THE LAW: MOSTLY QUIET ON THE IRS FRONT
Tax season doesn't always have to be something to fear. In fact, this year, the news is relatively good: There is no tax overhaul to fret over. But while most things are the same, there are a few changes that can provide plenty of trouble for people who don't look closely.
For 1996 taxes, there are still five brackets: 15%, 28%, 31%, 36%, and 39.6%. Because the tax rate schedules are routinely indexed for inflation, however, they're a little different this year. For example, if you're married filing a joint return, you jump from the 31% to the 36% tax bracket when your taxable income hits $147,700 in 1996, up from $143,600 in 1995. So you won't have to feel the pain of a higher tax bracket as quickly. A single person hits the 36% tax bracket with taxable income of $121,300 in 1996, up from $117,950 in 1995.
CLASSES AND CARS. Personal exemptions are now each worth $2,550, up from $2,500. That means you can reduce your income by $2,550 for yourself, your spouse, and each dependent. For instance, if you are married with four children, you can reduce your income by a total of $15,300. To prevent fraud, you must list the Social Security number for each dependent born before Dec. 1, 1996.
For years, Congress has sought to reduce itemized deductions for wealthy taxpayers. In 1996, the taxable income level at which itemized deductions begin to be reduced by 3% is raised to $117,950, up from $114,700 in 1995. The threshold is higher because it's indexed to inflation. Say your taxable income is $217,950 in 1996. The difference between $217,950 and $117,950 is $100,000. So you must trim your itemized deductions by 3% of $100,000, or $3,000.
And those who have enjoyed employer-paid educational assistance can now exclude $5,250 from their gross income in tuition paid by their employer, which was previously taxable. The change is retroactive to 1995, meaning it might pay to file an amended 1995 tax return. For example, if you're in the 31% tax bracket and your employer reimbursed you at least $5,250 during 1995, then you would be due a refund of $1,628 (31% of $5,250) from your amended return.
Say you use your car for business. This year, you'll get a bit of a break on auto mileage. The rate was 30 cents per mile in 1995. For 1996, it's 31 cents per mile and will be 31.5 cents per mile in 1997. But to protect yourself in an audit, you must keep a log of customers seen, the business purpose of the trip, and the number of miles traveled.
FUND FACTS. If you've joined the mutual-fund bandwagon, you're probably getting a flood of 1099 forms in the mail. These are statements that indicate the amount of capital gains the mutual funds have distributed to you, as well as a summary of every transaction you completed during 1996. You need to collect the data for each transaction, including selling price per share and cost per share, and report it on Schedule D of your 1040.
As a newcomer to mutual funds, the task will probably be easier because the major mutual-fund families are providing more cost data than before. Cost data allow you to compare the price of the shares you sold with what you paid for them. If you've owned the mutual funds for more than five years, then it's unlikely that the fund can provide you with the information directly on your yearend statement. So you'll have to call the fund family's 800 number to retrieve the old data.
The record-keeping is a lot simpler if you sold individual shares of stock. If you don't have a record of the price you paid, call your broker for the data. Don't forget to include the commission you paid in the cost of the stock, which reduces your profit. And make sure you take into account stock splits. If your broker doesn't have the information because you weren't a client at the time, then as a shareholder, you can call the company and request the data from the investor-relations department or your previous broker.
The rules on capital gains and losses: You can offset capital gains with capital losses dollar for dollar. In the unlikely event that you've ended up with more capital losses than capital gains, you can use the balance to offset up to $3,000 in ordinary income from salary, interest, and dividends.
Of course, tax preparation is never a task to relish, but this year's minimal changes are bound to make tax season a bit more pleasant than it could have been. And when it comes to taxes, we need to be thankful for even the smallest gifts.
By Stuart Weiss
Updated June 15, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.