Roth & Company, PC Tax Update Blog

Tax Update Blog: 2007 Filing Season Tip Archives


April 17, 2007

Today is the deadline for filing your 2006 1040. Unless you are extending, of course. For the most part, the game is over for 2006, and there's little to do but add up the score.

Any more, 2006 is dwelling on the past. It's time to move on. What lessons can we draw from this filing season while the pain is still vivid?


The hardest tax problems are those when people don't keep up on their taxes. It can happen when you reduce your withholding too much. It can also happen when you don't keep up with your estimated tax payment obligations. If you own an interest in a partnership or an S corporation, it can become a problem in a hurry, especially if you spend the nice distributions they give you without putting them away for your taxes.

The first quarter federal estimated tax payment is due today. If your tax preparer gave you a voucher, file it with your check as instructed. It won't get any easier next April if you don't.


Most people who come to their tax preparares in April looking for a miracle have already squandered most of their tax-saving opportunities. These are likely to be found at work. Take advantage of the easy stuff:

- Maximize your 401(k) contribution. If you aren't at least putting in enough to get the entire employer match, you are making an unforgivable financial blunder. More is better.

- Review your health plan opportunities. If your employer offers an Health Savings Account option, think not twice, but several times before rejecting it. Many employers offer generous breaks to switch to high deductible health insurance, and most of the time you'll be financially better off with an HSA. If there is no HSA at your job, make sure you take full advantage of the cafeteria plan.

- Start funding your 2007 IRA. The main benefit of these is tax-free buildup of earnings; if you fund it now instead of next April, your money is tax-sheltered an extra year.

- If you are saving for college, but a little money away in a Section 529 plan like College Savings Iowa every month.


One of the perplexing things about being a tax preparer is seeing somebody with a $500,000 W-2 unable to raise $30,000 to pay taxes in April. You should always have some amount of cash easily available. Some people advocate enough to pay six months of living expenses, but I think you can do with less - especially if you have some other investments, or if you have a house. If you are a homeowner, open a home-equity line of credit, and then don't use it except for emergencies - like a $30,000 tax bill.


This is the last installment of our series of 2007 filing season tax tips. Happy filing!

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April 16, 2007

Maybe you spent hundreds of dollars to have a preparer do your complicated 1040. Or maybe you spent the 30.3 hours the 1040 instructions say is the average estimated time it takes to do your own return. Either way, you've made a substantial investment in time and/or money.

Now isn't the time to cheap out. Unless you are filing electronically, you ought to spring for the extra $4.25 to file your return "certified mail, return receipt requested." It's well worth the time and trouble of going to the post office to get that postmarked receipt. The tax law is full of sad stories of taxpayers who lost thousands of dollars because they didn't have a postmark to document that they filed on time. Don't let it happen to you!

Another documented timely filing.

If there's no post office open or handy, you can also use a mailing receipt from one of the designated private delivery services authorized by IRS for timely return shipment. As they don't use P.O. boxes, you'll want to refer to Russ Fox's handy list of service center street addresses.

And don't procrastinate, because Jiffy Express isn't a designated private delivery service.

This is the penultimate entry in the series of 2007 filing season tax tips. Collect them all!

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April 15, 2007

It happens every year. Sometimes there are even good reasons. The return is ready, the taxpayer owes a bunch, and the cash isn't there. You don't have any investments you can turn into cash immediately. What to do?

DON'T BLOW IT OFF. The worst thing you can do is to just put your head in the sand. If you don't file anything, you start to accrue a monthly penalty of 5% of any amount you owe the IRS. 60% APR almost makes LoanMax look reasonable (though the total penalty maxes out at 25%). Interest also accrues on the unpaid taxes and penalties. Once you start digging this kind of hole, it can take years to climb out.

FILING BUT NOT PAYING. Getting an automatic extension with Form 4868 gives you until October to file a timely return. Even if you can't pay your tax, an extension can turn the 5% monthly failure-to-file penalty into a 1/2% montly failure-to-pay penalty. That is, it can if you ultimately file your completed 1040 and pay your taxes by the extended due date.

Also, the tax regulations don't impose the failure to pay penalty if you have 90% of your tax paid in by the original due date. In that case, you just have to pay the interest on the remaining balance due at the IRS rate for underpayments - currently 8%. If you are coming up just short, you should pay in what you can with an extension and pay the rest as soon as possible.

BORROW (but not from a car-title or payday-loan shop. The IRS is a better creditor). If you have a home equity line, tap it. The IRS accepts credit card payments. If you have a good credit rating, your friendly banker might be able to do something. If you have a gullible sympathetic relative, take advantage.

NOWHERE TO BORROW? Then it's time to fill out Form 9465, Installment Agreement Request. You can do this online. If you own more than $25,000, you may need to file additional infomration on Form 433f. Of course, if you owe that much, you need professional tax help anyway.

Once you get the installment agreement in place, live up to it. The IRS gets ugly in a hurry if you fall behind on an installment plan.

And whatever you do, don't bounce a check. It only makes your penalties worse. And work with a professional so you don't get caught short next year.

This is another of our series of filing season tax tips. There's a new one every day through April 17 at

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April 14, 2007

If you are going to file by the April 17 deadline, you should have your taxes about done by now. Before you drop that form in the mail, take a few minutes to go through the IRS last-minute checklist:

* Did you use the peel–off label and enter any corrections? If you used the label, did you enter your social security number in the space provided?

* If you do not have a label, or there are too many corrections, did you clearly print your name, social security number, and address, including zip code directly on your return?

* Did you enter the names and social security numbers for yourself, your spouse, your dependents, and qualifying children for earned income credit or child tax credit, exactly as they appear on the social security cards? If there have been any name changes be sure to go to or call at 1–800–772–1213.

* Did you check only one filing status?

* Did you check the appropriate exemption boxes and enter the names and social security numbers exactly as they appear on the Social Security Card, for all of the dependents claimed? Is the total number of exemptions entered?

* Did you enter income, deductions, and credits on the correct lines and are the totals correct?

* If you show a negative amount on your return, did you put brackets around it?

* If you are taking the standard deduction and checked any box indicating either you or your spouse were age 65 or older or blind, did you find the correct standard deduction using the worksheet in the Form 1040 Instructions or the Form 1040A Instructions?

* Did you figure the tax correctly? If you used the tax tables, did you use the correct column for your filing status?

* Did you sign and date the return? If it is a joint return, did your spouse also sign and date the return?

* Do you have a Form W-2 (PDF) from all of your employers and did you attach Copy B of each to your return? File only one return, even if you have more than one job. Combine the wages and withholding from all Form W–2's, on one return.

* Did you attach any Form 1099-R (PDF) that shows tax withheld?

* Did you attach all other necessary schedules and forms in sequence number order given in the upper right–hand corner?

* If you owe tax, did you enclose a check or money order with the return and write your social security number, tax form, and tax year on the payment? Refer to Topic 158 for more information, and

* Did you make a copy of the signed return and all schedules for your records?

A few minutes now can save you weeks of frustrating correspondence with the IRS. It's time well spent.

This is one of a series of daily tax tips appearing here at through April 17, this year's tax deadline. Collect them all!

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April 13, 2007

OK, the tax deadline is upon us. Counting today, we have five days to make our peace with the IRS.

Well, no, We have six months and five days, actually. All you need to do is file Form 4868 to get until October 15 to file your taxes. Just make sure you have at least 90% of your taxes paid in. It's smarter, of course, to be all paid in, but you avoid the 1/2 percent underpayment penalty if you are 90% paid in.

If you are a quarterly estimated tax filer, you should pay in enough to cover your first quarter 2007 estimated tax payment. You can credit it to 2007 when you finally file your 1040, and in the meantime it serves as a cushion in case your 2006 tax bill turns out to be more than you anticipate.

Some people don't like to extend. The typical arguments:

"I'm more likely to be audited." Nonsense. I have seen no evidence that extended returns attract IRS attention. It is clear, though, that returns with errors do attract IRS attention. If taking an extension means you file a more accurate return, you actually reduce your chances of an audit. That's especially true if you would other wise have to file an amended return to fix an error.

"I want the statute of limitations to run." This is actually has some merit, if you have a controversial position on your return. It also rarely applies in real life. While I'm sure it happens, I've never seen a client have to pay extra taxes because they kept the three-year statute open an extra few months by extending a return. Again, if by extending you make your return more accurate, you probably reduce the chances of the IRS looking at you.

Extensions also give you time to consider other options for your 2006 return, like a SEP. So take your time - extend it, don't amend it.

This is one of a series of daily tax tips appearing here at through April 17, this year's tax deadline. Collect them all!

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April 12, 2007

It's standard tax advice to leave your money in your IRA as long as possible. The longer your money stays in your IRA, the longer it builds up without being taxed. If you take it out too early (generally before age 58 1/2), you often also face a 10% excise tax on top of the regular income tax.

Yet circumstances don't always cooperate. If you took money out of your IRA in 2006, you may be able to avoid or reduce taxes and penalties on the withdrawal.

Sometimes part or all of your IRA withdrawals can be nontaxable. Other early withdrawals are taxable, but aren't subject to the 10% penalty. Keep these exceptions in mind so you don't pay extra tax or penalties on your return:

- Roth IRA contributions can be withdrawn tax-free to the extent of your non-deductible Roth IRA contribuitons before age 59 1/2. Of course, all Roth distributions after that age are tax-free.

- Traditional IRA distributions are tax-free to the extent they are attributable to your non-deductible contributions. Determine this amount using Form 8606.

- Qualifying distributions rolled over into another IRA within 60 days are nontaxable.

- Traditional IRA distributions are taxable, but may be penalty-free, in these situations:

*You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

*The distributions are not more than the cost of your medical insurance.

*You are disabled.

*You are the beneficiary of a deceased IRA owner.

*You are receiving distributions in the form of an annuity.

*The distributions are not more than your qualified higher education expenses.

*You use the distributions to buy, build, or rebuild a first home.

*The distribution is due to an IRS levy of the qualified plan.

*The distribution is a qualified reservist distribution.

You can find more information on whether you qualify to avoid these penalties here.

Return here to for a tax tip each day through April 17. Go here for the whole collection.

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April 11, 2007

Many taxpayers pay income taxes in more than one state. With the increased popularity of "pass-through" ownership of businesses through S corporations and limited liability companies, many taxpayers find themselves filing returns in two or more states. Others have taxes paid in other states by the businesses that they own through a "composite" return filed by their S corporation or partnership.

All states with an income tax have a system to keep their residents from paying full state taxes on the same income in more than one state. The credit for taxes paid in other states is computed on your resident state return; Iowans use Form 130. The credit is the lesser of the tax paid to the other state or the tax computed on the income in the home state.

If you are an Iowan who owns an S corporation, there is another alternative. You can compute an S corporation apportionment credit on Form 134. This credit can provide significant savings, especially for taxpayers whose S corporations retain a large part of their annual income.

And remember, in Iowa you can claim a credit for taxes paid in other states if you have foreign tax withheld. Many taxpayers have this through international mutual funds.

Stop here at for a tax tip a day through April 17. Collect them all!

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April 10, 2007

Some taxpayers can still knock $5,000 or more off their 2006 taxable income without giving up the use of their money until retirement. These are taxpayers who had a qualifying "High Deductible" health insurance plan during 2006, but who have not yet made a contribution to a Health Savings Account.

Health Savings Accounts work a bit like old-fashioned individual retirement accounts, or IRAs. You can deduct contributions to the accounts, but the earnings accumulate tax-free until withdrawal. But unlike IRAs, you can always withdraw earnings from an HSA tax-free to pay medical expenses not otherwise reimbursed by insurance. That means your earnings aren't locked away until retirement like IRA earnings are. If you don't use them for health expenses, you can withdraw the funds for retirement like IRA funds.

To contribute to an HSA for 2006, you need to have had a qualifying high-deductible health insurance plan in place during the year. This means an deductible of at least $1,050 for individual coverage or $2,100 for family coverage. The maximum deduction for single-coverage taxpayers is the lesser of $2,700 or the annual deductible; for family coverage taxpayers, the deduction caps out at the lesser of the deductible or $5,450.

The deadline for 2006 HSA contributions is April 17. A number of Iowa financial institutions sponsor HSAs, including Iowa Savings Bank of Carroll. To claim the HSA deduction, complete Form 8889.

Link: IRS discussion of HSAs


Come back to for a tax tip a day through April 17. Collect them all!

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April 09, 2007

If you started a new business on your own, or if you had a profitable moonlighting business on the side, you may be facing an unpleasant tax bill. You might be able to ease the tax pain by - figuratively speaking - taking money out of one of your pockets and putting it into another.

At this point, the easiest way to do that is to set up a Simplified Employee Pension plan, or "SEP." A SEP is a plan where an employer puts money into an employee's IRA. You can put up to 25% of your funds into an employee SEP and get a deduction, while the employee picks up no income. Of course this is most attractive when you are the only employee.

A SEP is easy to set up. All you need to do is complete a Form 5305-SEP and put it in your records, and fund your SEP-IRA by the due date of your return. If you extend your return, you have until the extended due date to set up and fund the plan.

The downside of a SEP is that if you have any employees, they have to get the same percentage of salary contribution that you have. As long as there are no employees, though, it can work very well.

If you want to set up the plan for the 2006 tax year, though, you need to get on the stick. You don't want to wait until the last minute to find a bank or mutual fund company to handle it. If you are down to the wire and you aren't sure what to do, it may be wise to extend your return so you can consider a SEP at your leisure, in consultation with your tax advisor.

The bottom line? It's still your money; it's just put away for retirement. You move it from one pocket to another, and you reduce your taxes by doing so.

Visit for a tax tip a day through April 17.

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April 08, 2007

It's a chilly Easter in most of the country, but sunny here in Des Moines. As it's a holiday, we'll stick with an easy tip today.

The IRS says that millions of eligible taxpayers are failing to claim the telephone excise tax refund. Anybody who has paid a long-distance phone bill in the past three years can claim this as a "gimme" tax credit, whether you itemize or not.

If you have lots of time and you have spent a lot of time on the phone, you can figure your actual refund for the last three years, but most of us will just claim the standard amount, based on the number of personal exemptions on your 1040:

* One exemption, the standard refund amount is $30;
* Two exemptions, the standard refund amount is $40;
* Three exemptions, the standard refund amount is $50;
* Four exemptions or more, the standard refund amount is $60.

There are a few people who don't qualify for the credit: those who only use prepaid calling cards or prepaid cell phones. Everybody else with a long distance bill qualifies. You can check the details here if you aren't sure.

To claim the refund, just put your number -- $30, $40, $50 or $60 -- on your 1040. It goes on Line 71, if you file the long form.

Click to enlarge.

Have a great Easter. And go Zach Johnson, Drake boy and Iowa native! (UPDATE: and 2007 Masters Champion!)

Come to the Tax Update Blog for a tax tip a day through April 17. Collect them all!

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April 07, 2007

Congress restored the long-lost deduction for sales taxes a couple of years ago with a new twist: you can deduct either state and local income taxes or sales taxes, but not both. People in high-tax states like Iowa take for granted that the income tax deduction is a better deal. That's usually right - but not always. And if you live in a low tax state like South Dakota or Florida, the sales tax deduction might be a no-brainer.

Iowa's loophole-ridden tax law can cause you to have a low income tax in some seemingly odd circumstances. Special breaks for the elderly often cause seniors to have little or no Iowa tax. Young adults and those who take advantage of Iowa's many "economic development" tax credits can also find themselves with little or no tax liability.

Those of us old enough to have worked with the pre-1986 sales tax deduction remember the demented clients who would bring a grocery bag full of all of their receipts for the year so you could compute their sales tax deduction. There's a better way.

The IRS has issued tables you can use to compute a "gimme" sales tax deduction, based on your income. You can add to the table number actual taxes paid for large purchases like cars or boats. These tables are incorprated in the online sales tax calculator at the IRS web site.

Visit the Tax Update blog at for a new tax tip every day through April 17. Collect them all!

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April 06, 2007

So you ended up owing the IRS this year. You had a big capital gain, maybe. Or you went out on your own, were self-employed, and you didn't count on not having taxes withheld. You're going to get a penalty, right?

Not necessarily. Just because you have a big balance due doesn't mean you have a penalty; even if you have one, a little calculation might help you trim it down.

The tax law has a default rule that requires you pay in 90% of your taxes each year through withholding or timely estimated tax payments. If you don't meet the requirement, you pay a non-deductible penalty computed using an interest rate set each quarter by the IRS. In effect, you pay the IRS interest for not giving them your money earlier.

There are important exceptions to the 90% rule that come in handy all of the time.

The biggest exception is the "protective" rule. If in 2006 you paid in at least as much tax through withholding and timely estimates as you had in 2005, you owe no penalty. If your 2005 adjusted gross income was $150,000 or more, you had to pay in 110% of your 2005 tax in 2006 to meet this exception. Most people who have a big one-time income boost can reduce or greatly eliminate their estimated taxes this way.

The other big exception is "annualizing" your 2006 income. If you had a big chunk of income late in the year, you can reduce or even eliminate your estimated tax penalties by filling out the "annualization worksheet" for Form 2210. This worksheet lets you compute the required tax payments quarter-by-quarter based on your income for each quarter.

When you do your estimated tax worksheet, you can spread your withholding evenly through the year. If you had a big year-end bonus, that withholding applies equally to each quarter.

And remember, the first estimated tax payment of 2007 is due April 17. Be sure to budget for it.

Look for a daily tax tip here through April 17; collect them all. Also, don't miss the Taxable Talk Bozo Tax Tips series, in case you need a smile.

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April 05, 2007

The Individual Retirement account is one of the easiest tax breaks to use, yet it is one of the most under-used tax tools. When Congress restricted the IRA deduction in 1986, many people just stopped paying attention. That's a bad idea. There's been a lot of new tax law since then, and an IRA contribution might be just the thing to make this year's tax filing more pleasant.

For yourself, you can always deduct an IRA contribution if your adjusted gross income is below $75,000 filing a joint return, $50,000 for a single return, or $10,000 if you are married filing separately. If you and your spouse aren't covered by any employer retirement plan, you can make a deductible IRA contribution regardless of your income. If you are covered but your spouse isn't, you can make a deductible contribution to the spouse's plan if your combined AGI is under $150,000. Full details of these limits can be found here.

The maximum 2006 IRA contribution per individual is $4,000, or $5,000 if you were 50 years old by the end of 2006. Remember, you have until April 17 to fund an IRA for 2006, so you still might be able to buy a deduction.

Get a tax tip a day for the rest of the filing season here at Collect them all!

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April 04, 2007

Many Iowans overlook the tax benefits available when you save for a child's education through College Savings Iowa. CSI is a "Section 529" plan sponsored by the state. It qualifies for the usual federal Section 529 benefits: earnings on plan funds grow tax-free, and they can be withdrawn tax-free to cover college costs.

CSI has an additional benefit for Iowa taxpayers: contributions can be deducted on Iowa returns - up to $2,500 per donor, per donee for 2006. That means a two parents with two kids can put away $10,000 in CSI for college and deduct it on their Iowa returns. The deduction is not available for contributions to other Sec. 529 plans.

You claim the deduction on Line 24 of the Iowa 1040 - the "other adjustments" line.

We are running a daily tax tip through April 17. Read them all here.

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April 03, 2007

You can look all day at your Form 1040 in search of the line used for taking the deduction for higher education expenses. It's pretty subtle. It's on line 35, labeled "Domestic production activities deduction."

Yes, that seems strange. Blame Congress. The deduction was slated to expire at the end of 2005, but Congress extended it through 2007 after the 2006 forms went to the printer. An IRS news release explains how you claim the deduction:

Higher Education Tuition and Fees Deduction
Claim the deduction for up to $4,000 in higher education tuition and fees on Form 1040, Line 35, “Domestic production activities deduction.”

Enter "T" on the blank space to the left of that line entry if claiming the tuition and fees deduction, or "B" if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering "B," attach a breakdown showing the amounts claimed for each deduction.

The deduction is available "above the line," whether or not you itemize and whether or not you have alternative minimum tax. It phases out when AGI exceeds $65,000 for single filers and $130,000 for joint filers. It doesn't apply in a year when you claim a Hope credit or lifetime learning credit for the same student.

This is another installment in our daily series of 2007 filing season tax tips.

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April 02, 2007

aj20.jpgThe Andrew Jackson you carry around in your pocket may look a bit like an aging figure skater. Don't let that fool you. Old Hickory was unbelievably tough. In a duel, he chose to wait for the opponent to shoot first. He accepted the bullet without flinching, and took all the time he needed to shoot his opponent dead.

Sometimes the Andrew Jackson strategy works in tax. For example, sometimes it pays to voluntarily pay higher tax rates on your capital gains and dividends, which are taxed at a maximum rate of 15%.

Why would you ever want to pay a 35% rate when you could pay 15%? If it gives you more deductions.

The tax law limits deductions on "investment interest" to your "investment income." Investment interest occurs when you borrow to purchase an investment, like stock, bonds or other investment property. Investment income includes interest income, but it normally doesn't include capital gains or dividends. Many folks incurred a lot of investment interest in the day-trading frenzy of the late '90s and the early part of this decade.

The tax law does allow you to elect to treat capital gains and dividends as investment income if you forego the lower capital gain rate. That can let you deduct investment interest expense that would otherwise carry forward.

Situations to consider the Andrew Jackson strategy of having your capital gains taxed as ordinary income include:

- You have more investment interest carryforwards then you are ever likely to use otherwise.

- You need the deduction right now.

- You are in the AMT "phase-out" range, where your marginal rate on capital gains and dividends is really 22%.

You make this election by including the amount of dividend and capital gain you want to have taxed as ordinary income on line 4g of Form 4952; then follow the instructions.

We will have a daily filing season tip through April 17. Collect them all!

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April 01, 2007

As you put your information together to prepare your 2006 Form 1040, make sure your charitable donees have held up their end of the process. For charitable donations of $250 or more, you get no deduction unless you have a receipt from the charity that tells you:

- the amount of cash and a description (but not the value) of any property other than cash contributed;

- whether the donee provided any goods or services in consideration for the contribution;

- a description and good-faith estimate of the value of those goods or services; and

- if the goods or services consist entirely of intangible religious benefits (e.g., admission to a religious ceremony, but not religious school tuition or fees), a statement to that effect.

You don't turn this statement in with your return, but you are required to have it if you claim the deduction. No documentation, no deduction, and probably you will get a penalty of 20% of any tax resulting from not having the documentation. That means if your charity hasn't gotten you this statement, it's time to ask them for it.

Remember, the requirements get more stringent starting in 2007. If you are, say, in the habit of putting $5 in the collection basket at church anonymously, you will no longer be able to deduct it. You will need either a cancelled check or a receipt from the charity to support your deduction.

Check IRS Publication 1771 for more information.

This is another installment in our series of 2007 filing season tips. Look for a new one each day through April 17.

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March 31, 2007

If you have kids, it's wise to have your returns prepared together. With the "kiddie tax" now applying to 17-year olds, you often can't do the kids returns without having done the parents.

Once the kids are off to college, the tax law's "education credits" make it worthwhile to coordinate parent and student returns.

The "Hope Credit" offers up to $1,650 in tax reduction if you have qualifed higher eductation costs. The "Lifetime Learning Credit" offers up to $2,000 of tax savings. Both of these credits start to phase out when adjusted gross income hits $90,000 on a joint return, or $45,000 otherwise.

If parent income exceeds the phase-out amount, they might save money by foregoing the dependency exemption for the student. If they do, the student can claim the education credits. If the student has income from a summer job or school job, she might be able to use the credit when Mom and Dad can't.

You claim these credits on Form 8863.

This is another installment in our series of 2007 filing season tips. Look for a new one each day through April 17.

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March 30, 2007

There are a lot of ways the tax law can keep you from deducting losses. Individuals can only deduct capital losses to the extent of their capital gains, plus $3,000. If you have losses from a business activity in which you are a passive investor - say, a partnership or an S corporation - you can't deduct net "passive" losses. Other rules limit losses based on your "basis" or your "at-risk" investment in a business.

The silver lining is that these losses aren't gone forever. They carry forward. Capital losses disallowed last year can offset capital gains this year. Disallowed passive losses carry forward to offset future "passive" income. Losses disallowed for lack of basis or "at-risk" investment offset future income from the same business.

When you have these losses, be sure to keep track of the carryforwards and use them in future years. Capital loss carryforwards are tracked on your Schedule D. Passive loss carryforwards are tracked on the worksheets for Form 8582. At-risk losses carry forward on Form 6198. There is no formal worksheet for carrying forward losses from basis limitations on partnerships and S corporations, so you need to track them separately.

When you do your return for this year, make sure you look at last years returns. These carryforwards could make a big difference in how you settle up with Uncle Sam April 17.

This is another installment in our 2007 Filing Season Tips series. Collect them all!

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March 29, 2007

The tax law allows you to get a deduction for donations of property to charities. Congress has tightened up on these deductions in recent years, so you need to make sure your paperwork is in order if you want to take a charitable deduction.

If you deduct a non-cash gift other than publicly-traded securities, and the gift is $5,000 or more, you need to have a signed valuation from a"qualified appraiser" before you can take any charitable deduction. A "qualifed appraiser" is an independent party who regularly performs appraisals for pay who is not related to the buyer or the seller. The appraiser has to give you a signed Form 8323 to attach to your return. Otherwise, no deduction.

Even if you have a smaller gift - say, you gave some clothes to Salvation Army - you still should have your paperwork in order. A Tax Court case handed down yesterday illustrates this. Minneapolatans James and Joan Soholt, like many taxpayers, gave household items to local charities. They carefully avoided round numbers by claiming a deduction for $3,492. They were less than careful in documenting their gift (emphasis added):

We next turn to petitioners' contributions of property. Petitioners introduced receipts indicating they donated clothing and other miscellaneous goods eight times in 2003. These receipts do not list the specific items contributed and simply note that petitioners donated a certain number of bags. Petitioners also introduced a worksheet they prepared when preparing their tax return that purports to list and value more specifically the items petitioners contributed. Mr. Soholt testified that petitioners estimated the value of the clothing they donated at one-half the original cost but also admitted he did not think used clothing was worth half as much as it was worth new. Petitioners did not introduce any evidence supporting their estimated value or regarding the quality of the donated items that would permit us to estimate its value.

While we are convinced that petitioners donated property to charity in 2003, petitioners have failed to provide any reliable evidence of the items they donated or their values. Petitioners are therefore not entitled to deduct any additional amount for charitable contributions of property other than the $89 respondent allowed.

So if you are taking a deduction for bringing bags of clothes to the charity thrift store, make sure you have better documentation than a list saying "5 bags of stuff."

Go here for our complete collection of 2007 filing season tips.

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March 28, 2007

Today's filing season tip is Iowa-only. If you are lucky enough to have a teenager, you may qualify for one of the few prom-ticket tax credits known in the wild.

Iowa offers a "Tuition and Textbook Credit" of 25% of the first $1,000 paid per dependent for tuition and textbooks. These are defined loosely:

The cost of the following items are eligible for the credit:
* Books: books and other instructional materials used in teaching subjects legally and commonly taught in Iowa’s public elementary and secondary schools, including those needed for extracurricular activities

* Clothing: “non-street” costumes for a play or special clothing for a concert

* Driver’s Education: only if paid to the school

* Dues, Fees and Admissions: includes those paid for extracurricular activities such as activity fees; booster club dues; fees for track and cross-country; activity ticket or admission for high school athletic events; fees for a physical education event in school such as roller skating

* Materials: includes materials for extracurricular activities, such as sporting events, speech activities, musical or dramatic events, awards banquets, homecoming, prom, and other school-related social events

* Music: rental of musical instruments for school or band; music/instrument lessons at a school; sheet music used in a school; valve oil; cork grease; music books and reeds used in school bands or orchestras

* Shop class and mechanics class: cost of required basic materials

* Shoes: football, soccer and golf shoes; cleats for football shoes; track spike shoes

* Travel: non-travel fees for field trips if the trip is during school hours

* Tuition: the school must be accredited; amounts paid are not allowed if they relate to teaching of religious tenets or doctrines of worship

* Uniforms: band, hockey and football uniforms


You may be too old to go to the prom, but at least you can enjoy the tax credit for it. Take the credit on line 49 of the Iowa long form.

We are posting a tax tip each day for the rest of filing season. Collect them all here.

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March 27, 2007

The IRS yesterday issued a list of the most common tax filing errors. The Top Five are (courtesy of the Tax Prof):

1. Choosing the wrong filing status
2. Failing to include or using incorrect Social Security numbers
3. Failing to use the correct forms and schedules
4. Failing to sign and date the return
5. Claiming ineligible dependents

It's a good idea to give this list a quick review before dropping that return in the mail or down the e-file hole.

Link: Our series of 2007 tax season tips.

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March 26, 2007

The IRS last year did a major redesign of the K-1 forms for partnerships and S corporations. These "pass through" entities don't pay taxes. They instead report their income and expenses to their owners on their K-1 forms, and the owners in turn report the K-1 information on their 1040s.

The new K-1s make some of the information harder to find. Many K-1s will have "charitable deductions" buried under "other deductions," usually as code "A" on box 12 of the S corporation K-1 or Box 13 of the partnership K-1. If your K-1 comes from a farm or a manufacturing company, also look for a code "O" deduction for the so-called "Section 199 deduction."

The K-1s should come with an attachment that tells you what the items in the different boxes are. If you don't have a copy, you can find them here (second page):

Form 1065 K-1
Form 1120-S K-1

Don't lose a deduction just because it looks like some sort of footnote!

This is the fourth in a series of daily filing season tax tips we are running through April 17. Find them all here.

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March 25, 2007

One of the most common errors we see on self-prepared income tax returns is miscomputing the deduction for state and local taxes paid. Iowa allows taxpayer to deduct federal taxes paid in computing state income taxes, and that deduction is also frequently botched.

The most common mistake involves missing a fourth quarter payment or a prior year balance due. For example, a fourth quarter state estimated tax payment made for 2005 in January 2006 should be deducted on the 2006 federal return, but it is often forgotten.

We use a worksheet to make sure we don't miss these deductions. It looks something like this:

Click worksheet to enlarge.

You need to be careful, especially with the refund part of the worksheet. Often refunds aren't taxable, as when the refunded taxes were paid in a year when alternative minimum tax was paid. You should carefully work through the refund worksheets in the IRS instructions before you put a taxable refund number on your return.

Still, don't shortcut this worksheet, or you might shortcut some of your rightful deductions.

Link: The complete collection of our 2007 Filing Season Tips

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March 24, 2007

The tax law provides a special deduction for educators. An "eligible educator" can deduct above the line (that is, without itemizing on Schedule A) up to $250 paid:

" connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom."

An "eligible educator" is:

an individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.

jon1.jpgYou qualify? Good. Now comes the tricky part - finding the line for "eligible education expenses" on page 1 of the 1040. It's tricky because the line isn't there; Congress enacted the deduction for 2007 after the forms were already printed.

Here's how the IRS wants you report your $250 deduction:

Educators claim the deduction for up to $250 of out-of-pocket classroom expenses on Form 1040, line 23, “Archer MSA Deduction.”

Enter "E" on the dotted line to the left of that line entry if claiming educator expenses, or "B" if claiming both an Archer MSA deduction and the deduction for educator expenses on Form 1040. If entering "B," taxpayers must attach a breakdown showing the amounts claimed for each deduction.

Not many folks claim Archer MSA deductions anymore, so "E" is likely to be your correct answer. Then turn in your papers and sit quietly at your desks until your refund arrives.

We will run daily filing season tax tips through the April 17 filing deadline.

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March 23, 2007

Starting today we will provide a tax tip each day to spotlight an item you might overlook on your federal or state returns. We'll start with the "Savers Credit."

This credit is designed to reward those who put away money for retirement. It provides a credit of from 10% to as much as 50% for each dollar put into an IRA or 401(k). It is available for taxpayers with an AGI as high as $50,000.

Young adults just starting in the work force are excellent candidates for this credit. The power of compound interest makes it a great idea to sock away cash into a 401(k) plan or IRA before you are 30. If the government wants give you back 50% of it as a refund, you'd be crazy to turn them down - especially if you can put the money into a 401(k) with an employer match.

This credit is claimed on Form 8880.

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