Tax Tips and Pitfalls
Here Are Some Tips For Finding Deductions

by Teena A. Takata


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As April 15th approaches, here are some tips for finding deductions (and some credits) - and a couple of suggestions for what to do if you owe the federal government and cannot pay the taxes in full by April 15th!

A Few Definitions (skip this if you are tax-savvy!)

Adjusted Gross Income - The number at the bottom of page 1 of Form 1040. For wage earners, this is your wages, interest income, capital gain income, taxable pension income and taxable social security income, with some deductions, such as deductible alimony or a deductible IRA (see Form 1040 for a complete list). For the self-employed, your net business income is included in adjusted gross income.

Tax Credit - An item allowed as a direct, dollar-for-dollar credit. Some new 1998 credits to consider are Hope Scholarship, Lifetime Learning, Child Credit. An old credit that still helps many, many people is Child Care Credit.

Itemized Deductions and Standard Deductions - Everyone is allowed a "standard deduction" - single people are allowed $4,250, married filing a joint return, $7,100, even a dependent child is allowed $700. If you are age 65 or older on December 31 of the prior year, add $650 ($1,300 if both spouses) to the standard deduction. To "itemize" you need over those automatic amounts of eligible expenses, for items such as home mortgage interest expense, taxes (real property [such as your home], deductible car license fees, state income taxes, charitable contributions). Certain other items such as medical expenses also are itemized deductions, but have to be more than 7 ½% of adjusted gross income before they start adding to the itemized deduction "bucket". Employee business expenses are similar, but they must exceed 2% of adjusted gross income to start filling the itemized deduction "bucket".

More Information is Available for Everyone, Anytime

First, our magazine is published on the internet - and federal and state agencies have internet sites with downloadable forms and instructions - the federal site is www.irs.ustreas.gov, and our state, California’s web site is at www.ftb.ca.gov/. Rumor has it these sites are very, very busy near tax time - so download in off hours if you can!

Identify expenses - If you itemize -

Deductions for Non-Itemizers

Tax Credits

If all else fails, and you cannot pay what you owe by April 15th - you can file the return with an Installment Payment Request (Form 9465). This is the IRS’s preferred approach.

You could also extend the tax return, and work hard at gathering the funds to pay the IRS by the extended due date or sooner, if possible (initially August 15, 1999, with one final extension available for good cause to October 15, 1999). Interest (at about 9%) and a late payment penalty of 1/2% each month applies.

Do not fail to file the balance-due tax return on time. The late filing penalty is 5% per month, with a maximum 5 month, or 25% penalty. (The failure to pay penalty of 1/2% a month also runs).


Teena A. Takata is a CPA who has worked primarily in the tax area for the last 20 years. Her firm specializes in tax planning (ie, minimization) for middle to small sized businesses, and also assists individuals and businesses who may not have filed for several years get current and back into the system. Her preferred small business accounting software is Quickbooks Pro, which she supports through email with many clients. She can be reached by email at Teena@besttax.com, but advises us she likely will not be able to answer tax questions from non-clients until after April 15th. If the above made your head spin, but you believe some opportunities may exist to minimize your tax, you may want to extend your return to provide you more time to study, and/or consult with a qualified tax preparer! We help educate our clients when they ask for help. You can also email Teena to sign up for her periodic newsletter, issued three to four times a year, that covers a variety of tax and business suggestions.

 


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Last modified: November 08, 2002