Double-check tax return to save time and money

PERSONAL FINANCE

Dollars & Sense

March 25, 2001|By EILEEN AMBROSE

THE TAX DEADLINE is just around the corner, and there's a bit of good news for procrastinators.

They get an extra day to file their returns because the traditional April 15 deadline falls on a Sunday.

The not-so-good news is that often in the rush of last-minute filing, or in the push to get the tedious task over with, taxpayers make mistakes, experts said.

Sure, the Internal Revenue Service sometimes catches math errors or fills in the blank when parents forget to claim child credits, but filers can't count on this happening. "Never rely on the IRS to lower your taxes for you," said Mark Luscombe, principal at CCH Inc., an Illinois tax information company.

As you prepare your return, these are some of the common errors that cost taxpayers money or delay a refund, tax experts say:

Filing status. Filing as single, head of household, widowed or some other category affects your tax bracket, and can cost you if you check the wrong box, said Richard Davis, an associate professor of accounting at Susquehanna University in Pennsylvania.

"Someone might say they are single, but in reality, they qualify for `head of household' because they are a single parent at home with a child," said Davis, formerly an IRS lawyer.

"Head of household" has a higher standard deduction - $6,450 vs. $4,400 for singles - and that means lower taxable income, he said.

Too much withholding. If you work more than one job or change employers, you may be paying too much in Social Security taxes, said Tom Pudner, a manager with KPMG LLP in Washington. That's because workers must pay 6.2 percent of the first $76,200 of salary for the year to Social Security, which means their maximum contribution is $4,724.

But by, say, switching jobs in midyear, your new employer doesn't factor in Social Security taxes you already have paid into the system during the year, and that can lead to overpayment, Pudner said. You'll be credited for any overpayment by filling in line 61 on the 1040, or line 40 of the 1040A short form. (Be aware that , once you hit your Social Security limit, you still pay into Medicare.)

Give yourself credit. Filers often overlook tax credits, especially newer ones, experts said. Better than deductions, credits reduce your tax liability dollar for dollar. So, a $500 credit cuts your tax bill by $500.

Many parents forget the child tax credit, which allows them to lop $500 off their tax bill for each child under age 17 at the end of last year, experts said. The credit applies to married couples filing jointly with adjusted gross income up to $110,000 and to singles with income up to $75,000.

Filers, too, should check to see if they are eligible for one or the other education credits. The Hope Scholarship Credit, a maximum of $1,500 per student each year, offsets education costs during the first two years of college. The Lifetime Learning Credit, a maximum of $1,000 per family annually, helps defray the cost of tuition, even for courses to improve job skills.

Lower-income workers with or without dependents may be eligible for the earned income tax credit. With this, you don't even have to owe any taxes or have had taxes withheld from your paycheck to get a refund. "You can get money back that you didn't even pay to the government," said Ed Nevin, a partner with Deloitte & Touche in Baltimore.

Among those eligible are individuals with no child and adjusted gross income of less than $10,380 and individuals with one child who have earned less than $27,413.

Have an international mutual fund that pays foreign taxes? You can generally get a credit on your share of those taxes, Pudner said.

Carryovers. Maybe you had substantial losses in the stock market a couple of years ago, more losses than you were entitled to deduct in a single year. Filers can carry forward losses and deduct them on future returns. "A lot of people forget about it and they never use it," Davis said.

State refunds. If you deducted state taxes from your federal return last year, then you must report any state refund on this year's return, Davis said. But you won't have to report that refund if you took the standard deduction last year and didn't itemize deductions, he said.

Student loan interest. If you're paying back student loans, you may be able to deduct interest payments up to $2,000. You don't have to itemize to get the deduction, but you will have to fill out the 1040 or 1040A form, because the deduction doesn't appear on the short 1040EZ form.

Charitable deductions. Many filers keep track of cash donations, but forget about clothing or other goods given to charity, Nevin said. Charitable organizations provide receipts on which you can fill in the fair market value of the donated goods, he said. Give more than $500 in noncash contributions and you must provide more details to the IRS on another form, he said.

Remember, you also can deduct 14 cents a mile if you use your car volunteering for a charity during the year.

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