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Tax mistakes take toll
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January 28, 2000: 2:37 a.m. ET
Financial planners give tips to avoid mistakes while preparing returns
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NEW YORK (CNNfn) - And now a subject we can all loathe with unabashed gusto: tax preparation.
As the April 15 deadline draws closer, the bad karma you experience filling out tax forms can only be outdone by the possibility you might be doing it wrong.
Enter the Financial Planning Association with its list of 10 mistakes to avoid while preparing your return for the Internal Revenue Service. The list covers everything from inclusion of your mutual fund reinvested dividends to such dimwit maneuvers as forgetting to sign your return.
"Don't assume that when you make a mistake you're cheating the IRS," said Mari Adam, a certified financial planner in Boca Raton, Fla. "A lot of times you're cheating yourself."
Adam said many people get tax filing advice from friends or co-workers instead of going to a professional.
"The real issue is when do you need advice," she said. "Don't assume that you don't (need advice) because you're not Warren Buffett or Bill Gates."
Avoid these mistakes:
- Assuming you don't have to pay the alternative minimum tax. Although aimed at wealthy earners, more middle-income taxpayers are being hit by this tax.
- Forgetting to five-year average. If you took all the money out of a qualified retirement account, you may qualify for five-year averaging.
- Forgetting to include your mutual funds reinvested dividends. In taxable accounts these dividends and gains are taxed in the year they are distributed. When shareholders sell their fund shares, they should add the dividends and gains into the original investment.
- Claiming your home-office reduction. When you sell a home you generally don't have to pay taxes on up to $500,000 in profit you've made since you bought it. However, you may have to pay capital gains taxes on that portion of the house for which you've taken a home-office deduction.
- Not calculating whether to file jointly or separately. Most couples file jointly, but sometimes it pays to file separately, especially if one spouse has significantly more income or more deductions than the other.
- Assuming you can't make more retirement contributions. You can make 1999 contributions to an IRA, simplified employee pension (SEP) and Keogh as late as your tax filing date plus extensions.
- Forgetting to claim carryovers and credits. You can't claim more than $3,000 in investment losses in a single year, but you can carry the unclaimed amount over into future tax years.
- Overpaying your Social Security. Wages over $72,600 are not subject to Social Security tax and there is no limit for Medicare. When you work for two or more employers, each employer withholds based only on what you earn from them, not your combined earnings.
- Failing to take gambling losses. Americans gambled over $630 billion in 1998 and lost $51 billion. Gamblers can deduct losses up to the amount of their winnings only if they keep acceptable records of their losses.
- Failing to do the basics. Review all allowable deductions, double-check your math, sign the return (don't sign it if someone else did the return and you don't understand it) and keep good tax records.
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