(MONEY Magazine) – Over the past two years, our friends on Capitol Hill saw fit to rest on the laurels of the Taxpayer Relief Act of 1997--which, to their credit, did result in such goodies as the Roth IRA--and refrained from reinventing the way Americans file taxes. Maybe they were busy with such distractions as the presidential campaign. It's just as well: The 1997 law is so complex, the Internal Revenue Service will be writing regulations for it well into the millennium. Nevertheless, we the people still must file--this year by April 16.

MONEY wants to help. So we quizzed taxpayers and preparers about which questions are most confounding and come up most often. And then we went to top tax professionals to get their advice. Here's what they have to say.

How can I turn last year's investment gains and losses into a win on my tax return?

JOHN A. BATTAGLIA, tax director, private client advisers, Deloitte & Touche: Do a good accounting. Make sure to determine what your cost basis is, especially if you've sold shares you bought over time. [Cost basis is usually the price of your shares plus the commission you paid to buy them.] And if you've bought mutual funds and reinvested dividends, that affects the cost basis of your mutual fund shares.

Ideally, if you sold shares during the year, you told your broker in writing which ones you wanted to sell and got written confirmation back. This is called specific identification. Let's say I have 500 shares of IBM that I bought at five different times, and I want to sell 100 shares. Some shares have a much higher basis than others. Well, I'd want to sell the lot of shares at the higher basis first so I'd have the least taxable gain. But in order to do that, if those were not the first shares I bought, I'd have to specify which ones I was selling; otherwise, the IRS will assume I was selling the first shares I bought. (Mutual funds have slightly different rules.) You can't pick and choose after the fact.

EVAN SNAPPER, senior manager, personal financial counseling, Ernst & Young: It's too late for last year's investments, but this year people should think about using their losses to offset their gains. Normally I focus on this later in the year, but it's probably something to think about all year long. If you have a position and it's a loser and you don't think it's going to recover, sell it. If you change your mind, you can buy it back in 31 days and still get credit for the loss. You can use your losses to offset all your gains plus an additional $3,000.

And don't forget your mutual funds. Over the past few years, they've generated significant capital-gains distributions for people.

BATTAGLIA: You need to count short-term capital gains against short-term losses, and long-term gains against long-term losses because they're being taxed at different rates. Schedule D does this for you on your return.

I converted my IRA to a Roth when the market was at its peak. It's worth a lot less now. I know I have to pay income tax on the value of the IRA at the time of the rollover--but can I do anything to reduce the hit?

TOM PUDNER, manager, national tax office, KPMG: You have until Oct. 15, 2001 to convert back anything you rolled into a Roth last year, even if you file your return by April 16. It's called a recharacterization. A lot of people may be in the situation where their assets have lost value and they don't want to pick up the higher income. Others might be forced to reconvert if their modified adjusted gross income for 2000 ended up over $100,000--they no longer qualify for a Roth.

Say you convert your Roth back to a traditional IRA, but you really want it in a Roth. You have to wait at least 30 days, but then you can convert it back to a Roth again. So if you had $20,000 in an IRA that you converted to a Roth last year, you'd have to count that $20,000 as income. If it's now worth only $12,000, you can convert back to an IRA, wait 30 days, and reconvert to a Roth. That way, you'll have to count only the $12,000 as income. Or whatever the value of the IRA is after the 30-day wait.

The other restriction is that you can do only one Roth conversion per year, which means that this year you can convert a Roth to a traditional IRA and back to a Roth. You'd have to wait until next year to do it again.

SNAPPER: A couple of things you must be aware of. You must make the switch within your account or by transferring directly from one tax-deferred account to another. You can't take a cash distribution from a Roth and then recontribute it. The second thing is that recharacterization rules require that the transfer from the Roth to the IRA include the earnings your contribution made while it was in the first account. Let's say you weren't reconverting a whole Roth; you did only a portion. You'd have to bring back those earnings made by that portion as well. You couldn't reconvert the principal and leave the earnings in the Roth.

Then there's the question of whether you should convert to a Roth at all. The most important thing to consider is that you have to pay the taxes up front. But basically, the longer you have before you'll need the money, the more beneficial it is to switch to a Roth. And those people who usually earn too much to qualify, if they had a real lousy investment this year and their income was down, this may be the year to do it. Or if you're in a low tax bracket now, do it because when you're retired, with pensions and benefits and everything, you could be in a higher tax bracket than you are today.

The other thing to consider, which is nice about a Roth, is that there are no mandatory distributions. So if you're wealthy, if you can grab a year when your adjusted income is under $100,000, that's a nice thing. You won't be forced to withdraw at age 70 1/2 as you would be with a traditional IRA. Then the Roth becomes part of your estate.

I just found out that I could be subject to the alternative minimum tax. Why would that be? Should I be concerned?

SNAPPER: The alternative minimum tax (AMT) is a parallel tax system that was put in place in 1986 by President Reagan so people couldn't get around paying income tax by using tax shelters and deductions. Basically, it's a tax rate of about 26% to 28%. But the only items you can deduct are mortgage interest and donations to charity. All taxpayers must calculate their tax bill both under the regular tax and under the alternative tax, and pay the higher of the two amounts.

MARK LUSCOMBE, principal analyst, federal and state tax group, CCH: One thing that can trigger the AMT is incentive stock options, especially in combination with state and local taxes, which are not deductible for the AMT. So if you're in a high-tax state like California or New York, you're more likely--other things being equal--to find yourself in an AMT situation.

If you have incentive stock options and you exercise them, you usually aren't taxed on them until you actually sell the stock. But if you're subject to the AMT, you're taxed based on the value of the stocks at the date of exercise. That could be a significant amount of money.

BATTAGLIA: If you know you're going to be in an AMT situation, there are things you can do to make the best of it. For instance, you normally wouldn't prepay state and local income tax because you're not going to get the benefit of the deduction. And you could accelerate some ordinary income, so you pay only 28% on it--but not so much that the AMT disappears and you end up paying 31%, 36% or 39.6%.

BRENDA SCHAFER, senior tax research coordinator, H&R Block: Keep in mind that if you pay the AMT in one year, you may be eligible for a credit against regular tax in a later year when you don't trigger the AMT. But this is when you need a good accountant.

I'm thinking about hiring an accountant this year. What qualities and credentials should I look for?

SCHAFER: Look for credentials such as enrolled agent or C.P.A. They're no guarantee, but they give you some assurance that the preparer has had adequate education and meets ethical standards.

LUSCOMBE: Talk about how aggressive the preparer is about deductions or expenses, and how that meshes with your feelings. One way to gauge that is how active he or she is in dealing with the IRS. Some audits are a good indication of experience; but if he or she's involved with lots of audits, that indicates some fairly aggressive positions.

Frequently, tax preparers get overburdened and file extensions. Ask the preparer if he or she frequently has to file extensions on behalf of clients because of the volume of work he or she has in April.

PUDNER: Ask associates in your profession for recommendations. Usually this gets you in touch with someone who works with people with similar needs and similar types of income to your own. Also, any tax preparer will probably give you a free half-hour interview. Ask whether he or she is a C.P.A., how big the practice is, areas of expertise, what the fees are. If you talk about your situation and the preparer is at a loss for words, look for someone with ideas.

BATTAGLIA: If you have a unique profession, let's say you're an actor, you don't want to go to somebody who doesn't have actors as clients. Or if you're an executive with stock options, you don't want to go to somebody who handles doctors and partnerships. I mean, you don't want to go be the guinea pig.

SNAPPER: It's also important to question the preparer about the size of his or her average client's assets. If his average client makes $1 million a year and you make $55,000, it may not make the right match. A little gray hair is sometimes not a bad thing either.

I earned more money this year than last, and now I notice that I lost a lot of my deductions. Did getting a raise end up costing me money?

SCHAFER: Many tax credits and deductions phase out at moderate to high incomes. In most cases, you have to calculate a modified adjusted gross income (MAGI), the definition of which changes for each deduction, credit or exclusion. If your MAGI or AGI falls within the phaseout range, you'll have to fill out a worksheet to determine how much, if any, of the credit, deduction or exclusion you qualify for. [See "Who Moved My Tax Credit?" on page 96 to find the income limits for various deductions.]

LUSCOMBE: If you're in the phaseout range, you still don't want to say to your boss, "Don't give me a raise this year because I might lose the child tax credit." Delaying a bonus from December to January, that's certainly the sort of planning you could do. But that takes monitoring your income and deductions during the year to anticipate where you're likely to be at year-end. And most people just don't do that.

I'm confused by all the deductions and credits available for my kids' education expenses. What's the best filing strategy?

SNAPPER: There are some nice educational credits to use. A tax credit reduces your actual tax, dollar for dollar. A deduction reduces the amount of income that is subject to tax, so a credit is worth more than a deduction. These credits are phased out when your modified adjusted income is between $40,000 and $50,000 for a single person and $80,000 to $100,000 if you file a joint return.

PUDNER: First I'll talk about the HOPE credit. Your child needs to be in college full time (12 credits) at least one semester and in the first two years of school. The maximum credit is $1,500; the first $1,000 is dollar for dollar of tuition, the next thousand is 50[Cents] on the dollar. So you must pay $2,000 toward education to get the full $1,500 credit. Another credit is the lifetime learning credit, which you can use not only in the first two years of school but also later and for grad school, continuing ed or vocational training. This credit is up to $1,000; but you get 20[Cents] on the dollar, so you get the full credit after you spend $5,000. You can take only one lifetime learning credit a year, but you can combine family members' tuition to add up to $5,000.

SCHAFER: You can use the HOPE credit in only two tax years. If you're paying less than $2,000 a semester in tuition, it may be worth waiting for the second semester of freshman year to take the HOPE credit. That way, that year you'll have two semesters of tuition to qualify for the credit, the second semester of freshman year and the first semester of the sophomore year. Next year you can take the full credit amount again for sophomore and the beginning of junior year. This way you get the credit for two full years' tuition rather than 1 1/2 years. You can take the lifetime learning credit for that first semester's tuition.

If you have more than one child in school, you can claim more than one credit. But you can use only one credit per child per return.

LUSCOMBE: If you used IRA or Roth money to pay for higher education expenses, you are no longer subject to the 10% premature-withdrawal penalty. You will have to pay ordinary income tax on the amount you withdrew. If you used Roth money, it won't be tax-free unless you're at least 59 1/2 and held the money five years.

In the future, if you have a choice between IRA money and Roth money, you'd probably want to use the IRA money--because that money would eventually be taxed anyway.

I maintain an office at home. Should I deduct it? What happens when I sell the house?

BATTAGLIA: There are rules you must follow to deduct your home office. First of all, if you're an employee, your home office has to be for the convenience of your employer, not just a desk you use in the evenings. You have to use it regularly and exclusively for business. If you have your own business in a home office, it's easier.

You can deduct things like a portion of your house insurance, security system, home repairs and maintenance, and garbage removal. You prorate the expenses based on the portion of your house your office occupies. Let's say I've got five rooms in my house. One room is used exclusively as a home office. Then 20% of these kinds of expenses will be deductible. I could also depreciate 20% of the house's value, if I owned it.

LUSCOMBE: And if you have your own business, you can actually deduct expenses that exceed your income. (They can't all be expenses from business use of the home. Office expenses that exceed income have to be carried forward to the next year.) That can help you out if, say, you want to use losses from a side business to offset salary income from a job. But if the losses become a pattern, the IRS begins to suspect that maybe you're not running the business for profit, that it's more of a hobby, in which case you can deduct only expenses up to your income and no more. Generally, the IRS presumes that your business is actually a hobby if you don't manage to show a profit in three out of five years.

SCHAFER: Claiming a home office is a valuable deduction because it reduces net income from your business and also reduces your self-employment tax. But when you sell your home, if you sell it at a profit, you generally will not be able to exclude the portion of the gain related to the home office. You'll pay capital gains on that part. For the part of the house that's not the office, you can exclude up to $500,000 in profit ($250,000 if you're single) from taxes as long as you owned and lived in the house for at least two of the past five years.

BATTAGLIA: You can always convert a home office back to personal use if you think you're going to sell in a few years and that the house will have appreciated significantly. So let's say I have a home office. I say to myself, "I've got this big gain. I can exclude up to $500,000 with my spouse. Since half of this house is my office, I won't be able to exclude half my profits from capital-gains taxes." You know what? I am going to move my business somewhere else, convert my home office back to a home and live that way for two years.

SNAPPER: There are certain people who talk about red flags that can trigger an audit. I'm not a big believer in red flags per se, but just so people know, three or four years ago the IRS started requiring you to file a separate form for home-office expenses. We used to just add it to the Schedule C as a line item. So if there were such a thing as a red flag, I think that claiming a home-office deduction would be one.

I'm supporting my parents, but they don't live with me. Can I still claim them as dependents? Can I deduct expenses related to their care?

SCHAFER: You can claim a parent as a dependent even if he or she does not live with you. But the irs will expect you to pass five tests before you claim anyone as a dependent.

--Relationship or member of household. This is a given, because your parent is a relative.

--Citizenship or residency. Your parent must be a U.S. citizen or a resident of the U.S., Canada or Mexico for some part of the tax year.

--Gross income. Your parent must not have gross income of more than $2,800 in 2000 [$2,900 in 2001]. That includes capital gains, gross rental income, self-employment income and all other taxable income. But the nontaxable portion of Social Security benefits or retirement distributions, for example, do not count as gross income.

--Support. Generally, you must provide more than half your parent's total support for the year. But if you got together with others--say, your siblings--to provide more than half your parent's support, and the other tests are met, one of you can claim the exemption. To do so, you must have provided more than 10% of the support and must obtain IRS form 2120, the Multiple Support Agreement, from anyone else (other than the parent) who provided more than 10% of the support.

--Joint return. A married parent cannot file a joint return unless both husband and wife would have no tax liability when filing separately. If the parents do file separately, you may claim the parent who meets the tests.

If you are single and supporting one or both parents, you may qualify to file as head of a household, which gives you a higher standard deduction and may put you in a lower bracket. You have to pay more than half the cost of keeping up a main home for a dependent parent for the entire year. Your home, a care facility or a nursing home all qualify as main homes.

PUDNER: You can deduct medical expenses for a parent for whom you are not allowed a dependency exemption. You have to pass all the IRS tests except for gross income. Then you can deduct any medical expenses, and in a lot of cases that's much more important than claiming the parent as a dependent. But the total medical expenses you claim--your parent's plus your own--are deductible only to the extent that they exceed 7.5% of your AGI.

When I file my return, I usually start strategizing for the year ahead. Any tips for next year?

LUSCOMBE: Make sure your withholding is in line. If you had to pay a lot of taxes this year or a penalty for underpayment, increase your withholding. But if you're getting a big refund, don't think that's so great. You've been making an interest-free loan to the government all year. So you should look at lowering your withholding.

SNAPPER: Think about adequate record keeping. People take, say, employee business expenses, and they get all nervous because they don't have records. If you kept adequate records, you'd be surprised by how much money you're paying.

Buy Quicken or a Quicken-like software package. If you stick to it for a little bit, it will be so much easier to prepare a tax return and you'll have a better idea of where your money is going. Also, you'll get the benefit of deductions you might not have taken in the past because you were nervous that you couldn't support them.

PUDNER: Make any IRA or Roth contributions as soon as you can. Once you've made them, all the earnings are tax deferred--and tax-free in the case of the Roth. If you've opened any tax-deferred education accounts for your children, such as an Education IRA or a 529 plan, fund them early in the year too.

BATTAGLIA: If you have to take a distribution from a traditional IRA, and you don't need the money, wait until December to make the withdrawal. That way it can grow for a longer time tax deferred, rather than taking it out in January and throwing it into a taxable account.

SCHAFER: If you have your own business, consider hiring your child. Be sure the child does real work and is paid at the rate you would pay another employee for doing the same work. You can deduct the child's wages and, unless your business is incorporated, you will not have to pay employment taxes on the child's wages until he or she reaches age 18. Your child may owe no tax on the earnings or may pay tax at a lower rate than yours.

Additional reporting by Katherine Zamira Josephs