Although the Taxpayer’s Relief Act of 1997 contains many new tax breaks, most of them go into effect in 1998. When filing their 1997 tax returns, taxpayers should consider the changes in capital gains rates and home sales after May 6, 1997. Here are the 14 most important issues to consider when filing your 1997 tax return:
Always double-check: (1) your math; (2) names, addresses and 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 any checks and always keep a copy of your return along with a copy of the canceled check with your tax records.
Note: The minimum requirement for retaining business receipts has been increased from $25 to $75. For expenditures under $75.00 written diary entries will suffice as proof.
Tax records should be maintained in separate folders for each year. Keep your return, any W-2 forms, Forms 1099 and copies of receipts and canceled checks evidencing deductions in the folder. Records should be maintained for at least 6 years, however, 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 $6,800 and joint filers under $12,200 are not required to file; nevertheless, they should file to claim a refund if they had taxes withheld.
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 1997. Apply with Form SS-5.
Those over age 65 or who are blind may be eligible to claim an additional standard deduction. If your are single and have a dependent who lives with you, check to see whether you qualify for lower tax rates as head of household or surviving spouse with dependent child.
If you are married and file a joint return, you may be eligible for the earned income credit if (1) you are between the ages of 25 and 65; and (2) your combined AGI is less than $9,500 with no qualifying child, $25,078 with one qualifying child and $28,495 with more than one qualifying child.
Double-check all W-2 employee compensation forms and Form 1099 for accuracy. If you worked multiple jobs, make sure you do not overpay social security taxes. Also, if you are receiving social security and your modified 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. Reduce your withholding by fling a W-4 with your employer to increase your take-home pay. Also, if your refunds are subject to levy by the IRS for unpaid taxes or by any other government agency, consider correcting your W-4 to eliminate the refund.
Don’t hassle with tax forms and rushing to the post office at midnight. Check out some of the tax preparation and filing services on the Internet. For a full-scale Java Form 1040 application, check out NetTax '9X tax calculation program. Or, use Turbo Tax On-Line (a Web-based version of Intuit's popular tax software) to prepare and file your federal tax return for $9.95. California residents may file their state tax return for an additional $4.95.
If you want to file the old-fashioned way, but need forms, download them from the IRS’s Website (http://www.irs.ustreas.gov/prod/forms_pubs/forms.html) and the California Franchise Tax Board’s site (http://www.ftb.ca.gov/forms/97_forms/index.asp).
If you have a small business or complicated real estate or financial investments, consult with a tax expert to insure you are paying the lowest possible tax. Do not rely on a computer program for this advice. These programs are helpful in the "computational" aspects of tax preparation (doing the actual calculations and placing the information on the correct line on the form), but are no substitute for understanding how taxes work and, more importantly, how you can structure your business or investments to lower your taxes. Also, if you owe taxes in more than one state, get professional advice on how to file these returns. The software tax packages cannot handle these complexities very well.
If you can't file your federal tax return on time, you may apply for an automatic extension but you must complete Form 4868. Then, you’ll have until Monday, August 17, 1998 to file your return. You must pay at least 90% of the eventual tax due to avoid penalties. If you live outside the U.S., you receive an automatic 2-month extension without filing the Form 4868, but you must attach a statement that you live outside the U.S. on your tax return.
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’s Franchise Tax Board with Form 3519.
There’s a two-fold benefit available: (1) tax software should go on sale after April 15th; and (2) instead of doing your taxes, take advantage of the restaurant specials during the first two weeks of April.
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 as part of your household during the entire year, and whose gross income (excluding nontaxable income) was less than $2,650, in 1997. 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 $2,650, provided the relationship does not violate local law.
If you sold your home prior to May 6, 1997, you fall under the old residency rollover rules. To avoid tax, you must acquire a new residence for equal or greater cost than your old one. Also, the once-in-a-lifetime exclusion of $125,000 in profits applies to those over age 55 who elect it.
For sales after May 6, 1997, you may exclude $250,000 as an individual and $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 Internal Revenue 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. Be careful in claiming depreciation for an office in the home.
For investment assets (other than collectibles) sold after May 6, 1997and 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.
Note: Make sure that you have properly accounted for the basis in mutual fund shares that were sold.
There is an exclusion for employer-paid undergraduate educational assistance your receive (up to $5,250 per individual) for tuition, books, fees and supplies. The exclusion does not apply to tools or supplies retained after the course or for meals, transportation or lodging. Graduate-level courses starting after June 30, 1996, no longer qualify for the exclusion.
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.
A scholarship for tuition and supplies for a student earning a degree from 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 of receiving the scholarship or tuition reduction. Athletic scholarships received by students who are expected, but not required, to participate in sports, will qualify for the exclusion.
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 1997. You can also contribute to an existing IRA prior to the due date of your return. You may make a $2,000 contribution to an IRA for a non-working spouse.
Penalty-free IRA withdrawals for unreimbursed medical expenses exceeding 7.5% of AGI are permitted. Also, penalty-free withdrawals are permitted if you are unemployed for three months or use the funds to purchase medical insurance (no AGI limitation).
Retirement benefits cannot be taxed by California if you now live in another state. You are not required to file a tax return in California. 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.
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 a $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 each may contribute $2,000 to a non-deductible IRA and to a Roth.
Contributions to a non-deductible IRS may be made by high income individuals. Make the contribution, then use the Roth rollover rules to convert the IRA to a Roth. Even if you do not meet the rollover requirements for this year ($100,000 AGI or lower), you could meet them in subsequent years and you’ll have the rollover funds ready. The conversion on the non-deductible contribution (but not the earnings) will be tax-free when the rollover occurs.
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.**