There's Still Time to Cut Your Tax Bill
And they're off.
With April 15 less than a week away, tax procrastinators are racing againstthe clock. While there's little you can do now to reduce income or increasedeductions, saving for retirement or itemizing deductions can be excellentways to produce last-minute savings.
Don't worry -- you're not alone. The Internal Revenue Service expects toreceive 34% of the nearly 130 million returns in the last week of filing,with nearly a full quarter of all returns filed on the last day. But usecaution. "Haste makes waste. You could shortchange yourself and miss out on anumber of deductions if you aren't careful," says David Silverman, anenrolled agent with David J. Silverman & Co. in New York.
One way taxpayers can directly affect their tax burden is to contribute to an individual retirement account, or IRA. "While most things for tax year 2001 had to have been done by Dec. 31, IRA contributions are one of the exceptions," says Don Roberts, an IRS spokesperson.
Taxpayers have until April 15 to make contributions to an IRA and can deductup to $2,000 for the tax year 2001 -- many people forget this. According to astudy from Fidelity Investments, 84% didn't know about the April 15contribution deadline, while 76% weren't aware of the $2,000 deductionthreshold.
Even the savviest people overlook deductions for contributions to a spousalIRA, Roberts says. Under this scenario, one spouse works and saves forretirement, while the other has little to no income and, therefore, cannot.To encourage both to save, the government allows spouses to contribute on theother's behalf -- allowing for a deduction of up to $4,000. "As long as thespouse has enough earned income to cover both, then you can put in for both,"Roberts says.
But not everyone is eligible to take a deduction for an IRA contribution. Ifyou're not covered by a pension plan, then you may be able to take a deduction.Otherwise, eligibility is based on income. Singles with income under $33,000or marrieds under $53,000 can take the full deduction, but those who makemore than $43,000 filing single or $63,000 for marrieds filing jointlyreceive no deduction. (For more on this topic, read K.C. Swanson's
"Taxes in2002: Retirement Plans.")
Not-So-Standard Deductions
Itemizing your deductions could also produce savings. This year thestandard deduction is $4,550 for single filers and $7,600 for married filingjointly. (The blind and those over age 65 receive an extra $900 for marriedfiling jointly and $1,100 for filing single.) "You should do it both ways andsee which saves you the most," says Alan Kahn, president of the AJK FinancialGroup in Syosset, N.Y.
The first step is to use Schedule A on Form 1040 to see if you've spent moneyon a tax-deductible expense. "The easiest thing you can do is take the moneyyou've already spent and make it deductible," says Larry Foster, partner inthe accounting firm Richard A. Eisner.
One area could be extremely popular this year: charitable donations. Andbecause of the deluge of donations contributed to various charities afterSept. 11, the IRS altered the rules on claiming such donations for 2001.Usually, the IRS requires a receipt for any donation exceeding $250, but nowtaxpayers have until Oct. 15 to obtain a receipt or show proof you tried toobtain one. "Some charities that received a lot of donations were not able toget out receipts by the filing deadline," says Roberts. "We wanted to givethem some relief."
Medical expenses in excess of insurance coverage are deductible, but only to the extent that they surpass 7.5% of your adjusted gross income. While this is ahigh hurdle for some to clear, the IRS lets you count a variety of expenses --such as a recently added deduction for weight-loss programs. Also,medical-related travel expenses add up fast, because they're deductible at14 cents a mile. "You can even take a deduction if you flew cross-country tosee a specialist," Foster says, adding that a companion's flight andovernight hotel stays are also deductible.
The section for miscellaneous deductions offers a great deal of leeway andflexibility, especially for the unemployed and self-employed. From paperclips to printing costs, you can deduct all expenses related to a job searchor maintaining a business at home, but you may only deduct the amount thatexceeds 2% of your adjusted gross income.
And "people always forget these common deductions, like student loaninterest, mortgage interest and interest on home equity loans," Kahn says,adding that state and local income taxes withheld from your salary during thecourse of the year are also deductible.
Pitfalls and Pointers
After weighing the options, avoid common mistakes such as entering the wrongSocial Security number, sending unsigned forms or adding incorrectly.
And be aware of a common error related to the tax rebate checks given outover the summer. If you received the maximum benefit -- $300 for those filingsingle and $600 for those filing married -- leave line 47 on Form 1040 blank."That line is for people who may be entitled for more money," says EricTyson, author of
Taxes for Dummies
.
With time at a premium, mistakes can be avoided by filing electronically,using either software or an online tax preparer. It's quicker, there are notrips to the library or post office to unearth forms, and the step-by-stepinstructions often catch overlooked deductions and errors. "Returns arescreened. If the Social Security number is wrong, then it won't be accepted,"says Roberts.
If all else fails, you can get a four-month extension, which can be obtainedby filing Form 4868 or calling 1-888-796-1074. But be aware: To avoidinterest and penalties, make sure you pay at least 90% of your estimated taxburden. "If you can't get it done, file an extension," Silverman says. "RuleNo. 1 is don't have it go in late."
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