By Kay Bell Bankrate.com
February, 2007
Tax time is tension time. You have the hassle of pulling together all the material so you can file. Then there's the actual filling out of the forms. And if you owe, that's a whole different set of worries.
Sometimes that final dollar amount, whether it's a check you write to Uncle Sam or one he sends to you, is affected by mistakes made on returns. And even if a mistake doesn't cost you cash, it could delay the receipt of any refund you're expecting.
To get exactly what you should from the IRS -- and as quickly as possible -- look out for these filing pitfalls. Some are new, thanks to recent law changes. Others are perennial problems taxpayers face each filing season. With a little care, you can avoid them all.
1. Wrong numbers on phone tax refund
It sounded like a no-miss tax break. Everybody who had long-distance phone service from March 1, 2003, through July 31, 2006, would get a refund of the federal excise tax that was collected during that service period. So why did about a third of the people who filed their returns earlier this year not claim it? Jim Keller, PPC executive editor, tax, for Thomson Tax & Accounting, calls the ignored refunds "a startling statistic."
1. Wrong numbers on phone tax refund
It sounded like a no-miss tax break. Everybody who had long-distance phone service from March 1, 2003, through July 31, 2006, would get a refund of the federal excise tax that was collected during that service period. So why did about a third of the people who filed their returns earlier this year not claim it? Jim Keller, PPC executive editor, tax, for Thomson Tax & Accounting, calls the ignored refunds "a startling statistic."
"This should be something that's purely straightforward," says the Fort Worth, Texas-based Keller. "It's not really rocket science."
An easier question to answer might be why some people are filing incorrect claims for the refund, which is available for 2006 taxes only. Although the tax break is indeed easy if you use the standard amounts established by the IRS, some taxpayers are trying to get back the exact amount of long-distance taxes they paid during the qualifying 41-month period. This precise calculation could be confusing, causing filers to mistakenly enter the wrong amounts, such as their total phone charges for the rebate period instead of just the 3-percent excise tax amount. Others, however, are trying to claim illegally inflated amounts, says the IRS. The IRS already has cracked down on some alleged fraud attempts and is looking closely at all returns for any questionable phone refund claims.
An easier question to answer might be why some people are filing incorrect claims for the refund, which is available for 2006 taxes only. Although the tax break is indeed easy if you use the standard amounts established by the IRS, some taxpayers are trying to get back the exact amount of long-distance taxes they paid during the qualifying 41-month period. This precise calculation could be confusing, causing filers to mistakenly enter the wrong amounts, such as their total phone charges for the rebate period instead of just the 3-percent excise tax amount. Others, however, are trying to claim illegally inflated amounts, says the IRS. The IRS already has cracked down on some alleged fraud attempts and is looking closely at all returns for any questionable phone refund claims.
Tax Forms
Looking for help with taxes? You're in the right place. View and print the most current forms from the IRS.
- Form 1040
- Form 1040 EZ
- Form 1040 (Schedule A&B)
- Form 1040 (Schedule C)
- Tax Tables
- Tax Rate Schedule
- More Federal Forms
- State Forms
Although the standard claim amounts, which range from $30 to $60 depending on the number of exemptions listed on a filer's return, are relatively small, you'll be better able to avoid mistakes here by taking the set amount. And you'll save yourself a lot of time, too.
Business filers have one other phone refund factor to consider. Companies cannot use the standard refund amounts, but must file for an exact amount. To make the process somewhat easier for businesses, the IRS created a special formula. Instead of using all 41 months of eligible phone bills, the simplified calculation relies on information from April 2006 and September 2006 statements.
2. Extended deductions, added confusion
Three popular tax breaks that had expired -- state sales taxes paid, educators' out-of-pocket expenses, and tuition and fees -- were renewed last year. But because lawmakers took so long to reinstate the write-offs, they didn't make it onto 2006 tax forms. That's posing a problem for filers who still fill out their forms the old-fashioned way.
You'll not find any mention of these tax breaks, known collectively as extenders, on any paper forms. To claim them, you'll have to enter the deduction amounts on tax form lines that are officially designated for other deductions and then make special notations to indicate which of the late-approved breaks you're claiming. "I expect this could trip people up more than the telephone refund," says Keller.
The easiest one to deal with is the itemized deduction for sales taxes paid. This goes on Schedule A where the state income tax deduction is usually claimed. But the teachers' expenses and tuition and fees breaks are odd, says Keller, in that they will go on lines that are already coded for something else that's not remotely related to either of these extended deductions.
If you're claiming any of these three tax breaks, be sure to read the forms' directions carefully. Bankrate also offers filing guidance. Or you can do your taxes on your PC. Most tax preparation software companies have updated their programs to account for the deductions and necessary notations.
3. Triple direct deposit dangers
Also new for 2006 taxes is the option to directly deposit your refund into three accounts. But the more numbers you enter on a tax form, the more chances you have to enter them incorrectly. And a wrong account or routing number could cause you to lose your refund entirely.
Business filers have one other phone refund factor to consider. Companies cannot use the standard refund amounts, but must file for an exact amount. To make the process somewhat easier for businesses, the IRS created a special formula. Instead of using all 41 months of eligible phone bills, the simplified calculation relies on information from April 2006 and September 2006 statements.
2. Extended deductions, added confusion
Three popular tax breaks that had expired -- state sales taxes paid, educators' out-of-pocket expenses, and tuition and fees -- were renewed last year. But because lawmakers took so long to reinstate the write-offs, they didn't make it onto 2006 tax forms. That's posing a problem for filers who still fill out their forms the old-fashioned way.
You'll not find any mention of these tax breaks, known collectively as extenders, on any paper forms. To claim them, you'll have to enter the deduction amounts on tax form lines that are officially designated for other deductions and then make special notations to indicate which of the late-approved breaks you're claiming. "I expect this could trip people up more than the telephone refund," says Keller.
The easiest one to deal with is the itemized deduction for sales taxes paid. This goes on Schedule A where the state income tax deduction is usually claimed. But the teachers' expenses and tuition and fees breaks are odd, says Keller, in that they will go on lines that are already coded for something else that's not remotely related to either of these extended deductions.
If you're claiming any of these three tax breaks, be sure to read the forms' directions carefully. Bankrate also offers filing guidance. Or you can do your taxes on your PC. Most tax preparation software companies have updated their programs to account for the deductions and necessary notations.
3. Triple direct deposit dangers
Also new for 2006 taxes is the option to directly deposit your refund into three accounts. But the more numbers you enter on a tax form, the more chances you have to enter them incorrectly. And a wrong account or routing number could cause you to lose your refund entirely.
The new form to divide your refund into three accounts is Form 8888, which you send in with your individual return. It's not a difficult document to complete, but if you put in wrong account numbers, your refund could end up in someone else's account or be sent back to the IRS. Either way, you might not be able to retrieve your refund, since there is no IRS procedure for replacing such lost electronically transferred funds.
Also remember that the IRS can correct errors, such as a miscalculated amount, that you make on your return. If the change reduces your refund amount, the IRS has a specific procedure for determining how the lower amount will be deposited. "Any adjustments come from the bottom up," says Keller, "starting with a line 3 then from line 2 and then the first account."
This could pose a problem if one of your direct deposit accounts is an individual retirement account. "There are no rules for a normal refund, but there are rules for IRAs, and they are fairly strict," says Keller. An unexpected change in an IRA deposit could cause problems with both the IRS and your financial institution that's accepting the direct refund deposit. To guard against that possibility, Keller suggests making an IRA the first account so it would be the least likely to be adjusted in case of error.
4. Fluctuating hybrid vehicle credits
On Jan. 1, 2006, a new tax credit for alternative-fuel vehicles went into effect. This change provides taxpayers who purchase an eligible environmentally friendly vehicle more tax savings than the previously allowed deduction.
However, the credit is not a fixed amount. It varies for each qualifying vehicle. Even more problematic is that once a manufacturer sells 60,000 IRS-approved autos, the credit amounts start phasing out. That's the case for Toyota, which last summer sold 60,000 hybrids, primarily its popular Prius model. On Oct. 1, 2006, the credit amounts for all the Japanese automaker's eligible vehicles were cut in half.
If you bought a Toyota or its Lexus brand hybrid in 2006, especially during the final quarter of the year, make sure you claim the correct credit amount. And if you bought another automaker's eligible alternative-fuel auto, take care to enter the correct amount; there are more than 40 hybrids and a handful of compressed natural gas vehicles that qualify, each with a specific allowable credit.
5. Complete charitable contributions
Did you give to charitable groups last year? All types of donations, from cash to cars, could be valuable tax deductions, so make sure you count them all when you file. Be sure to follow the donation tax rules, the most important being that you give to a qualified organization, that is, one that has tax-exempt status with the IRS. Also be careful when calculating any gifts of clothing and household items made after Aug. 17, 2006. A new law requires that these donations be in good or better condition or the deduction is disallowed.
6. Kiddie tax complications
A special tax law known as the kiddie tax applies to investment income from accounts held by young investors. In 2006, lawmakers changed the rules so that more teenaged account holders now face higher taxes on these earnings. Previously, once a child turned 14, unearned income was taxed at the youngster's lower tax rates. Now, the qualifying age is 18. Until they reach that age, any earnings in excess of $1,700 are taxed at the parent's ordinary income rate. This change was enacted in May 2006, but was made applicable to all of last year's earnings. So if your kids have investment accounts, make sure you calculate the taxes correctly.
Also remember that the IRS can correct errors, such as a miscalculated amount, that you make on your return. If the change reduces your refund amount, the IRS has a specific procedure for determining how the lower amount will be deposited. "Any adjustments come from the bottom up," says Keller, "starting with a line 3 then from line 2 and then the first account."
This could pose a problem if one of your direct deposit accounts is an individual retirement account. "There are no rules for a normal refund, but there are rules for IRAs, and they are fairly strict," says Keller. An unexpected change in an IRA deposit could cause problems with both the IRS and your financial institution that's accepting the direct refund deposit. To guard against that possibility, Keller suggests making an IRA the first account so it would be the least likely to be adjusted in case of error.
4. Fluctuating hybrid vehicle credits
On Jan. 1, 2006, a new tax credit for alternative-fuel vehicles went into effect. This change provides taxpayers who purchase an eligible environmentally friendly vehicle more tax savings than the previously allowed deduction.
However, the credit is not a fixed amount. It varies for each qualifying vehicle. Even more problematic is that once a manufacturer sells 60,000 IRS-approved autos, the credit amounts start phasing out. That's the case for Toyota, which last summer sold 60,000 hybrids, primarily its popular Prius model. On Oct. 1, 2006, the credit amounts for all the Japanese automaker's eligible vehicles were cut in half.
If you bought a Toyota or its Lexus brand hybrid in 2006, especially during the final quarter of the year, make sure you claim the correct credit amount. And if you bought another automaker's eligible alternative-fuel auto, take care to enter the correct amount; there are more than 40 hybrids and a handful of compressed natural gas vehicles that qualify, each with a specific allowable credit.
5. Complete charitable contributions
Did you give to charitable groups last year? All types of donations, from cash to cars, could be valuable tax deductions, so make sure you count them all when you file. Be sure to follow the donation tax rules, the most important being that you give to a qualified organization, that is, one that has tax-exempt status with the IRS. Also be careful when calculating any gifts of clothing and household items made after Aug. 17, 2006. A new law requires that these donations be in good or better condition or the deduction is disallowed.
6. Kiddie tax complications
A special tax law known as the kiddie tax applies to investment income from accounts held by young investors. In 2006, lawmakers changed the rules so that more teenaged account holders now face higher taxes on these earnings. Previously, once a child turned 14, unearned income was taxed at the youngster's lower tax rates. Now, the qualifying age is 18. Until they reach that age, any earnings in excess of $1,700 are taxed at the parent's ordinary income rate. This change was enacted in May 2006, but was made applicable to all of last year's earnings. So if your kids have investment accounts, make sure you calculate the taxes correctly.
