April brings blooming flowers, budding trees, and dreaded tax time.
If you're one of the millions who hasn't yet prepared their 2006 return, don't panic. There's still time, though yes, the clock is ticking. As you ponder your return, here's a look at some common mistakes, and how you can avoid them.
Get the basics right
The Internal Revenue Service says the most common mistakes on tax returns are the easiest to avoid. Make sure your name and Social Security number, and those of your dependents, are entered correctly.
Another common error: neglecting to sign and date the return. And if you're filing jointly, both spouses must sign.
Your filing status is also important. Robert Blackwell, a Certified Public Accountant with Levine Jacobs & Co. in Livingston, New Jersey, tells the story of one client who forgot his marriage - at least as far as his taxes were concerned.
The client told Blackwell he needed an appointment to prepare his return, and he had a "friend" who also needed an appointment. Blackwell was pleased to get a new client. When the meeting time neared, he learned the two were married, but they had planned to file two separate returns as singles.
"Hold the presses,'' Blackwell said. "I tell them they must either file a married joint return or married filing separate return.''
Math errors are also common.
"With so many easy-to-use software programs, it's probably a good idea to use one if you aren't having a professional prepare your return,'' said Cynthia Conger, a CPA/PFS and CFP in Little Rock, Arkansas. "If you are computer-phobic and would rather do it manually, at least use a calculator to check your math.''
Don't miss credit/deduction opportunities
One of this year's common mistakes could cost you a few bucks, said Julie Welch, a CFP and CPA in Kansas City, Missouri. Many taxpayers are failing to claim the Federal telephone excise tax credit, a one-time credit related to Federal excise taxes paid after February 28, 2003 and before August 1, 2006.
"The IRS has a simplified method for determining this credit for most individuals,'' Welch said. "It is $30 for a person filing with one exemption, $40 for two exemptions, $50 for thRee exemptions, or $60 for four or more exemptions, or one can choose to calculate the actual amount from the telephone bills.''
Welch said another overlooked credit this year is for energy-conscious improvements made in one's home. For example, if you installed some new windows, a credit of up to $200 is available.
If you're paying for a child's college education, there are many credits and deductions for which you may be eligible. In any given tax year, you may be better served by either the Hope or Lifetime Learning Credits, or by the Tuitions and Fees deduction. Run the numbers to see which is best for you.
Keep in mind that because Congress was late to renew the Tuition and Fees deduction, it didn't make it onto paper 1040 forms. You can still take the deduction, but it has to be entered manually on line 35. If you use tax software programs, make sure you've downloaded the latest version.
Check and double-check your statements
It's possible that the tax data you've collected from investment accounts is incorrect.
Conger said she was asked to review a client's elderly parent's 2005 return, which had not yet been filed, and to prepare a 2006 return. Conger learned on the 2005 return, the parent didn't include all the received dividend income from a mutual fund account. The discrepancy could have led to an audit.
"Be sure that all income from each mutual fund or brokerage statement is included,'' she said.
Home sales can lead to errors, too.
CPA and CFP Vince Pallitto of Summit Asset Management in New Jersey said he had a client come in with his tax papers, including mortgage statements from two banks. One was from his previous home and one was for his new home. One statement showed $4,218 of real estate taxes paid and the other had showed $2,596.
Pallitto reviewed the HUD statements from each closing and discovered the third-quarter real estate taxes for the new home, another $2,596, were paid from the attorney's escrow. That added up to thousands more for the client's real estate deductions that would have otherwise been missed.
Double-check retirement income
If you haven't kept close track of your IRA contributions over the years, you could be overpaying taxes on your distributions, said Welch.
"If someone previously made nondeductible IRA contributions, a portion of the distribution would be nontaxable,'' she said. "Many people forget to track their basis in their nondeductible IRAs and overpay taxes when taking a distribution.''
If you're hovering near your 59 ½ birthday and you need a distribution from your IRA, learn from a client of Michael Steiner, a CFP with RegentAtlantic Capital in Chatham, New Jersey.
Steiner's client needed cash and his only option was to tap his rollover IRA. His plan was to take a distribution of $20,000, but he knew he'd be subject to an early withdrawal penalty of 10 percent in addition to income taxes that would have been due on the distribution.
"When I looked up his date of birth and checked the calendar, I realized that he was going to be turning 59½ in less than one month,'' Steiner said. ''As a result, he was able to put off taking the distribution until reaching the magical age, thereby saving him $2,000 in penalties.''
If you've started to collect Social Security benefits, keep in mind that any distributions you take from IRAs could impact how your Social Security is taxed.
"If one is in the range where a portion of the Social Security is taxable but the tax doesn't apply to the maximum 85 percent yet, then if that person has additional income such as from an IRA distribution, it is taxed at an effectively higher tax rate,'' Welch said.
Add up medical deductions
You can deduct your medical expenses if they add up to more than 7.5 percent of your adjusted gross income. If you're retired and paying for your own health insurance, there's a good chance you'll be able to take the deduction.
Conger said long-term care insurance can also be deducted and is often overlooked.
"Additionally, if there is a parent in assisted living, a portion of the cost of assisted living or nursing care is deductible as a medical expense,'' Conger said. ``Ask the assisted living facility director what portion of the monthly cost is for room and board and what part is considered nursing care.''
Welch adds some other items you shouldn't forget: Medicare Part B premiums, fees for stop-smoking programs, fees for physician-prescribed weight-loss programs to treat an existing disease, special equipment such as wheelchairs and hearing aids and transportation costs.
Deduct cost of helping parents
If you're providing more than 50 percent of the support for a parent, even if the parent is not living with you, you can claim that parent as a dependent, Conger said. If you do claim your parent, make sure your parent isn't filing a return and claiming himself or herself.
And if several siblings are each helping to support your parents, check out IRS Form 2120. This form allows siblings to determine on a year-by-year basis which sibling can claim the parents as dependents, even if the individual sibling didn't provide more than 50 percent of the support.
Related links
Internal Revenue Service
Social Security Administration
Links to State Tax Web sites
