15 Filing Mistakes to Avoid
- To avoid filing mistakes, review your entire return.
- Provide the correct mailing address if you choose to mail a paper return.
- Choose an alternative tax preparation method, and avoid the most common errors.
- Incorrect filing status recorded
- Social security number(s) incorrect, missing or don’t match name(s)
- Incorrect or missing forms and schedules
- Return not signed
- Claiming ineligible dependents
- Failing to claim credits (Child Tax Credit, Earned Income Credit, etc.) or figuring credits incorrectly (because of not understanding credit eligibility or incorrect calculations)
- Failure to report and pay domestic payroll taxes (if you are employing a housecleaner, in-home caregiver, nanny, etc.)
- Forgetting to claim income that’s not included on a Form W-2, Form 1099 or other return
- Not filing a return when due a refund
- Failing to figure whether or not you’re liable for the Alternative Minimum Tax (AMT)
- Entering the wrong amount of taxable Social Security benefits
- Mailing your return to the wrong address
- Math errors (according to the IRS, a math error is an incorrect number entered on the return — with or without a calculation — such as reporting wages of $29,472 as $24,972)
- Standard deduction used when itemizing is more advantageous (the GAO estimates that more than 500,000 taxpayers could save by itemizing)
2007 Tax Law Changes
Mortgage Forgiveness Debt Relief Act of 2007
President Bush signed the Mortgage Forgiveness Debt Relief Act Dec. 20, 2007. Here’s a summary of the bill’s main provisions.
Income from Discharge of Indebtedness on Principal Residence
This provision is effective Jan. 1, 2007, through Dec. 31, 2009. Under this provision, which adds new IRC section 108(a)(1)(E), the discharge of qualified principal residence indebtedness is excluded from gross income. For purposes of the exclusion, qualified principal residence indebtedness is acquisition indebtedness (to buy, build or improve the residence) up to $2 million ($1 million for Married Filing Separately). The home must be owned and used as a principal residence (within the meaning of section 121). The basis of the home must be reduced (but not below zero) by any debt forgiveness excluded under this provision.
If only a portion of the loan discharged is qualified indebtedness, the exclusion applies only to the amount of debt discharged that exceeds the amount of the loan that exceeds the nonqualified indebtedness.
For example, assume that a taxpayer has a $500,000 loan outstanding on his principal residence, of which $80,000 is equity debt. If $100,000 of the loan amount is discharged, only $20,000 ($100,000 discharged debt — $80,000 equity debt) of the debt discharge qualifies for the exclusion under the new provision.
This provision does not apply to discharge of indebtedness on account of services performed for the lender. Also, an insolvent taxpayer must use the principal residence exclusion instead of the insolvency exception, unless the taxpayer makes an election to apply the insolvency exception instead of the exclusion provision.
Exclusion of Sale of Residence Gain for Surviving Spouses
This provision is effective for sales and exchanges after Dec. 31, 2007. For sales within 2 years of a spouse’s death, the capital gain exclusion is increased to $500,000 if the surviving spouse hasn’t remarried and the ownership and use tests were met by both taxpayers immediately before the date of death. This provision adds new section 121(b)(4).
Volunteer Firefighters and EMTs
This provision, effective Jan. 1, 2008, through Dec. 31, 2010, adds new section 139B and allows volunteer firefighters and emergency medical responders to exclude from income a qualified state and local tax benefit (reduction or rebate of a tax) or qualified payment made on account of performance of qualified services. The maximum exclusion is limited to $30 multiplied by the number of months during the year that the taxpayer has performed the volunteer services. The maximum exclusion is $360.
Eligible volunteers must provide services to a “qualified volunteer emergency response organization” which means any volunteer organization that is:
- organized and operated to provide firefighting or emergency medical services for persons in the state or political subdivision
- required (by written agreement) by the state or political subdivision to furnish firefighting or emergency medical services in such state or political subdivision
Failure to File a Partnership Return
Effective for returns required to be filed after date of enactment, this provision increases the time to assess the failure to file penalty from 5 months to 12 months. It also increases the penalty amount from $50 per month to $85 per month.
Failure to File an S Corporation Return
This provision is effective for returns required to be filed after date of enactment. It adds new section 6699 and implements a failure to file penalty for S corporation returns. An S corporation will be subject to the penalty if:
- it’s required to file a tax return but fails to do so timely
- it files a return but fails to show the required information
The penalty is imposed for each month (or fraction of a month) during which the failure continues, not to exceed 12 months. The penalty for any month is determined by multiplying $85 by the number of shareholders during any part of the year.
Tax Debt Help – How to File Your Tax Return
Paperwork you’ll receive
All of the required tax forms from employers, brokers, mortgage companies and others must arrive by January 31. Find a place for your tax records as you receive the relevant documents listed below. Also, as these arrive, review them for accuracy.
Common forms most people receive include:
- W-2 from employers reporting income and taxes withheld throughout the year.
- 1099-MISC if you’ve done any freelance work.
- 1099-DIV from mutual fund companies and brokerage firms reporting dividends paid and distributions made.
- 1099-INT from banks reporting interest income.
- 1098 from your mortgage company reporting the interest you’ve paid for the year.
See Your Tax Form Checklist for information about additional forms you may need to receive.
If you’re still missing any of these forms, first call the employer, investment company or bank. If that doesn’t seem to help, call the IRS at 800-829-1040.
Records to Dig Up
Next, start to assemble your own records.
Even if you owe taxes, it’s a good idea to start organizing early. You certainly don’t want to forget a vital deduction because you rushed through your documents at the last minute.
If you’re self-employed, gather receipts for:
- Your business phone calls
- Mailing and copying expenses
- Equipment purchases
- Transportation to business meetings
- Professional licensing fees
- Other expenses you can write off
For more information, see IRS Publication 535, Business Expenses.
If you have an office in your home, find the receipts for the utilities and records of your mortgage or rent payments. You may be able to deduct a portion of these costs if you qualify. See IRS Publication 587, Business Use of Your Home for more information about the rules.
If you’ve had a lot of unreimbursed medical expenses, it’s also worthwhile to tally your receipts (transportation costs to medical treatments count, too) and see if you qualify to deduct any of those costs this year. These expenses are only deductible to the extent they exceed 7.5% of your adjusted gross income.
See more on Deductible Medical Expenses in our Medical Taxopedia. Also, for detailed information, see IRS Publication 502 Medical and Dental Expenses.
Also, track down canceled checks and receipts for all charitable contributions. If you’ve given more than $250, you’ll need a receipt as well. If you’ve given property worth more than $5,000, you will need documentation from professional appraisal.
You can no longer deduct the fair market value of a car when you donate it to charity. In most cases, you can only deduct the amount of money the charity receives when it sells the vehicle.
See our taxopedia for Charitable Deductions.
If you’ve sold stocks or mutual fund shares, you’ll need to dig up your records showing how much you originally paid for the shares and any dividends that you’ve reinvested — otherwise, you end up paying more in taxes than you owe. It can be in incredibly complicated to figure out your tax basis if the company has gone through any mergers or spin-offs. In that case, you might be able to get help from your brokerage firm or from the company’s investment relations department. For more information, see Finding a Stock’s Cost Basis.
Resources for do-it-yourselfers
Taxpayers have more free resources than ever before. If you have a computer and an Internet connection, you not only have access to the complete library of IRS Forms and Publications, but also advice from experts, discussion boards, and, best of all, a bevy of free online software and e-filing choices. Here’s a quick list of what you can find, right here on Kiplinger.com:
- Common tax forms for individuals and businesses.
- Kiplinger’s Taxopedias, your quick guide to what’s deductible and what’s not.
- Kiplinger.com Community’s Tax Forum, where you can share questions and answers with other readers.
- Information on state taxes with links to state tax agencies.
- Kiplinger’s Tax Glossary.
And when you’re ready to put all your newfound knowledge to use, you can prepare and file your taxes electronically using .
E-filing versus tax software. If you earned $54,000 or less in 2007, you can qualify for Free File, an online tax preparation and filing service launched by the IRS in partnership with some of the biggest names in tax software — including H&R Block, the makers of TaxCut, and Intuit’s TurboTax.
Although bare bones, the online versions are basically the same as the software that comes in a box, with a couple of major exceptions: First, no price tag. Second, there is no added fee for electronic filing.
Online preparation may not be for everyone, though. If you have a dial-up connection, doing your taxes on the Web could become a time consuming ordeal and you may be better purchasing tax software, which is also deductible. Most software packages include advice and features you won’t find online.
For example, TurboTax Deluxe ($29.95), looks for deduction opportunities as you go and shows you how to qualify for about any deduction.
Either way you decide to go — online or software — digital tax preparation and e-filing could save you both money and time. The IRS says electronic filing reduces errors and cuts the delivery time of refunds in half.
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – Confused About the Upcoming Tax Rebate?
$300 for retirees, $600 for most individuals and $1,200 for most couples.
But wait, there’s more: It’s not really free money.
Some Americans are getting awfully excited about the prospect of spending their own money.
The $168 billion economic stimulus package just passed by Congress will ship checks of up to $600 for individuals and $1,200 for couples starting in May. Most households will get these checks, although individuals with adjusted gross incomes of more than $75,000 and couples making more than $150,000 will see less or nothing at all.
Additionally, families will get $300 per child.The biggest change since the original proposal: Those who paid no income taxes will get $300 as long as they earned at least $3,000, including veterans disability or Social Security benefits.An estimated 130 million taxpayers will share the rebate money.
Here’s what you need to keep in mind while you’re waiting:
This isn’t free money — for most people
To produce this cash, Congress created a one-time tax credit to reduce taxable income for most taxpayers this year. Normally, you wouldn’t see that cash until the spring of 2009, when you filed your 2008 return. But Congress wants to speed that money to you now, so checks will start going out in May.
- Smart Spending blog: Rebate? Bonus? One is easier to spend
Remember, this is your money you’re getting back, and the rebate checks are basically an advance on your 2009 refund. When similar rebates were sent out in 2001, a lot of people were upset to see their (next) refund reduced.
The only people for whom this really is free money are low-income folks (those who earn at least the minimum $3,000 required to trigger the checks or who receive at least $3,000 in Social Security or veterans benefits) who won’t end up owing any taxes for 2008.
If that’s your situation, or you somehow wind up with a check when you technically shouldn’t have — you earned income in 2007 but won’t in 2008, for example — you won’t have to pay back the money.
S. Raines, Sr. Financial Advisor/Tax Preparer
My StumbleUpon Page
