Last-Minute Tax Tips

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, April 5, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.


Although the Taxpayer’s Relief Act of 1997 contains new tax breaks, most go into effect in 1998. Here are the 10 most important issues to consider when filing your 1997 tax return:

1. Filing Techniques

Always double-check: (1) your math; (2) names, addresses, social security numbers; and (3) lines on the forms where you entered information. Send your return by certified mail, return-receipt requested. Place your social security number on all checks and always keep a copy of your return along with a copy of the canceled check with your tax records.

In general, individuals with gross incomes under $6,800 and joint filers under $12,200 are not required to file; nevertheless, they should claim a refund if they had taxes withheld.

Double-check all W-2 employee compensation forms and Form 1099 for accuracy. If you worked multiple jobs, make sure you did not overpay social security taxes. Also, if you are receiving social security and your modified adjusted gross income (AGI) is less than $25,000 ($32,000 for joint filers), your benefits are not taxable.

Review last year’s tax return for losses or deductions (especially business losses, capital losses, charitable contributions and passive loss limitations) that may be carried forward to this year’s return.

If you regularly receive large tax refunds, you are over-withholding on your income and giving the government an interest-free loan. Reduce your withholding by fling a W-4 with your employer. This will increase your take-home pay.

2. File for an Extension

Want two reasons to postpone the hassle of filing by April 15th: Tax software should go on sale after April 15th; and instead of doing your taxes, take advantage of restaurant specials during the first two weeks of April (the slowest period in the year!).

Apply for an automatic extension with Form 4868. You’ll have until Monday, August 17, 1998 to file. You must pay 90% of the eventual tax due to avoid penalties. If you live outside the U.S., you receive an automatic two-month extension without filing the Form 4868, but you must attach a statement that you live outside the U.S. on your return.

California requires you to pay 100% of the taxes due, but will grant you an automatic six-month extension. Make additional tax payments to California’s Franchise Tax Board with Form 3519.

3. Creative Use of the Dependency Exemption

Claim a dependency exemption if you supply more than 50% of support for a U.S. citizen or resident, or a resident of Mexico or Canada, provided that person lived in your home as part of your household during the entire year, and whose gross income (excluding nontaxable income) is less than $2,650, in 1997. The person need not be related to you. Thus, a dependency exemption may be claimed in same-sex living situations, when one partner earns less than $2,650.

4. Principal Residence Exclusion

For sales after May 6, 1997, you may exclude $250,000 as an individual ($500,000 filing jointly) if you have lived and used your home as a principal residence for two of the past five years prior to sale. If you acquired your home less than two years ago, but used Code Section 1034 to roll over the gain from your prior home, then you may add on the ownership and use of the prior home to meet the two-year requirement.

Note: The exclusion does not apply to depreciation allowable in connection with rental or business use of your home after May 6, 1997.

5. Capital Gains Deduction

In general, for investment assets (other than collectibles) sold after May 6, 1997 and held 18 months or longer (12 months for assets sold between May 7, and July 28th), a new 20% capital gains rate applies. For those in the 15% bracket, the capital gains rate is 10%. Real estate depreciation is taxed at 25% for properties sold after May 6, 1997.

Mutual fund distributions are now reported on Schedule D to account for the new rates. Distributions that were automatically reinvested in the fund increase your adjusted basis. This will reduce your gain and increase your loss. Make sure that you have properly calculated the basis in mutual fund shares that you sold.

6. Deducting Adult-Education Expenses

If your employer did not pay for educational expenses or if 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.

7. Exclusion for Student Scholarships

A scholarship for tuition and supplies for a student earning a decree at a qualified educational organization are tax-free. The same applies to a tuition reduction to employees of a qualified educational organization. Payments for teaching, research or other services performed as a condition to receiving the scholarship or tuition reduction are not deductible. Athletic scholarships received by students who are expected, but not required, to participate in sports, will qualify for the exclusion.

8. Open an IRA

Need a last-minute tax break? Open an IRA, or contribute to an existing IRA, before April 15th and deduct the payment (within the limits pertaining to IRA deductions) in tax year 1997. The IRA deduction phases out for individuals with AGI between $25,000 - $35,000 and joint filers between $40,000-$50,000. In general, joint filers may make a $2,000 contribution to an IRA for a non-working spouse, provided their earned income is at least $4,000.

9. Open a Non-Deductible IRA, Then Convert it to a Roth.

Available this year only is the opportunity to double-up on your Roth contributions by making a $2,000 non-deductible IRA contribution by April 15, 1997, then rolling it over to a Roth and making another $2,000 contribution to your Roth in 1998. Individuals whose AGI is less than $95,000 and joint filers with combined AGI of less than $150,000 are fully eligible to make a $2,000 Roth contribution in 1998. Joint filers may now contribute $2,000 each to a non-deductible IRA (before April 15, 1998) and $2,000 each to a Roth (before April 15, 1999). The conversion on the non-deductible IRA contribution (but not the earnings) will be tax-free when the rollover occurs.

10. Retirement Benefits

Retirement benefits earned while working in California cannot be taxed by this state, if you now live in another state. You are not required to receive retirement distributions if you are employed after age 70 1/2 and own less than 5% of the company. Also, the 15% excise tax on excess distributions from IRA and retirement plans have been eliminated.


Sidebar to Article:

Tax Shopping On-Line

You no longer have to bother with tax forms and the mad dash to the post office at midnight. Check out several of the tax preparation and filing services on the Internet, or find yourself a local tax preparer.

Tax calculation, preparation and filing programs:

NetTax '9X tax calculation program (free):

Turbo Tax On-Line ($9.95 Federal; $4.95 for California).

Calculate your refund with H&R Blocks program (free):

Download form and publications from the IRS or Franchise Tax Board:

IRS Forms:

IRS Publications:

Franchise Tax Board’s site:

Find a tax preparer within your ZIP code with Yahoo’s Yellow Pages:

Locate the Tax Prophet’s previous columns and other tax information at:


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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.**