Earlier you file taxes, the more likely you may amend return

Personal Finance

April 15, 2007|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

While others are scrambling to meet Tuesday's tax filing deadline, maybe you're kicking back because you're done.

But are you?

You might have overlooked deductions or understated income. That's more likely to happen this year than most because of some unusual tax occurrences this filing season.

For instance, last-minute tax breaks by Congress didn't make it on the printed tax forms and in instruction booklets. And potentially millions of eligible filers missed out on a one-time-only telephone tax refund. On top of that, some brokerages sent out investment income statements a little later than usual, meaning early filers might have failed to report this income.

So instead of being finished with your taxes, you might find yourself having to file an amended return.

"Sadly, the general rule of thumb is the earlier you file, the greater your chance you will need to amend your return," says Gene Utterback, an Annapolis enrolled agent who is licensed to represent taxpayers before the Internal Revenue Service.

You generally have three years from the original due date to amend a return, but why wait? If you're due a refund, there's no reason to let Uncle Sam hold onto that money for years without paying you any interest.

And if you owe money, it's even more important to amend the return as soon as possible - before interest and penalties kick in or, at least, before they amount to very much.

The IRS will catch and correct minor math errors. Still, the agency expects 2.83 million amended returns this year.

Here are more details on new or recently revived tax breaks that could make amending a return worthwhile:

The telephone tax refund is worth $30 to $60 for filers taking the standard refund. This refund comes after a levy on long-distance phone calls was abolished last year.

As of mid-February, more than 10 million filed returns hadn't claimed the refund, prompting the IRS to remind people to claim it. In late March, the IRS sent out another notice to alert cell phone users that they, too, likely are eligible for this refund.

Kindergarten through high school teachers can deduct up to $250 for classroom supplies they bought on their own.

Families can deduct up to $4,000, depending on income, in college tuition and fees paid last year.

You can deduct either state sales taxes paid last year or the amount paid in state and local income taxes. Most Marylanders will benefit from the income tax option "unless they have a large purchase like a boat or a couple of high-end cars," says Ingrid Lamb, a Chesapeake Beach accountant.

Thanks to last year's Pension Protection Act, service members can recoup the 10 percent early withdrawal penalty they paid if they took money from an individual retirement account after being called up for active duty after Sept. 11, 2001, says John W. Roth, a senior tax analyst with CCH, a provider of tax information. These service members, who must have been on active duty for at least six months, have until Aug. 16 to amend their 2001 to 2003 returns to recover the penalty, he says.

You can't amend your federal return electronically. You must submit your changes on the paper form 1040X.

The 1040X has three columns. In column A, you write the amount previously reported on the return.

Column C is the correct amount. And Column B is the difference between A and C.

Filing an amended return can be simple if you forgot to claim, say, the telephone tax refund. This refund appears on Line 15 of the 1040X.

The process gets more complicated if you underreported income.

You may need to figure whether you're still eligible for deductions or credits that phase out as income rises, experts say.

If you're seeking a refund, give your original return time - Roth suggests at least 45 days - to be processed before mailing in the 1040X to avoid confusion. That's because an IRS staffer will need to check the 1040X against the original return on file.

Again, if you owe money, don't postpone amending the return. The IRS tends to be good about cashing the check and dealing with the amended return later, Utterback says.

You also will need to amend your state return if the changes you make on the federal return affects state income taxes.

Often Marylanders amend their state returns because they filed before receiving their 1099 statements on investment income, says Jim Arnie, director of Maryland's revenue administration division.

But if the only change you make this year is to claim the phone refund, there's no need to amend the state return, he says.

Marylanders who used the state's free iFile system to electronically file returns this year can use the same system to amend returns.

If you used a different electronic system or filed a paper return, you will need to amend your return on paper by filing form 502X, Arnie says.

Some tax experts warn that if you amend your return you open the door to the IRS combing through other things on your return, a potential problem for those who liberally take deductions.

"Those 1040Xs are looked at by live human beings," says Donald Williamson, chairman of American University's accounting department. "Most of the cases I see in tax court often rise from someone filing an amended return."

Donna LeValley, contributing editor of J.K. Lasser's Your Income Tax 2007, disagrees, saying that an amended return isn't going to cause more problems with the IRS unless you're asking for a refund that's way out of whack with your income.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@ baltsun.com.

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