The only thing worse than having to smile at your mother-in-law while missing your favorite team play in the NCAA basketball tournament is having to fill out your income tax forms.
"We find people file later each year, because tax simplification created more complexities and confusion," said Vance Johnson, CPA, partner for Philip Rootberg & Co., a Chicago-based accounting firm.Filing is so repugnant that most of us put it off to the last minute, and we end up making the same mistakes every year that reduce and delay our refunds.
The Meyers Report cannot help you file any faster, but here are some common, avoidable pitfalls according to tax experts:
- Failing to take the standard deduction. This figure is no longer computed into the tax tables, so an oversight could cost you between $3,000 and $5,000, depending on your filing status.
If you are single and age 65 or older, the law allows you to add $750 to your standard deduction. If you're a married senior, you can take an additional $600 each. Blind persons also can add an additional $750 to their standard deduction. If you are a blind married senior, you can deduct $1,350.
To take the larger standard deductions, check the extra box on line 32A of Form 1040 or line 14A on Form 1040A. If you don't, your return will be slowed.
(BU) Personal exemptions. Another missed or undercalculated deduction is the personal exemption, which was raised to $1,950 for 1988 from $1,900 in 1987.
However, if you are declared as a dependent on another person's return, you cannot take the exemption. If you are using Form 1040-EZ, be sure to check the box on line 4 that asks whether or not you can be claimed on another person's return.
(BU) Misreading tax tables. Many errors result simply from misreading the tax table. Unfortunately, procrastination never helps accuracy. Proceed slowly and thoroughly when filling out your return. If you are careless or in a hurry, you may list the amount owed for a different tax status by mistake.
(BU) Double check all your math on your return. You won't be penalized for errors, but you may be charged interest on any additional tax due. Errors also mean your return will take longer to be processed.
(BU) Sign the return. Failing to sign your return and attach all your W-2s to the proper tax form can cause delays in your refund.
Other errors may result from an unfamiliarity with new rules in the tax code. Here is a quick summary of the major changes for this year:
- Capital gains are now taxed at the same rate as personal income.
- Only 40 percent of interest paid on credit cards and other consumer debts may be deducted for 1988. For the 1989 tax year, the deduction is reduced to 20 percent. For 1990, it is 10 percent. The deduction is completely eliminated in 1991.
- Parents are now required to report the Social Security number of dependent children more than five years old.
- All interest paid on your home mortgage can be deducted as long as the mortgage amount is not more than $1 million. Interest on a home equity loan may be deducted provided that the loan amount is not more than $100,000.
- Miscellaneous deductions can cause miscellaneous confusion. Specifically, you may deduct only that portion of allowable costs that exceeds 2 percent of your adjusted gross income (AGI). All miscellaneous deductions must be itemized on Schedule A of your Form 1040.
Miscellaneous deductions are described as any expense related to your investments, your taxes or to your unreimbursed business expenses. Tax filers must be careful. Often items that are mistakenly included under miscellaneous deductions should actually get full deductions, and other times a listed deduction has been eliminated.
For example, charitable contributions may be deducted in full and are not included in miscellaneous expenses. But, unreimbursed business expenses do fall under the miscellaneous category and are therefore subject to the 2 percent floor.
- Home offices. If you are self-employed, you can deduct the costs of operating and maintaining a home office, but only if you use the designated space regularly and exclusively as your principal place of business, or as a space where you regularly and exclusively meet with clients. Also, your deduction may not exceed the amount of money you made during the year from that business.
- Business meals and entertainment deductions were cut to 80 percent of the total expense. These expenses must be directly related to, or associated with, the active conduct of business. The IRS draws the line at "lavish or extravagant" expenditures.
Although these terms are not specifically defined under the law, as long as your bill is not too outrageous, it can probably be deducted. Keep records of the purpose, cost, business relationship, time and place of each meal and entertainment expenditure.
If you need more assistance, consult an accountant. For you gamblers in the crowd, stop by your local IRS office or call their toll-free tax hotline at 1-800-424-1040. Unfortunately, a recent Government Accounting Office survey revealed that one-third of the advice given out by the IRS was inaccurate.