Answers to some of your tax questions

Question As President Bush said in the State of the Union address, America must get less dependent on oil and other finite natural resources. I am in favor of avoiding dependence on other countries and not supporting oil giants' record profits, but I don't want to change my lifestyle. How do our tax laws raise awareness and conservatism in this area?

Answer: Acceptance of lifestyle changes is a subjective thing. Regardless of the gas usage, you might not want to give up your heavy, gas-guzzling sport utility vehicle that will get you to the hospital under severe weather conditions. You might not want to lower your office thermostat for fear your patients or employees will be uncomfortable. But there are financial incentives through tax credits and deductions to encourage you to be more energy-efficient without experiencing too much of a culture shock or inconvenience.

The recent Energy Tax Incentives Act of 2005, as well as prior tax law provisions, include a number of tax incentives. You have a $500 lifetime maximum tax credit for energy-efficient improvements to your home, starting Jan. 1. Improvements such as insulation, windows, roofing, furnaces and fans qualify. But check the individual product before purchase because not all items qualify for the dollar-for-dollar $500 credit.

If your plans include constructing a medical office building, there is a provision in the energy tax act that allows contractors a deduction up to $1.80 per square foot constructed. If you plan to construct a home, there is also a contractors tax credit for the construction of energy-efficient homes, which began Jan. 1. Both of these tax incentives might reduce your ultimate construction costs if you ask your contractor to pass the tax savings into the bid price.

Purchasing an energy-efficient dishwasher, clothes washer or refrigerator in 2006 and 2007 will provide you a tax credit and reduce monthly utility bills. Solar energy equipment in your home might bust your checkbook at first, but the cost will be mitigated by a $2,000 tax credit and certainly will reduce your utility bills.

Question: What type of 2006 tax legislation can we expect to see? I am interested in whether the alternative minimum tax burden will be modified.

Answer: One of the first orders of 2006 congressional business is expected to be a tax reconciliation bill that extends various tax benefits due to expire. Currently, there exists a House and a Senate version of the reconciliation bill. Both versions include extending for two years the higher Section 179 fast write-off for furniture and equipment, and one-year extensions for both the sales tax deduction option for itemizing and for the research tax credit.

Regarding alternative minimum tax, there is a provision in the Senate version to keep the AMT exemption at its current level with an indexing provision, but this is a long way from protecting you from its tough tax bite. (AMT, devised in 1970 to keep high-income individuals from itemizing their way out of paying taxes by assigning a higher rate to particular income levels, has never been adjusted for inflation. About 19,000 people were affected in 1970; estimates run as high as 35 million American taxpayers affected by 2010, including 93% of earners between $100,000 and $500,000.)

Whether Congress intends to lessen the AMT burden is unknown. With high federal budget deficits and Congress' interest in keeping or extending tax incentives, it will be a challenge for them to fund a reduction in AMT and meet their budget target.

Question: I am gathering my 2005 tax information and have a donation question. Do I really need an appraisal for my piano donation?

Answer: If the piano value is more than $5,000 and you fail to attach an appraisal to your 2005 income tax return, the Internal Revenue Service will deny your deduction.

The appraisal requirement applies to donations of $5,000 or more of similar items of property that are under the same generic category or type such as paintings, clothes, land, buildings or coins.

This appraisal requirement has far-reaching impact. For example, if you "clean your closets" and have clothes with a fair-market value of $7,000, your $7,000 donation deduction will be denied, unless you obtain an appraisal. For tax-planning purposes, consider spreading the donation over two years to avoid the need for an appraisal.

Effective for the 2005 tax year, vehicle donation rules with a claimed value of more than $500 changed. You may only deduct the smaller of the following totals: the fair market value on the date of contribution, or the gross sales proceeds received by the charity upon the sale of the vehicle. If you are considering donating a business vehicle, and its tax basis is higher than its value, consider other methods for disposing of the vehicle that will give you the higher tax-basis deduction.

Don't forget that you need a letter from the charity acknowledging each of your donations and the fact that no goods or services were provided in exchange for the gift.