American Express Tax & Business Services Inc.
September 28, 1999
T he last thing you want to do is stick red flags on your tax return inviting the IRS to look over the numbers. Be careful. Do all you can to make your return audit-proof.
BASICS
ID numbers. Be sure you have the right Social Security numbers for you and your dependents (regardless of age). If you’re adopting a child, you can get a temporary tax ID number by filing IRS Form W-7A (Form W-7 if it’s a foreign adoption).
Filing status. Make sure you’ve used the most advantageous filing status. Marital status is determined as of December 31, so if you’re married on that date, you can file a joint return. If you’re separated and have dependents, see whether you qualify for head-of-household status.
Dependency exemptions. If you’re claiming an exemption under a multiple support agreement, or for your child who lives with his/her other parent, make sure you file a signed Form 2120 for a multiple support agreement or Form 8332 for waiver of the exemption for the child by the custodial parent.
GROSS INCOME
Matching. Make sure that the figures for salary, interest, dividends, pensions and annuities you report match the numbers on information returns you received (Form W-2 for wages and a type of Form 1099 for most other income). If you’re reporting a different amount, it’s advisable to put the W-2 or 1099 amount on your return, show how you adjusted it to come up with the right figure, and attach an explanation. Reason: IRS computers match returns against W-2s and 1099s and will pick up any discrepancies.
Loss traps. Don’t deduct losses you are not entitled to take, including:
Losses on mutual fund shares where you’ve reinvested dividends within 30 days of the sale. This violates the wash sale rules and makes any loss nondeductible.
Losses on personal assets (such as your home or a car) not used for business.
Losses from passive activities in excess of passive activity income.
Unused capital losses of a spouse who died in a prior year.
ADJUSTMENTS TO GROSS INCOME
IRA traps. Don’t claim the following IRA transactions as deductions on your return:
Contributions made after April 15, 1998, even if you obtain a filing extension.
Rollovers.
Contributions made between January 1, 1997, and April 15, 1997, that you deducted on your 1996 return.
Divorce. Child support and voluntary alimony payments aren’t deductible. Be sure to include the Social Security number of the person to whom you pay alimony (the IRS matches your deduction with the income reported on the recipient’s return).
Relocating retirees. Don’t deduct moving expenses if you have retired and are relocating.
DEDUCTIONS AND TAX COMPUTATION
Extra deduction. If you’re 65 and older and/or blind, claim the additional standard deduction amount if you don’t itemize deductions.
Charity. Make sure you received written acknowledgments from any charity to which you made a contribution of $250 or more (a canceled check isn’t good enough).
State estimated payments. Don’t deduct your fourth-quarter 1997 state and local taxes paid in 1998 (they will be deductible on your 1998 return).
Reimbursement trap. Don’t deduct your commuting costs or any employee expenses for which you were reimbursed under your employer’s accountable plan.
Gamblers’ trap. Unless you’re a professional gambler, don’t deduct gambling losses in excess of your winnings (and make sure you can prove your losses with a diary, ticket stubs, etc.).
Employee business expenses. Don’t try to claim miscellaneous deductions on a Schedule C if they’re employee business expenses. These expenses are only deductible as itemized deductions on Schedule A.
Find the right column. If you use the tax tables to figure your tax, be sure to look under the correct column for your filing status. (Using the wrong column is one of the most common errors that taxpayers make.) If you have any long-term capital gains, use Schedule D to figure your tax.
TAX CREDITS
Child care. If you’ve received child-care or adoption benefits from your employer, don’t claim a credit for the same expenses. But if you’re entitled to claim a child-care credit for your out-of-pocket expenses, don’t forget to include the tax ID number of the child-care provider.
Social Security tax overpayments. If you worked for more than one employer in 1997 and earned more than $65,400, don’t forget to take a credit for any excess Social Security taxes you paid.
OTHER TAXES
Self-employment. Be sure to figure self-employment tax if you had self-employment income of at least $400.
Early withdrawals. If you took a distribution from a qualified retirement plan, IRA or commercial annuity before you turned 59 and a half, be sure to include a 10% early distribution penalty unless an exception applies.
Alternative Minimum Tax (AMT). Check whether you’re liable for any AMT, especially if you exercised incentive stock options or held private activity bonds.
Nanny tax. If you had a household employee in 1997 and you paid at least $1,000 in wages, be sure to figure employment taxes and include payment with your return.
FINAL CHECK OF YOUR RETURN
Form and date. Make sure your payment check includes your Social Security number and the year and return number (e.g., “1997 Form 1040”).
1099s and W-2s. Attach all W-2s and the 1099s that show any taxes you paid. Don’t attach other 1099s or Schedule K-1s.
Check and recheck. Math mistakes are common. Problem: They can easily lead to IRS questions.
Sign and date. Make sure you (and your spouse) sign and date your return.
Mailing/filing. Use the correct postage (if the return is more than five pages, a 32¢ stamp is not enough). Better still: File using registered or certified mail as proof that the return was filed on time. Alternatively, use an IRS-approved private carrier such as Federal Express.
FREQUENTLY OVERLOOKED DEDUCTIONS
Spousal IRAs. Did you deduct a full $2,000 IRA contribution for a nonworking spouse? $2,000 is allowed for the first time on 1997 returns. If you made only a $250 contribution because you thought the old limit applied, you can add to the IRA until April 15 and claim a full $2,000 deduction.
Health insurance. If you’re self-employed (or a more-than-2% S-corporation shareholder), you can deduct up to 40% of your health premiums on 1997 returns. Don’t apply the old 35% limit.
Carryforwards of unused tax benefits from prior years that you may be eligible to take this year. Types of carryforwards: Capital losses, passive-activity losses, charitable contributions, investment interest and home-office deductions. And don’t forget continued depreciation deductions on equipment placed in service in prior years.
Car expenses you may overlook: Auto and license registration fees if the fees are based on the value of your car, 10¢ a mile for medical travel, 12¢ a mile for unreimbursed volunteer activities for charity, travel for your job from your home to a temporary place of business.
Contributions you made to state disability funds. These are treated as a state tax payment.
Medical items: Eyeglasses, hearing aids, contact lenses, childbirth classes, birth control pills, legal abortions, cosmetic surgery to alleviate a deformity (to the extent not reimbursed by insurance) and Medicare Part B premiums, to name but a few. Also deduct your parent’s medical expenses if you provide more than one-half of his/her support, even if you can’t claim an exemption for the parent.
Closing costs. Home owners can deduct mortgage interest and real estate taxes paid at closing when buying/selling a home, points paid by a seller on your behalf, points paid on a mortgage you have refinanced if you’ve been deducting them ratably over the term of the old mortgage, prepayment penalties and late fees on your mortgage.
Charitable contributions: Amounts withheld from your pay as donations to the United Way or other charities, unreimbursed expenses you incurred while volunteering, up to $50 a month if you hosted a foreign exchange student in your home via a special program.
Job expenses: Special work clothes (and cleaning expenses), union dues, subscriptions to professional and trade journals, small tools, incidental travel expenses (telephone, laundry, fax fees).
Investment items: A safe-deposit box for storing investments, journals and newspapers for investments, IRA custodian/trustee fees if separately billed and paid. (You can’t deduct commissions you pay for buying or selling securities. These are added to the basis in your securities.) Also, remember to deduct securities that became worthless in 1997.
Bottom Line/Personal interviewed Philip D. Bergstrom, CPA, national manager of professional services with American Express Tax & Business Services Inc., IDS Tower 10, Minneapolis 55440. He is technical editor of American Express Tax Guide 1998 (HarperBusiness).
