FORM 1040 HELPFUL HINTS

Important Information 1040 Filing Tips Schedule A Deductions Overlooked Deductions Other Web Sites

Oh, How I Love Doing My Taxes

READ THIS BEFORE FILING YOUR 1040

• Filing Status

If you are single,  legally separated from your spouse or have lived apart for a greater part of the tax year, you may be able to file as a head of household. Head-of-household status requires that you provide a home for someone in addition to yourself -- usually a parent or child.

• State Tax Refunds

Refunds of state and local taxes may not be taxable in the year of receipt. If you didn't itemize in 2000 you do not have to claim the refund as income. Even if you did itemize, you may not be required to claim the entire amount.

• Excess Social Security

If you have more than one employer and your total income exceeds the FICA threshold, you may have paid to much FICA tax.

• Capital Gains & Losses

You must report capital-gains distributions from mutual funds on Schedule D, not on the face of form 1040. This allows you to take advantage of the lower capital gains rates.

• IRA Deductions

Contributions up to April 15 can be used to offset 2000 income. Spouses of covered taxpayers can now deduct up to $2000 if AGI is less than $150,000.

• Student Loan Interest

This new tax saver made its debut in 1999. You can write off up to $1000 of student loan interest even if you do not itemize. The interest must be for the first 60 months of the loan and AGI must be below $40,000 if single to take advantage of the full amount.

• Moving Expenses

You do not have to itemize to take this deduction as it is now an above the line (before AGI) deduction. The move must be in connection with taking a job in a new location and the new job has to be at least 50 miles farther from your old home than your old job was.

• Self-Employed Health Insurance

If you are self-employed, you can deduct up to 60% of your health insurance costs as an adjustment to income. Otherwise, medical costs can only be deducted if you itemize and for costs in excess of 7.5% of AGI.

• Child Tax Credit

For each child under age 17 when 2000 ended, you can take a credit (not a deduction) of $400. AGI phase-out begins at $110,000 if married filing jointly and $75,000 if single.

• Education Credits

The Hope and Lifetime Learning Credit are now available. The Hope Credit is worth up to $1,500 for each qualifying student in the first two years of college or vocational school. The Lifetime Learning Credit is worth up to $1000 a year for expenses for students beyond sophomore year for expenses incurred. AGI phase-out begins at $40,000 for singles and $80,000 for joint filers.

• Estimated Tax Payments

Rather than claim a refund on your 1999 return, did you have the IRS apply the amount to your 2000 tax bill? Remember to take the credit for that payment, along with any quarterly estimated tax you paid in 2000. Also, for 2000, estimated taxes of 108.6% of last years taxable income were required to avoid a penalty.

• Direct Deposit of Refund

If you have a refund coming, tell the IRS to send it directly to your checking or savings account by entering the account information on your return. It's quicker and saves the IRS money.

• Underpayment Penalty

If you owe $1000 or more beyond what you paid via withholding or estimates, and the amount due is more than 10% of your tax bill for the year -- the IRS will assume you also owe a penalty for failing to pay enough during 2000. If you had a burst of income at the end of the year such as after a Roth conversion, you can use the annualized income installment method to possibly hold down the penalty.

• Mortgage Points

If you bought a home in 2000, points you paid to get the mortgage are deductible in full. Points paid to refinance are deductible over the life of the loan, 1/15 per year if a 15 year mortgage. Points on a retired loan can be deducted when retired.

• Charitable Gifts

If you drive your own car while doing volunteer work, deduct 14 cents per mile. Make sure you claim all charitable deductions, even small ones. Deductions over $250 require a receipt.

• Mutual Funds

Do not overpay tax on your profits. This is a major threat if you redeemed shares during 2000. The fund will tell you how much you received when you sold shares, but it's up to your records to show your "tax basis", which is the amount you invested in the shares. If you records are incomplete, call your fund and ask for help.

• Inherited Assets

• If you sold assets that you inherited, you deserve a very special tax break. Inherited property enjoys a "stepped-up" basis, which means the tax on any gain during the previous owner's lifetime is forgiven (although the estate may have been taxed on the gain). You are taxed only on the appreciation after you inherit the asset.

• Gifts

A taxpayer does not have to pay tax on any gift received. Gifts of up to $10,000 can be given per person per year without any tax repercussions. You cannot give a gift to an employee as this is considered earned income.

FORM 1040 FILING TIPS

Should I file Married Filing Separately or Jointly?

There is really no way to be able to answer that question for sure, other than by actually preparing both "sets" of returns, and see which ones come out better.

In general, those who MIGHT benefit from filing separately are couples who:

1. Both work outside of the home,

2. Have sizable medical deductions that apply to only one of them,

3. Have income from separate investments or property

4. Do NOT live in a community property state (or do, but most of their holdings are separate property under state law), OR

5. You are separated or contemplating a separation, and have doubts about the wisdom of being individually liable for your joint tax liability.

(Hint: If even only one of the above applies to you, you might consider trying to file separately, and see if it would come out to less than filing jointly.)

Note: There are significant restrictions that apply to Married Filing Separately returns. For example, you BOTH must itemize or claim the standard deduction, you do not get the $25,000 exemption from passive treatment for active-participation rental real estate losses, and half of ALL of your Social Security benefits are taxed. Be sure you read the instructions carefully for guidance with these and other restrictions.

If you live in a community property state, state law may dictate how you need to report your earned income, as well as certain other income and deductions. Local professional guidance is suggested.

 

How do I determine if someone is a Dependent?

 

In order to be able to claim someone as a dependent, they must not have claimed themselves when filing a return (if they had to file), and you must satisfy EACH of FIVE tests:

1. RELATIONSHIP or MEMBER OF HOUSEHOLD test: The dependent must
be related to you by blood or marriage. This includes children (including legally adopted), brother, sister, parents, grandchildren, great-grandchildren, parents-in- law, daughter/son-in-law, brother/sister-in-law, step brother/sister, half brother/sister or - if related by blood - your aunt, uncle, nephew or niece. If you do NOT meet the relationship test, the dependent can still qualify if he or she lived in your home the ENTIRE tax year. This would include a foster child (any child who lived in your home as a family member for the year).

2. UNMARRIED test: The dependent must be unmarried at the end of the year OR, if he or she is married, cannot be filing a joint return with his or her spouse.

3. CITIZEN OR RESIDENT test: The dependent must be a citizen of the United States, a resident alien, a resident of Canada or Mexico, or your adopted child who is none of the above BUT who lived with you all year in a foreign country.

4. INCOME test: In general, the dependent cannot have had gross income subject to tax of   $2,750 or more. EXCEPTIONS: The income limitation does not apply if the dependent is your child AND either - is under age 19 at the end of the year OR - is under age 24 at the end of the year AND a full-time student for any part of five months in the tax year.

5. SUPPORT test: Generally, you must be able to establish that you have provided MORE than half of the dependent's total support for the tax year. The cost of support includes food, clothing, education, medical and dental care as well as the fair rental value of shelter provided. This must exceed the total of all other assistance coming from other sources, including other relatives, government entities, the person's savings and non-taxable income.

Note: Special rules apply to divorced or separated parents, or cases where the bulk of the person's support is provided by two or more people. See Forms 8332 and 2220, respectively.

 

How do I treat my child's interest and dividend income?

 

A return must be filed by (or for) a dependent child, if the child has income above ANY of the following limits:

- Wages (when added to self-employment income) over $4,150
- Unearned income over $650
- Total income over $650 includes at least $1 of unearned income
- Self-employment income over $400
- Sale of stock, bonds or mutual funds (whether at a gain or loss) if the gross proceeds from
   the sale exceed $650.

If your child has to file a return, and is being claimed as a dependent on your return, he or she cannot also claim a personal exemption on his or her personal return.

If your child is under age 14 at the end of the year, and has investment income, Form 8615 must be attached to the child's return, to determine what portion (if any) of the income is to be taxed at the parent's marginal rate.

Under certain circumstances, you can forego filing a separate return for your child, if you elect to report his or her income on your return using Form 8814. This election is available ONLY if ALL of these conditions apply:

- All income is from interest or dividends only
- Income does not exceed $5,000
- No estimated tax payments have been made in the child's name
- No taxes were withheld from the income
- If the child is under 14 at year end, you are the parent referred to in the instructions for Form         8615.

Note: Under most circumstances, we do NOT recommend that this Form 8814 election be made. It will generally result in a higher portion of your child's income being subject to tax, will increase your AGI (which limits some of your deductions), could increase or cause an underpayment penalty, and could make an even more dramatic difference on your state income tax return.

Starting in 1999, the new tax law provided some relief from the taxation of unearned income under $250, even if the dependent has earned income over $650. See the summary of the new tax law, elsewhere in the FAQ area, for details.

I received a 1099-OID. How to I report this income?

 

Original Issue Discount (OID) is the difference between the principal (or "face value", redeemed at maturity) and the (lower) price at which it was issued. Generally, part of the OID is assumed to be received each year you hold the bond, and is taxed in same manner as interest income on that bond.

Each year, the issuer of the bond (or your broker, if you bought it on the secondary market) will provide you with a Form 1099-OID, reporting the OID it believes is taxable to you that year. This is calculated on the assumption that the discounted price was your acquisition price, and that you held the bond for every day of the tax year.

If you bought or disposed of the bond during the year, or paid a premium over the discount amount in buying the bond, the amount of OID shown on Form 1099-OID will be more than what you actually have to report. (The same may be true in cases where you have stripped or coupon bond.) In such cases, you should report the Form 1099-OID amount on Schedule B, but then subtract out (as "OID Adjustment") the difference.

Can I deduct job related use of my car and how much can I deduct?

 

The IRS raised the standard mileage rate for business use of a car to 32.5 cents from 31.5. In 2001, the rate is 34.5 cents per mile.

 

When writing off business use of a car, taxpayers have the option of deducting actual expenses or claiming the IRS standard mileage rate plus parking and tolls. The mileage rate can be used for rented cars as well as cars a taxpayer owns. In many cases, the actual expenses for a leased car are greater than the mileage deduction. Make sure you determine your expense both ways before choosing the which method to use.

 

How do I file if I was recently divorced?

 

For tax purposes, your marital status is determined as of December 31st of the tax year. Therefore, if you are legally married as of that date, your filing status choices are generally married filing joint or married filing separately. While filing a joint return is usually easier, it can have drawbacks if the other party does not cooperate in assembling the information necessary, and both spouses will remain separately liable for the income and deductions of BOTH parties reported on the joint return.

One exception: If you do not live together, nor mingle your finances, for the last six months of the tax year, AND you paid more than half the cost for the year of keeping up the home in which you and your dependent child lived, you can generally file as Head of Household.

If you live in a community property state, be aware that your state law will determine what allocations need to be made between your separate returns for the period of time you were married.

For a divorce decree after 1985, the custodial parent is generally permitted to claim the dependency exemptions for the children, regardless of who actually provided most of the support. If the custodial parent agrees that the other parent should be able to claim the child, he or she must sign a Form 8332 which gets attached to the non-custodial parent's return for the year.

SCHEDULE A DEDUCTIONS

Medical Expenses

Medical expenses are allowed only for the part that tops 7.5 percent of your adjusted gross income (AGI). If you do overcome the 7.5 percent hurdle, remember to include travel expenses incurred to obtain medical care. For car trips, claim 10 cents a mile, plus parking fees and highway tolls.

Casualty and Theft Losses

On losses resulting from fires, auto accidents, burglaries or similar events, remember that there is a two-step computation to arrive at your allowable deduction. Such losses are deductible only if they amount to more than 10 percent of your AGI. Moreover, you get no deduction for the first $100 of each casualty of theft loss.

Mortgage Points

They are 100 percent deductible in the year of payment if you pay them to obtain a loan to buy, build or improve (as when you add or remodel a room) your "principal residence", which is legalese for a year-round home -- as opposed to a vacation retreat or property for which you rent out. There is no immediate deduction for points paid to refinance (with none of the proceeds used to pay for improvements) a mortgage on you principal residence. The points are deductible over the life of the loan.

Charitable Deductions

Did you volunteer to raise money for charity or to perform other tasks, such as teaching Sunday School? You cannot take a charitable contribution deduction for the value of your time and services but your good deeds do entitle you to claim un-reimbursed expenses as an itemized deduction.

These allowable deductions include such items as telephone calls, postage and stationary, supplies used in making baked goods for charity sales, and the cost of cleaning of uniforms not adaptable to ordinary wear that you are required to wear while performing these services.

A frequently omitted write-off is for travel to and from your volunteer work. If you use buses, trains or taxis, simply record your fares and calm these as charitable travel. If you drive, claim 14 cents a mile, plus a separate deduction for parking fees and highway tolls. Also, you can deduct for meals, lodging and travel expenses on out-of-town trips required by your organization.

OVERLOOKED TAX DEDUCTIONS

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