ROBERT L. SOMMERS
Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.
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Always double-check: (1) your math; (2) names, address and social security numbers; and
(3) lines on the forms where you entered information. Review last year's return for
potential unused losses or credits that can be applied to this year's return. Send your
return by certified mail, return receipt requested, place your social security number on
any checks and always keep a copy of your return along with a copy of the canceled check
with your tax records. The minimum requirement for retaining business receipts has been
increased from $25 to $75.
Tax records should be maintained in separate folders for each year. Keep your return,
any W-2s and Form 1099s and copies of receipts and canceled checks evidencing deductions
in the folder. Records should be maintained for at least 6 years, but records involving
the purchase of a capital asset (such as the closing statement for the purchase of real
estate) should be retained as long as you own the asset, plus 6 years.
Note: In general, individuals with gross incomes under $6,550 and joint filers under
$11,800 are not required to file; however, they should file to claim a refund if they had
If you can't file your return on time, you may apply for an automatic extension but you
must complete Form 4868 and you will then have until Friday, August 15th to file your
return. You must pay at least 90% of the eventual tax due to avoid penalties. California
requires you to pay 100% of the taxes due, but will grant you an automatic 6-month
extension. Make additional tax payments to California on Form 3519.
Dependent identification numbers (usually social security numbers for U.S. citizens and
residents) must be on your return to claim a dependent exemption and child care credits.
The IRS may disallow these tax benefits for missing or incorrect numbers, unless the
dependent was born in December 1996. Apply with Form SS-5.
You may claim a dependency exemption if you supply more than 50% of the support for a
U.S. citizen or resident, or a resident of Mexico or Canada, provided that person lived in
your home are part of your household during the entire year and who gross income
(excluding nontaxable income) is less than $2,550 in 1996. The person does not have to be
related to you. Thus, a dependency exemption may be claimed in same-sex living situations,
when one partner earns less than $2,550.
The exclusion for employer-paid educational assistance (up to $5,250 per individual)
was reinstated for courses starting between January 1, 1995, and May 31, 1997.
Graduate-level courses starting after June 30, 1996, no longer qualify for the exclusion.
If your employer included educational payments in your W-2s for 1995, you could be
entitled to a tax refund. Your employer should provide you with Form W-2c to correct any
overstatements of income in your 1995 or 1996 W-2s.
If your employer did not pay for educational expenses or you are taking graduate study
courses, remember educational expenses may be deducted if they are either mandated by your
employer or incurred to maintain or enhance your present skills. You cannot deduct
educational expenses if the courses qualify or retrain you for a new trade or profession
or are part of "entry level" education, such as the minimum educational
requirements to become a teacher, doctor or attorney.
One of the last tax breaks open to you before April 15th is an Individual Retirement
Account. As long as you open such an account before the due date of your return, you can
place money in an IRA and deduct the payment (within the limits pertaining to IRA
deductions) in tax year 1996. You can also contribute to an existing IRA prior to the due
date of your return. Unfortunately, the IRA deduction for a non-working spouse remains
$250 for 1996. Starting in 1997, this deduction increases to a maximum of $2,000 each for
If a household worker is your employee and earns more than $1,000 per year, you must
file a Schedule H, part of to Form 1040. Your employee was entitled to receive a W-2
statement from you before January 31st. You and your employee are required to pay social
security taxes (the combined rate is 12.4%) and Medicare taxes (the combined rate is
2.9%). Failure to deduct the employee's share of these taxes makes you liable for the full
amount. You must also pay an additional 6.2% Federal Unemployment Tax. These tax payments
are not deductible; however, you might be entitled to a child-care credit if the domestic
worker was employed to care for your children.
Note: If your worker is an independent contractor, these rules do not apply. The
IRS has recently liberalized the independent contractors rules, and part-time household
workers may qualify for this exception. California, however, has not followed the IRS's
As of 1996, there is a new $5,000-per-child credit for certain adoption expenses. The
credit is phased out ratably, in general, for adjusted gross incomes between $75,000 to
$110,000. The credit is increased to $6,000 for a U.S.-born special-needs child. Unused
credits may be carried forward for 5 years. You may forego the exclusion and receive
tax-free employer-provided adoption assistance for up to $5,000 as well. Credit is applied
on a per-child basis and is available in the year the adoption becomes final.
Damages for physical injuries or physical sickness will continue their tax-free status,
but amounts received after August 20, 1996, for non-physical injuries (emotional distress,
defamation, discrimination, wrongful termination) and "punitive" damages
(generally, damages which punish the wrongdoer rather than reimburse the victim) are fully
taxable. This change does not apply to payments made by an agreement, court decree or
mediation award in effect on or before September 13, 1995.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**