| BUSINESSWEEK ONLINE : FEBRUARY 1, 1999 ISSUE | ||||||||
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| PERSONAL BUSINESS
Taxes: Now, What Did I Forget... Before you sign that return, here are 10 things your accountant needs to know It's Apr. 14, and you've just left your accountant's office. You're feeling lightened of your tax load, ebullient almost. Your accountant did a bang-up job; you're even due a refund. Those irksome auditors can't touch you. Or can they? Maybe you forgot something. Accountants after all are neither omniscient nor psychic. ''People change, circumstances change,'' says Richard Sklar of Weikart Tax Associates in New York. ''Unless the client tells us things have changed, we still think of this person as being a wage-earner, getting a W-2, and not having much to deduct. The fact that the client just got a $75,000 book advance but has never written a book before--you don't think of the client in that way.'' The message? Financial pitfalls await taxpayers who fail to account for life changes over the past tax year. So, based on tales told by tax professionals, here are some things you need to remember come tax time: 1 An Inheritance One accountant tells the tale of the client whose brother died, bequeathing him a generous U.S. savings bond inheritance. The client cashed the bonds and, on his own return, dutifully included a 1099 income report for $12,000 in interest. But because the brother died early in the year and had a modest income, the client should have put the interest on his late brother's return, instead of his own. The income thus would have been taxed at a 15% rate instead of the surviving brother's 31%. Paying close attention to inheritances is also key at tax time because beneficiaries enjoy any tax benefits the estate hasn't used. Say the estate sold securities and took a capital loss. The beneficiaries can claim the loss--plus legal fees--as deductions. 2 Changed Circumstances Did you switch jobs last year? Job-hunting expenses and costs of relocating more than 50 miles away may be deductible. Did you marry or separate? One financial expert recalled how he learned belatedly that a female client with two kids had been separated from her husband for six months. Her tax status improved dramatically when she became a ''head of household.'' 3 Senior Status At 59 1/2 you can withdraw individual retirement account money without a penalty. At 65, your standard deduction increases. But some elderly clients make their tax preparer play guessing games about their age. That's a mistake: One youthful-looking man neglected to mention he was receiving Social Security income. The IRS noticed, and the man had to pay a stiff interest penalty. Another client lost a credit because she didn't come clean about her over-65 status. One taxpayer wasn't deducting his pension under a New York State rule that gives tax-free status to the first $20,000 of a senior's pension income. The client paid an extra $2,000 in state taxes because his accountant never asked his age. 4 New Dependents ''We've had clients who, when they got their return, said: 'Where's our munchkin?''' says Diahann Lassus, co-owner of Lassus Wherley & Associates, a New Providence (N.J.) accounting firm. Believe it or not, when they're going over their financials, people actually forget events as momentous as a new baby--and new tax dependent. Keep in mind, however, that dependents are not always children: Are you suddenly supporting that bum-of-a-brother-in-law who just moved in with you? This is altogether possible when an adult has earned less than the personal exemption and you are providing half his support. Another scenario: You are splitting with your siblings the cost of taking care of an elderly parent. One couple, both in their 80s, announced to their accountant that ''We have two new dependents.'' It turned out two of their parents, aged 100-plus, had moved in. What accountant would ask that of an 80-year-old? 5 Household Help So you're a new parent! The next step: 'fessing up about your new nanny. Taxpayers need to avoid the problems of Zoe Baird, a Clinton nominee for attorney general who did not pay social security tax for her nanny, an illegal immigrant. You must include household employees such as nannies and cleaning help on your federal tax forms--and remember to tell your accountant about such workers. You must also remember that there are state compliance rules. ''The overwhelming majority of these rules require quarterly compliance,'' says Alan Goldberg, president of New York-based NannyTax, a payroll tax compliance firm that specializes in household help. Among one's obligations in some (but not all) states: filing unemployment insurance forms each quarter, along with payment for the tax. On the federal side, there's the W-2 form an employer must give household employees in January. While you're at it, don't forget to send that W-2 to the Social Security Administration. 6 Educational Expenses Many people know the tuition for a job-related course is deductible, but for married couples earning up to $100,000 a year and individuals earning up to $50,000, it gets better than that. The new Lifetime Learning Credit awards a 20% tuition reimbursement credit for any course--an accountant studying philosophy, for instance. Then there's the new Hope Scholarship Credit. It gives back the first $1,000 of college costs, plus half of the next $1,000. 7 Volunteer Expenses Do you call the numbers at a church bingo game, as opposed to just playing? Think back: You probably qualify for a deduction. Jim Weikart, senior partner at Weikart Associates, once helped build a school in Guatemala. His lodging and airfare were fully deductible. So is that check you just wrote for the charity dinner you didn't attend. But the actual cost of the meal would not be deductible if you ended up eating it. 8 New Business ''Somebody decides she wants to be a novelist,'' says Sklar. ''She starts contacting agents, buys a computer, sets up a home office, does research, makes an effort to sell a draft. They can be presumed to have a business.'' For three years, that budding novelist can take related deductions without seeing a nickel of income. Many people who work at second jobs at home--graphic artists or photographers, for example-- should remember this three-year rule. 9 Capital Gains The Internal Revenue Service will sock it to you should you forget to report the capital gains earned on the sale of stock or appreciated collectibles. Gifts, in particular, are frequently overlooked. ''A lot of people think, 'Well, Aunt Nellie gave this stock to me; it's mine,''' says Susan Wilde, income tax supervisor for the De Pere Business Center in De Pere, Wis. But if you sell that stock at a profit, or if that check from Aunt Nellie exceeds $10,000, Uncle Sam may take a bite. And municipal bonds? True, their interest is usually tax-free. But if your bond was issued in Florida and you now live in New Jersey, you'll owe taxes to the Garden State. 10 Stock Options Executives who exercise incentive stock options, then ignore them on their tax returns, do so at their peril. ''It's one of those things where you don't get tax documents that say, 'O.K., you have to do something with this,''' notes Lassus. If you exercise an option without selling the stock, and you are subject to the alternative minimum tax, you'll owe tax on the difference between the exercise price and market value. Don't expect your company to pay the tab, either. By Joan Oleck EDITED BY AMY DUNKIN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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