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Do your homework

Rule changes and obscure breaks abound in the Tax Code this year. Claiming your due requires intensive deduction.

March 25, 2007|Kathy M. Kristof | Times Staff Writer

Pity the taxpayer who tries to go it alone this year.

What with stealthy deductions, rule changes and the usual stultifying complexity, taxpayer error rates are climbing.

And if you make a mistake, it's likely to be in the government's favor, not yours.

There are plenty of pitfalls. Three specialized breaks aren't printed on the 1040 form, making them easy to overlook. The Internal Revenue Service says that about 30% of this year's early filers failed to claim a one-time telephone tax credit that almost everyone is eligible for. And more people had capital gains last year than ever before -- which frequently trigger the Byzantine alternative minimum tax.

It's not too late to call in a professional. But if you decide not to, keep reading:

Three deductions aren't on the 1040 this year because they were returned from the brink of extinction in late December, long after the IRS had printed the 2006 forms. Those who qualify must write them in. The details:

* Teachers can write off up to $250 in out-of-pocket costs for classroom supplies. This deduction used to be on line 23 of the 1040. Teachers can write it in on line 23, which on this year's form mysteriously reads, "Archer MSA deduction."

* Singles earning less than $65,000 and married couples earning less than $130,000 can deduct up to $4,000 in education expenses for qualified tuition and related expenses for themselves, a spouse or dependent. To claim this one, write it in on line 35 -- which is labeled "Domestic production activities."

* People who pay more in sales tax than in state income tax can choose to write off the former rather than the latter as an itemized deduction. This deduction is claimed on Schedule A on the line asking for state and local income tax. If you're claiming sales tax, write a big "S" on this line.

Taxpayers who have already filed their returns have made a huge number of errors, the IRS says. The agency blames confusion about new credits offered this year and tweaks to rules governing longtime breaks. What you need to know:

* The telephone excise credit, a refund of a 3% federal excise tax on long-distance calls that was revoked last year, is available to every taxpayer who has a phone. About one-third of the 30 million who had filed by early February failed to claim it -- and about half of those returns were completed by professional preparers.

It's not a big break: Singles get a standard $30, while a family of four gets $60. Taxpayers may be able to claim more if they dig up their phone records for the 41-month period that ended last July 31. If so, they must fill out a form to prove that the amount of tax they paid exceeds the standard amount. Either way the credit is claimed, it's worth claiming.

* If you made energy-saving improvements to your home in 2006, you may be entitled to one or more credits that would pay you back 10% to 30% of what you spent. These credits are treated like prepayments of tax and are claimed on line 52 of the 1040.

The maximum amount will depend on the property purchased or improved. The total credit for replacing windows is 10% of the amount spent, to a maximum of $200; for air-circulating fans, it's 10% to a maximum of $50; and for water heaters it's also 10% of the expense, up to $150.

Those who retrofit for solar power get even more: up to 30% of the amount paid for photovoltaic or water-heating equipment. The maximum credit is $2,000.

* Charitable contributions of personal property -- clothing, furniture, cars, etc. -- have long been deductible but Congress changed the rules to require greater substantiation and impose stricter limits. Any gift of personal property that isn't in "good" condition can't be deducted unless it's worth more than $500 and has been properly appraised.

* Congress also changed the "kiddie tax" rules. In the past, children under 14 had to pay tax at their parents' rates if they earned more than $1,700 in investment income in a given year. Now this applies to children under the age of 18, who are far more likely to have wage income and file on their own. To figure a child's tax in cases like these, use form 8615.


Congress has tried to protect folks who aren't super rich from the alternative minimum tax by passing what it calls a patch to restrict the tax's reach. So far, it isn't working very well.

Created more than 30 years ago to ensure that the very wealthy paid their fair share and didn't take undue advantage of loopholes, the alternative tax has never been adjusted for inflation.

So now it can kick in for middle-class families with many children, large medical bills, high state income taxes or substantial capital gains. People who might be affected have to calculate their tax twice, once under the regular rules and once under the alternative rules, and they have to pay the higher amount. (The top tax rate under the alternative formula is less than the regular formula's top rate, but the alternative method also eliminates many write-offs, such as the one for state income tax.)

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