figures. Generally, the changes run from 3.5 to 4 percent. For instance, the 25-percent tax bracket for married-filing-jointly rises by $2,400. The standard deduction goes from $10,300 to $10,700. The mileage deduction rises from 44.5 to 48.5 cents per mile. And there are tax credits when you buy certain hybrid (gas-saving) vehicles. Every few dollars helps when it comes to tax time.

Want more about filing your taxes? Go to irs.gov.

Happy filing!

Joe Sova is the editor of the Hungry Horse News.