Personal Business: Taxes
DON'T GET TRIPPED UP BY LAST-MINUTE TRAPS
Whenever you make a mad dash to beat the Apr. 15 tax deadline, you're apt to make mistakes. But now, there's a greater risk of last-minute missteps catching an eye at the Internal Revenue Service.
The reason is a spate of tax-law changes that make preparing returns for 1991 "more complicated," says Bonnie Grisz, senior manager in the Dallas office of accountants Arthur Andersen. Now, the taxpayer must perform extra calculations on new worksheets buried in the Form 1040 instructions. People who do their returns manually "are used to focusing on what's on the return itself," says Michael Kennedy, tax partner in charge of the Philadelphia office of Coopers & Lybrand. "Going off of the return can be tricky."
For instance, 1991 returns are the first on which you can't actually deduct all the itemized deductions you list on Schedule A. Not, that is, if your adjusted gross income (AGI) is over $100,000. Such taxpayers have to find a 10-step worksheet on page 42 of the long-form instructions. You use it to reduce deductions by 3% of the amount of AGI over that ceiling. But some deductions are spared, and you can still keep 20% of the amount of those affected.
Even exemptions are no longer simple enough to be worked out on Form 1040 alone. If your AGI for 1991 is more than $75,000, you have to use a worksheet on page 24. It lists different cutoffs for each filing status (such as married filing jointly--$150,000) and takes you on an eight-step trek toward reducing each exemption's value; the amount of the cut is 2% of each $2,500 step over your threshold.
Tax procrastinators who also happen to be new parents face another hurdle. To justify a $2,150 dependent exemption, Congress has decreed that even a one-year-old must have a Social Security number. There's a $50 fine for omitting it, although the IRS suggests that you might be spared by noting you've applied for a number.
OLD SCORES. People who think about taxes only once a year might unwittingly take some deductions that died with the 1990 tax year. If these slip past a preparer and if the IRS takes a few years to catch up with them in an audit, the interest and penalties could prove costly.
On returns for 1991, there's not even a partial deduction anymore for "personal interest," such as on credit-card balances or car loans. And the deduction for investment-interest expense--the kind you pay to a brokerage house when you buy stocks on margin--"is limited to the taxpayer's net investment income," notes the 1992 U.S. Master Tax Guide from Commerce Clearing House.
Some taxpayers may be disappointed, too, to learn that hair transplants, face-lifts, and other "unnecessary" cosmetic surgery no longer count as medical deductions. But surgery needed to correct a disfiguring accident still qualifies, says Martin Shenkman, a Teaneck (N.J.) tax lawyer who writes for Bender's Federal Tax Service.
If the alternative-minimum tax hasn't been part of your life before, you might not know if it is now. The AMT makes you add back deductions and tax-favored income, such as that from exercising incentive stock options. You have to pay the AMT if it comes out more than your regular tax. So because Congress raised the AMT for 1991 from 21% to 24%, it's apt to snare people who haven't planned ahead to avoid it.
STOP THE CLOCK. It doesn't take anything new or out of the ordinary to trip up many otherwise-savvy taxpayers every year, says Coopers' Kennedy: That's because "a lot of people don't pay attention to the geography of the return." Often, when they report their income from a money-market fund, they enter it in the part of the return that is meant for interest.
They probably got that idea from the fund's ads. But while money-market funds invest in Treasury bills and other instruments that pay interest, the IRS classes what the funds pay out to you as dividends--and dividends go on a different line.
If such complexities leave you feeling less than ready by Apr. 15, you can send a check for what you estimate you owe and ask for an automatic four-month filing extension on Form 4868. One advantage of that, adds Andersen's Grisz, is that you gain extra time to "establish a Simplified Employee Pension (SEP) plan if you're self-employed" or feed a Keogh retirement plan that you opened before the end of 1991. Either way, it could mean a 1991 deduction of up to $30,000.D. J. EDITED BY AMY DUNKIN