Ten Last-Minute Items to Consider When Filing Your Return

Here are the ten most important issues when filing your 1999 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. File your return electronically or mail it by certified mail, return-receipt requested. Put 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.

If you file via the Internet, make sure your Internet provider retains an electronic copy of your file; otherwise, you'll have to enter information manually next year.

Individuals with gross incomes under $7,050 and joint filers under $12,700 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(s) for accuracy. If you worked multiple jobs, make sure you did not overpay social security taxes. Also, for those receiving social security with "modified" adjusted gross income (AGI) less than $25,000 ($32,000 for joint filers), those benefits are not taxable. In general, a child or dependent is taxed only on income exceeding $700. Non-resident aliens pay a flat 30% tax on 85% of social security income.

Review last year’s return for losses or deductions (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 new W-4 with your employer. This will increase your take-home pay. Note: If you owe state taxes, your federal refund may be sent by IRS to pay the liability directly.

2. File for an Extension

Two reasons to postpone the hassle of filing by April 17th: Tax software will probably beon sale after April 17^th; 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 Tuesday, August 15, 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 must attach a statement on your return that you live outside the U.S.. Note: To avoid penalties, you must pay the full amount of taxes due by the end of the extension period.

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

If you owe, consider an installment arrangement with IRS, rather than paying your taxes with a credit card. Currently, IRS is charging 9% interest and an additional 1/2% per-month penalty for non-payment, compared to credit card interest rates between 15-19%, in addition to a 1%-2.5% up-front fee.

3. Dependency, Education Credits and Student Loan Deduction

Note: Although strict income limits and other requirements apply, consider the following: Claim a $500 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.

Student loan interest of $1,500 is now deductible for those meeting certain income requirements.

4. Itemize Deductions

You may either itemize your deductions or take a standard deduction. The standard deduction for filing as single is $4,300, joint is $7,200 and head of household is $6,350. Choose to itemize your deductions if they exceed these amounts. Itemized deductions include: medical expenses exceeding 7.5% of your AGI,; real estate taxes; state, local, municipal income taxes; personal property taxes; casualty and theft losses; charitable deductions; and miscellaneous deductions exceeding 2% of AGI (see the sidebar).

Note: Payment for automobile licensing is generally deductible as a personal property tax. Check your registration renewal notice for that amount.

Note: If you finance a mortgage, the points paid must be amortized (deducted ratably over the life of the loan). If you refinance, the unamortized points (potentially several thousand dollars) on the previous loan become an immediately itemized deduction.

---

5. 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 $2,750 in 1999.

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 $2,750. NOTE: Family member may be claimed as dependents although they to not live with you (i.e. parents in a nursing home), provided the other tests are met.

6. 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 various capital gains rates. Distributions that were automatically reinvested in the fund increase your adjusted basis. This will reduce your gain and increase your loss. Make sure you properly calculated the basis of the mutual fund shares that you sold.

Investors beware: If you have a huge gain in 1999 and an equally big loss in 2000, you cannot carryback your capital loss to offset your gain in any prior year(s). A day trader, should consider electing mark-to-market accounting, which permits an offset of capital gains with capital losses.

7. Consider a Home Office Deduction

Those who have a business without a fixed location or office, and use a space in their home exclusively for business, including administrative and management activities, are entitled to a home office deduction. For instance, a real estate agent who uses a home office for administrative purposes now qualifies.

Remember, in addition to the pro-rata share of your home used as an office, you may deduct utilities, insurance, and housekeeping in the same ratio. For instance, if 25% of the living space is used as an office, then 25% of the utilities, insurance and housekeeping are also deductible. The home office deduction applies even if you rent. A separate business phone line and specific phone charges for business are also deductible.

Note: Depreciation of your residence is subject to a recapture tax of 25% upon sale. The residence exclusion -- $250,000 in gains by a single filer ($500,000 by a joint filer), provided the residence was owned and occupied at least two of the five years prior to sale – does not apply to depreciation.

8. 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.

9. Exclusion for Student Scholarships

Scholarships for tuition and supplies for a student earning a degree at a qualified educational organization are tax-free. The same applies to tuition reduction for employees of a qualified educational organization. Payments for teaching, research and 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.

10. Open an IRA

Need a last-minute tax break? Open an IRA, or contribute to an existing IRA, before April 17^th and deduct the payment (within the limits pertaining to IRA deductions) in tax year 1999. The IRA deduction phases out for individuals with AGI between $30,000-$40,000 and joint filers between $51,000-$61,000. 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.

Don't overlook a Roth. Although you do not receive a tax deduction, contributions to a Roth grow tax-free and the distributions available at age 59 1/2 are completely tax-free. The Roth benefit phases out for individuals with AGI between $95,000 - $110,000 and joint filers between $150,000 - $160,000. Single and joint filers with AGI of $100,000 or less may roll-over some or all of their IRA to a Roth; however, the rollover is subject to tax.

Consider using the Roth to speculate on high-flying tech stocks. If you hit it big, sell the stock, diversify your portfolio, then manage your investment until retirement age, at which time you'll draw down your booty tax-free!

[Sidebar] Itemized Miscellaneous Deductions

Employee Business Expenses: Unreimbursed expenses incurred as an employee may be deducted, such as, work-related travel (except commuting expenses), passport for work travel, medical examinations required by the employer, malpractice and other insurance premiums, licenses and dues paid, occupational taxes, business bad debts, damages paid for breach of employment contract, use of a home-office for the convenience of your employer, tolls and parking fees, entertainment, purchase of tools, protective clothing and equipment, materials and supplies. You may deduct mileage at $0.325 through March 31, 1999 and $0.31 thereafter.

Tax Preparation: Tax advice, preparer’s fees, books, publications and software, electronic filing fees.

Schooling: Tuition, books and travel to classes that maintain or improve your work skills. The cost of magazines, seminars, journals and other learning materials pertaining to your job, as well as professional and union dues or fees.

Job Hunting Expenses: Printing and mailing of resumes, fees paid to job search companies, job-listing services, career counseling, travel, phone calls and other costs associated with looking for a job, whether or not you are currently employed.

Investment Expenses: Legal, tax, accounting and investment advice pertaining to your investments, income and taxes, professional publications, safe deposit boxes used to store investment documents, journals and subscription services, investment software, flat fees paid for advice.

Special Situations (taken from IRS Publication 17):

College Professors: Research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to the field of expertise.

Impairment-related work expenses. If you have a physical or mental disability, certain expenses you incur that allow you to work may not be subject to the 2% limit.

Performing artists. If you are a qualifying performing artist, you may be able to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction.