Don't let Line 47 lead you to err on tax form


March 03, 2002|By Eileen Ambrose

SO, WHAT are you doing the next 13 hours and 27 minutes?

You could do your taxes. That's how long the Internal Revenue Service estimates it will take taxpayers to prepare a 1040 return this filing season - 26 minutes longer than a year ago.

Though the tax law passed last summer made 441 changes, most of them won't be a factor in filing a return until next year or later. So why the longer preparation time?

Some tax professionals half-jokingly blame the extra minutes on Form 1040's Line 47, or the "rate reduction credit." It involves last year's much publicized "tax rebate." And it's so confusing that by mid-February the IRS reported more than 1 million returns had rate reduction credit errors.

"That's just something I don't think anyone envisioned, how confused people were going to get," said Jackie Perlman, senior tax research analyst for H&R Block in Kansas City, Mo.

Mistakes, whether over Line 47 or jotting down the wrong Social Security number, come with a cost. Errors can delay refunds by a week or more. Or, filers can lose out by being unaware of credits and deductions to which they are entitled.

Here are some common mistakes as well as some tax breaks that may be overlooked:

Rate reduction credit. If you received only a partial tax rebate last year or you didn't qualify for one because, say, your income was too low, this credit is for you. It appears on Line 47 on the 1040, Line 30 on the 1040A and Line 7 on the 1040EZ. A credit reduces your tax bill dollar for dollar.

Before last year's tax law, the lowest tax rate was 15 percent. The new law created a 10 percent rate, retroactive to January 2001. This rate is levied on the first $6,000 of taxable income for singles, $10,000 for heads of household, and $12,000 for married couples.

Essentially, last summer's tax rebate to stimulate the economy was just an early refund of what taxpayers would have received anyway on filing their 2001 returns. (The IRS based rebates on taxpayers' 2000 returns, although this early refund was for 2001 income.)

Because some taxpayers already received a tax rebate, the tax tables for 2001 don't reflect the new 10 percent rate, said IRS spokesman Sam Serio in Baltimore. But to make sure others get the benefit of the new rate, the IRS created the rate reduction credit line for one year only, he said. Next year, the 10 percent rate will be built into the tax tables.

So, if you received a check for the maximum rebate - $300 for singles, $500 for heads of household and $600 for married couples - ignore the rate reduction credit line. "If you got anything less than that, you want to go to the worksheet in the tax booklet and work it out. You may get more," Serio said.

Also, if you were ineligible for a tax rebate because someone claimed you as a dependent in 2000, but not for 2001, you may now qualify for tax savings by filling out the rate reduction line.

Those who were claimed as a dependent on someone's return in 2000 and again for 2001 may be eligible for the tax savings, too, but they should leave the rate reduction line blank. Instead, they should use the Tax Computation Worksheet for Certain Dependents in the tax booklet and enter the results on Line 40 of the 1040, Line 26 on the 1040A or Line 11 on the 1040EZ.

Some may have not received a rebate check last year because the money was applied to their back taxes or unpaid child support and student loans. So, the credit doesn't apply to them.

Others may have gotten too big a rebate check because they earned more in 2000 than in 2001. The good news is Uncle Sam won't make them give the money back.

According to the IRS, the main errors involve taxpayers who already received a rebate filling out the line, dependents claiming the rate reduction credit, filers leaving the line blank when they qualify for the credit or wrongly figuring the credit due.

Also, some taxpayers are mistakenly reporting the rebate as income.

If you made a mistake regarding the credit, don't file an amended return, Serio said. The IRS is checking the credit and will correct errors, he said.

Earned income credit. This credit is targeted at working families with low incomes, although single workers with no children can qualify if they meet income requirements. The earned income tax credit is "refundable," which means you may get a refund if the credit is larger than your tax bill or if you have no tax liability at all.

Income limits to qualify have risen for 2001. The maximum credit is $4,008 for a taxpayer with income under $32,121 and two or more children, Serio said. Often, families eligible for the credit don't claim it. "It is a complex calculation. That's where we see the errors. And a lot of people aren't aware of it," Serio said.

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