Eight Last-Minute Items to Consider When Filing Your Return

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, March 28, 1999

Copyright 1999 Robert L. Sommers, all rights reserved.

Eight Last-Minute Items to Consider When Filing Your Return

Here are the eight most important issues to consider when filing your 1998 tax return (see Sidebar for on-line tax resources):

Filing Techniques

Always double-check: (1) your math; (2) names, addresses, social security numbers; and (3) lines on the forms where you entered information. File your return electronically or mail it 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 and proof of mailing with your tax records.

In general, individuals with gross incomes under $6,950 and joint filers under $12,500 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) benefits are not taxable. Note: Foreigners pay a flat 30% tax on 85% of social security income.

Review last year’s 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 filing a W-4 with your employer. This will increase your take-home pay.

File for an Extension

Two reasons to postpone the hassle of filing by April 15th: Tax software will probably on sale after April 15th; 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 16, 1999 to file, but you must pay 90% of the eventual tax due to avoid penalties (the balance will carry interest charges). If you live outside the U.S., you receive an automatic two-month extension without filing Form 4868. You need to attach a statement that you live outside the U.S. on your return.

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

Dependency, Education Credits and Student Loan Deduction

Claim a $400 credit for each dependent under age 17. The HOPE Scholarship provides families a maximum credit of $1,500 for a student's first two years of college (100% of the first $1,000 in expenses and 50% of the next $1,000), provided the student is attending school at least half-time. The Lifetime Learning Credit applies for the next two educational years and for graduate students, to a maximum of $1,000 (20% of the first $5,000 in expenses), whether or not the student is enrolled at least half-time. Note: Strict income limits and other requirements apply to these credits.

Student loan interest of $1,000 is now deductible for those meeting certain income requirements. Note: See last column for details on these credits and deductions.

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 $2,700, in 1998. The person need not be related to you and there is no age qualifier. Thus, a dependency exemption may be claimed in same-sex living situations, when one partner earns less than $2,700.

Capital Gains Deduction

In general, for investment assets (other than collectibles) held 12 months or longer, the 20% federal capital gains rate applies. Those in the 15% bracket use a federal capital gains rate of 10%. Real estate depreciation is taxed at 25% federal for properties sold after May 6, 1997. California does not have a special capital gains rate.

Mutual fund distributions are 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.

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.

Exclusion for Student Scholarships

Scholarships 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 services performed as a condition of 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.

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 1998. The IRA deduction phases out for individuals with AGI between $30,000 - $40,000 and joint filers between $50,000-$60,000. In general, joint filers may make a $2,000 contribution to an IRA for a non-working spouse, provided their combined earned income is at least $4,000.


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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.**