1. The Gift That Ends Up Taking
You probably know you need receipts to back up any donations of $250 or more. But did you know you must actually have those receipts in hand by the time you file? Otherwise, the tax law says no write-off is allowed. Period.
Speaking of donations: If you contributed a used car to charity last year, you are — through no fault of your own — on shaky ground with the IRS. But you can firm things up. I recommend attaching a statement to Form 8283, Noncash Charitable Contributions. In it, describe the car's age, condition and mileage, and include photocopies of classified ads for comparable cars.
Why all the trouble? Many taxpayers have been claiming excessive deductions for donated clunkers. So the IRS is now more likely to scrutinize any return with a used-car donation.
2. The Rollover Fumble
This is something I messed up on my own return not too long ago. Say you left your old job or retired in 1999 and rolled over your retirement account, tax-free, into a traditional IRA. What you'd receive from your former employer is a 1099-R that shows a taxable retirement-account distribution, even though it was tax-free. Or maybe you rolled over an existing IRA tax-free from one brokerage house to another. Again, you'd receive a 1099-R showing a taxable distribution, even though you didn't actually have one.
The solution: Include the 1099-R figure on Line 15a of your 1040 (or Line 16a if it was a retirement-plan distribution). Then show the taxable amount — zero if you rolled everything over — on Line 15b or 16b, respectively. Be sure to write "Rollover" next to Line 15b or 16b. Blank lines will trigger an IRS inquiry about why you failed to account for the distribution shown on your 1099-R. Then — like me — you'll become pen pals with the government as you try to explain what happened. Not fun.
3. Home Cooking
If you bought an existing home last year, you may find a tax goodie buried under the blizzard of paperwork. I'm talking about your right to deduct any mortgage points paid by the seller. I know that being able to write off an expense someone else has paid for sounds too good to be true. But it is true, so don't overlook it. The only catch: you must reduce the tax basis of your new home by the amount of seller-paid points that you deduct. That will mean a bigger profit when you sell, but since you can usually exclude home sale gains up to $250,000 ($500,000 if you are married), the bigger profit probably won't actually result in any extra taxes.
Another little known deduction: If you refinanced the mortgage on your home and paid any points, you have been slowly amortizing the cost of those points over the life of the loan. But say you sold your home in 1999. Many people forget they can deduct the unamortized balance in the year of sale. Use the write-off on Schedule A as "qualified residence interest."
Here's another deduction many people miss simply because they aren't aware of it: If you sold a house last year, take a look at your real-estate closing statement. It probably shows that you prepaid a portion of the property taxes that came due after the date of sale. You can deduct this amount on your return.
4. Mutual Contempt
Were all of your 1999 long-term capital gains from mutual funds distributions? If so, check the box on Line 13 of your 1040. Then compute your tax using the Worksheet in the 1040 instructions. This ensures you'll benefit from the lower long-term capital-gains rates without having to fill out the dreadfully complicated Schedule D. If you do nothing, your long-term gains will be taxed at your regular income-tax rate (up to 39.6%).
5. Who's in Charge Here?
One of the most common mistakes I see is people filing as single taxpayers when they qualify for the much-more-favorable head-of-household (HOH) filing status. After I wrote about this issue last year, a reader took my story to his accountant. A few weeks later, amended returns claiming refunds for the last several years appeared in his mailbox.
Say you're single and your unmarried child lives with you. If you pay more than half the household's costs, you qualify. This is true even if your child had too much 1999 income (over $2,750) to be claimed as a dependent. You may also qualify if you are still married and lived with your child but apart from your spouse for at least the last half of 1999.
Finally, if you are single and can claim your parent as a dependent, you can probably file as HOH. This is true even if your parent has his or her own place. You are the HOH if you pay more than half the cost of your parent's home.
6. New Kid on the Block
If you have a little bundle of joy who was born last year, don't forget to sign them up for a Social Security number before filing. It's required to claim your rightful personal exemption write-off ($2,750 for 1999). What happens if you file without the number? The IRS will disallow the exemption, recompute your tax, and either send you a bill or mail you a lower-than-expected refund.
7. Exemption for College-Age Child
Those new college-education tax credits are tasty. Unfortunately, they are phased out starting at an adjusted gross income (AGI) of $80,000 for joint filers and $40,000 for singles (complete phaseout occurs at an AGI of $100,000 and $50,000, respectively).
When your income is way too high to take advantage, claiming your college-age child as an exemption could turn out to be a mistake. Why? Because if you forego the exemption ($2,750 for 1999), your child can use the education credit against his or her tax bill. On your side of the equation, giving up the exemption may actually cost you little or nothing. This is because the exemption is phased out between an AGI of $189,950 and $312,450 if you file jointly and between $126,600 and $249,100 if you are single. Remember: this strategy works only if your child had enough income last year to owe taxes (otherwise, the credit has no value to your child).
8. Where's the Cash Flow?
So you won't have the money to pay the feds by April 15? Don't make the common — and expensive — mistake of ignoring your tax-filing requirement until you've rounded up the bucks. Instead, you should either file your return by the deadline or apply to get an automatic extension until Aug. 15.