Herb's Corner

There’s no argument over taxes

By Herb Drill

Star Trek: Deep Space Nine is probably only seen on Saudi Arabian TV, but I’ll bet “Quark” and his fellow Farengee still argue over rules of acquisition - and taxes. The Internal Revenue Service ( IRS ) doesn’t argue over this point: if you utilize a tax preparation service, find a professional ,because you’re responsible for the return.

For those of us who are disabled or have a child with a severe learning disability, ADHD, or other physical, mental, or emotional impairment, you may qualify for tax benefits. IRS claims it's likely 15-30% of families with a disabled child have at least one unclaimed benefit. Because tax laws are complex, and many tax preparers don’t have occasion to use them, families may lose thousands of dollars in refunds. A guide (SchwabLearning.org) summarizes significant federal income-tax benefits, but isn’t professional advice. Give a copy to your tax advisor, and explore potential state income-tax benefits.

We’ll expand on that later.

The taxman’s overall No. 1 tip is: “Get a head start; early filers get refunds sooner. Plus, e-filing catches math problems, confirms your return was received, and gets a faster refund. You must have records, including W-2s and 1099s. Get the right forms, available 24/7/365 at www. IRS .gov. If you have questions, try www. IRS .gov, or call 1-800-829-1040 . The U.S. Dept. of the Treasury wants more taxes via the Electronic Federal Tax Payment System, or EFTPS. Either way, you must file if your income is above a certain level, based upon filing status, age, and type of income. You should file if federal income tax was withheld from your pay, or you qualify for:

· Earned Income Tax Credit for eligible low-income workers.

· Child Tax Credit if you have three or more qualifying children, or if you have earned income that exceeds $10,750.

· Health Coverage Tax Credit for those receiving Pension Benefit Guaranty Corp. funds.

Marital status on Dec. 31 covers the year. If more than one filing status applies, you may choose one that gives you the lowest obligation:

· Generally, if you’re unmarried, divorced, or legally separated based on your state law, you’re Single.

· If married, you and your spouse may file jointly. If your spouse died this year and you didn’t remarry, you may file jointly with that spouse for the year of death.

· Married taxpayers may file separately.

· Head of Household must be unmarried and paid more than half the cost of maintaining a home for you and a qualifying person.

· Qualifying Widow(er) with Dependent Child - If your spouse died, you have a qualifying child and meet certain other conditions, you may choose this.

See Publication 501 - Exemptions, Standard Deduction, and Filing Information at www. IRS .gov, or call 1-800-829-3676 .

Forms for filing individual returns are 1040EZ, 1040A, and 1040. If you’re filing on paper, use the simplest form to cut errors that may cost you money. You may use 1040EZ if: taxable income is below $100,000, status is Single or Married Filing Jointly; you’re under 65; you don’t claim dependents, or interest income is $1,500 or less. You may use 1040A if: taxable income is below $100,000; you have capital gains; you claim certain credits, or have IRA contributions, student loan interest, or higher education tuition and fees. You may use 1040 if you can’t use either a 1040EZ or 1040A. You must file 1040 if: taxable income is $100,000 or more; you itemize deductions; you’re self-employed, or reporting income from the sale of property. Publication 17 - Your Federal Income Tax, helps prepare tax forms. It’s at www. IRS .gov, or call 1-800-829-3676 .

You should receive a W-2 (Wage and Tax Statement) from each employer. Employers must furnish this no later than Jan. 31. If you don’t get it, contact the employer. If you don’t get it by Feb. 15, contact the IRS at 1-800-829-1040 . When you call, have the employer's name and address; employer’s telephone number; your name and address; Social Security number; your telephone number; estimated wages earned; federal income tax withheld, and the dates you began and ended employment. If you lost your W-2, your employer can send a “reissued statement” and charge for it. If you can’t get a W-2 by the filing deadline, you may use Form 4852, but it will delay any refund while the information is verified. If you receive a corrected W-2 after you filed and it doesn’t match the income or withheld tax reported, you must file Form 1040X (Amended Return). Forms 4852 and 1040X and instructions are on www. IRS .gov, or call 1-800-829-3676 .

You may get a Form 1099 to add to your return, provided by the payer, and you should get it (them) by Jan. 31. If you’re missing one after that, contact the payer. If you don’t have it by Feb. 15, call the IRS at 1-800-829-1040 . You may obtain 1099 data from other sources; i.e., your bank may summarize the year’s interest paid on the December or January statement for your savings or checking account. You will not attach a 1099 to your return, except when you receive a 1099 that shows income tax withheld. You should keep a copy of all 1099s with your tax records.

Whether to itemize deductions reflects how much you spent on medical care, mortgage interest, taxes, charities, casualty losses, and miscellaneous The standard deduction is more for taxpayers 65 or older, or who are blind. If itemizing manually seems too hard, buy software like TurboTax, or hire a CPA.

Nothing is better than funding tax-advantaged savings vehicles and flexible spending accounts. It's easier than ever to use FSAs since many employers report your out-of-pocket costs directly to plan administrators, which reimburse you with no further paperwork.

The IRS says that if you file 1040 and itemize deductions on Schedule A, there are four types of deductible non-business taxes: State and local income taxes, real estate taxes, personal property taxes, and foreign income taxes. You can claim a deduction for either income or sales taxes, or any estimated taxes paid to state or local governments. If deducting sales taxes instead, you may deduct actual expenses or use IRS tables to determine your deduction. Sales taxes paid on motor vehicles and boats may be added to the table amount, only up to the amount paid to the general sales tax rate.

Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your taxes to local governments out of this, you can deduct the amount actually paid during the year. Normally, your lender will send a 1098 - Mortgage Interest Statement with this information by Dec. 31.

Let’s return to the disability issue.

The Americans with Disabilities Act Title I prohibits private employers with 15 or more employees from discriminating against a qualified individual with a disability. IRS Section 44 creates a credit to help small businesses cover ADA-related eligible access costs. A business that for the previous tax year had either revenues of $1 million - more or less, or 30 or fewer full-time workers may use this credit, equal to 50% of the eligible access expenditures in a year that exceed $250 but aren’t more than $10,250. The maximum credit is $5,000. It can be used to cover costs including barrier removal, interpreters, or providing or modifying equipment. The expenses must be associated with required adaptations to existing facilities, and the credit isn’t available for costs of new construction (www.ada.gov).

IRS Section 190 allows any size business to expense up to $15,000 per year items that normally must be depreciated. It may be used for costs tied to the removal of architectural or transportation barriers at a business that complies with applicable accessibility standards. The two incentives can be combined if the expenditures qualify under Sections 44 and 190.

Also, IRS issues so-called “Revenue Rulings,” interpretations that are binding policy, and tax professionals rely on them in advising clients about tax liabilities and benefits. For example, Revenue Ruling 78-340 authorizes a deduction for tuition or tutoring fees paid for a child with a severe learning disability who was attending a special school at the recommendation of the child’s doctor. Caretakers - such as grandparents or aunts, and non-relative caretakers - such as foster parents, may qualify for tax benefits.

If you’re an employee and have a physical or mental disability that limits your employment functionally, or a physical or mental impairment that limits one or more of your major life activities substantially, you may be able to claim impairment-related work expenses. If so, complete Form 2106 - Employee Business Expenses, or Form 2106-EZ - Unreimbursed Employee Business Expenses, and attach it to Form 1040. Publication 529 - Miscellaneous Deductions contains more detailed information.

As for the U.S. Dept. of Justice, it provides small businesses with a Tax Incentives Packet on ADA tax benefits to help firms comply with the law. The packet details credits and deductions available to businesses of any size to help offset some costs of improving accessibility. It includes a list of ADA publications available free, and telephone numbers and Internet sites to answer questions. Call the ADA Information Line at 800-514-0301 (voice), or 800-514-0383 (TTY). Specialists answer questions 10 a.m.-6 p.m. eastern time, and an automated service is available 24/7 for publications. ADA has information and publications day or night (www.usdoj.gov/crt/ada).

· If it applies, you may take the Credit for the Elderly or Disabled if you’ll be 65 or older at Dec. 31, 2006 , or retired on permanent and total disability. It’s a dollar-for-dollar reduction of your tax bill - $1,125 maximum.

Here’s more advice:

IRS says review accuracy and detail. Use the peel-off address label and make necessary corrections. Put your Social Security number in the box provided, and check only one filing status and appropriate exemption boxes. Enter correct Social Security numbers for each of those exemptions. Make sure the financial institution routing and account numbers for direct deposit of a refund are accurate, and sign and date the return. If filing a joint return, both spouses must sign and date the return. Attach all Forms W-2 and other forms that reflect tax withheld to the front of the return.

For a complete checklist and some of the most common errors, see Tax Topic 303 - Checklist of Common Errors When Preparing Your Tax Return, at www. IRS .gov, or call TeleTax at 1-800-829-4477.

Due to oil and gasoline prices, IRS raised the mileage deduction to 48.5 cents per mile. For medical- and move-related mileage, the rate is 15 cents per mile, while the deduction for miles driven for charity is 14 cents. MONEY Magazine argues the best tax news is what you make by avoiding costly mistakes and unearthing opportunities to save buried in your return:

1. Embrace your computer. Turbotax.com, Taxact.com, and Taxcut.com support e-filing.

2. Make Roth or traditional IRA deposits up to April 15.

3. Hurricane victims can deduct casualty losses and make penalty-free IRA withdrawals. Volunteer drivers can deduct 34 cents a mile versus the typical 14 cents; if you housed victims for at least 60 days in a row, you can deduct $500 per person; gifts made to any charity after Aug. 28, 2005 are fully-deductible.

4. There’s a $1,000 credit for a child under 17 if your adjusted gross income is under $110,000 for a married couple or $75,000 for a single parent. If you pay someone to watch children under 13, you may qualify for the child care credit.

5. Qualified medical costs over 7.5% of your AGI are deductible: prescribed weight loss programs, stop smoking classes, acupuncture, chiropractic care, therapy, braces, eyeglasses, and lead paint removal if you have a kid at home. See IRS Publication 502 for a list.

6. If you refinanced, deduct your origination fees and discount points. You must spread the deduction over the life of the loan.

7. Work at home and you may write off your home office. It must be your principal place of business, and you can't use the room for anything else.

Do you owe tax? Enclose a check or money order made payable to the “United States Treasury” and Form 1040-V - Payment Voucher, if used. Or, you may pay by credit card by contacting one of the credit-card service providers.

After this taxing discussion, we have a profound question you won’t find at www.irs.gov: “Why does a slight tax increase cost you $200, and a substantial tax cut saves you only 36 cents?”