When it came to taxes, 1995 was a year of sound and fury.
In a much-ballyhooed bill, Congress promised to give tax breaks to families, to beat back taxes on capital gains and to make tax-favored individual retirement accounts available to all. It also vowed to do away with the so-called marriage penalty and to eliminate the Social Security tax that pushes middle-income seniors into a high tax bracket.
Yet in the end, no agreement on these ambitious plans was reached with President Clinton. And Washington insiders aren't optimistic about prospects for the bill's revival. Both parties simply get too much mileage out of the stalemate--particularly in an election year, when partisan politics peak.
For taxpayers, that's good news and bad news.
The bad news, of course, is that the breaks you may have been waiting for are not coming.
The good news? It should be easier to file your 1040 this year.
Still, there are a few items that can trip up even the savviest taxpayers, accountants say. That's because they are either new or fairly obscure, so a lot of people will simply overlook them--though such an oversight can cost you a bundle. Here are a few things you ought to be careful not to miss on your 1995 return.
* Nanny taxes. This year, for the first time ever, individuals who hire baby sitters or other household employees will be able to declare the employee's wages on the employer's 1040. That's a big departure from years past, when you needed to file no fewer than four forms with the federal government to report your worker's wages and to pay your half of his or her employment taxes. Now all you need to do is declare the taxes you owe on line 53 of your 1040 and include a Schedule H (household employment taxes).
Although the new rule makes things easier, it also makes it far more important that you comply. Failing to report an employee's income and taxes on your 1040 is tantamount to falsifying your tax return. If you do that on purpose, you will not only be fined, you could also be sent to prison.
* Deductions for job searches. If you were among the millions of people who were downsized, outsourced or otherwise jettisoned from a corporate job, you should know that most of the money you spent looking for new work is tax-deductible. That includes travel expenses, resume preparation, mailing, phone calls, fees for employment agencies and career counseling. These expenses are deductible even if you didn't find work. Medical exams to prove you are fit are also deductible, according to the Institute of Certified Financial Planners.
However, these expenses are classified as miscellaneous itemized deductions that can be claimed only if their total exceeds 2% of your adjusted gross income. So if you earned, say, $30,000 in 1995, you may only deduct miscellaneous expenses that total more than $600.
* Replacement residence reporting. If you sold a house--or lost a house in foreclosure--and didn't immediately replace it, you are likely to get a notice from the Internal Revenue Service asking whether you bought a house of equal or greater value in the 24 months after the sale, says Gary Iskowitz, partner at Iskowitz & Koo accountants in Los Angeles.
If you didn't, you must pay tax on the difference between the sales price and your tax basis--read "cost"--in the home. It's possible to have a taxable profit even when you lost your house in foreclosure. That's because your tax basis accounts for gains on previous residences that were then rolled into the purchase of your most recent residence. In other words, if you made a profit of $50,000 on your previous home, rolled that gain into the purchase of a new home but lost $40,000 when the second home was foreclosed upon, you still have a $10,000 taxable gain.
This rule isn't new, but strong enforcement of it is, Iskowitz says. The IRS' information-matching program has only recently become sophisticated enough to catch up with onetime homeowners. As a result, the agency is finding many people who failed to pay the appropriate tax.
* Points. Any points you paid to refinance your home are deductible over the life of the loan. But that deduction usually won't amount to much. If, for example, you refinanced and paid $2,000 in points on a 360-month (30-year) loan, you can write off $5.55 per month--$67 per year--on your income taxes. However, if you refinance a second time, any unclaimed points are immediately deductible, says Philip J. Holthouse, partner at Holthouse Carlin & Van Trigt in Los Angeles. If the person in the above example refinanced again after claiming $134 in deductions for refinance points, he or she would get to write off the remaining $1,866 in the year of the second refinancing--not to mention the pro rata share of points for the new mortgage.
