1. Wrong numbers on phone tax refundIt 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 taxpayers who filed returns through March 24 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.
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 confusionThree 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 dangersAlso 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.
What are you doing with your tax refund?
4. Fluctuating hybrid vehicle creditsOn 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 contributionsDid 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 complicationsA 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.
7. New interest informationBecause your Social Security number exists on bank and investment accounts, the IRS knows how much unearned income you made as soon as you do, thanks to the 1099 forms that financial institutions send to the tax agency. If you forget to include this info on your return, the IRS examiners will let you know that you owe taxes on it, too. Don't give the IRS the chance to send you a notice about absent income or it could cost you penalty and interest charges. Just make sure the amount you do report is correct. This year's 1099-INT forms, which tell you and the IRS how much interest an account earned, has two new boxes. Box 8 includes various tax-exempt interest payments. Box 9 reports how much of that tax-exempt interest is subject to the alternative minimum tax. Some financial institutions have reported problems with the forms and have issued or plan to issue corrected 1099s to their customers. Make sure you have the final, correct earnings document and amount before you file or you'll have to file an amended return.
8. Math miscalculationsThe most common error on tax returns, year after year after year, is bad math. Mistakes in arithmetic or in transferring figures from one schedule to another will get you an immediate correction notice. Math mistakes also can reduce your tax refund or result in you owing more tax than you thought.
Using a tax software program like Drake to file your return can help reduce math errors. The built-in calculators do the work for you, adding, subtracting and inserting numbers on additional forms as needed. But you still have to make sure that your initial numbers are correct. Entering $3,500 when the real figure is $5,300 makes a lot of tax difference. Getting the numbers right is crucial because you can be sure that the IRS will be double-checking numerical entries against its copies of your tax statements (W-2, 1099s and the like). When IRS examiners find a discrepancy, they'll definitely let you know, and in many cases will correct your mistake and refigure your taxes for you. Don't give them the chance. Make sure your math entries are right.
9. Social Security number oversightsSince the IRS stopped putting taxpayer Social Security numbers on tax package labels in response to privacy concerns, some taxpayers forget to write in their identification numbers. Your tax ID number is crucial because there are so many transactions -- income statements, savings account interest, retirement plan contributions -- keyed to this number. The nine-digit sequence also is vital to claim several tax credits, such as the Child Tax and Additional Child Tax credits and ones for educational expenses and dependent care costs. Without the numbers, or with wrong ones, the IRS will disallow these tax breaks.
10. Ignoring IRS-provided mailing materialMore than 73 million people filed electronically last year. But almost 63 million others sent in paper forms. If you plan to fill out your return by hand this year, be sure to use the preprinted label and the envelope that came with your tax packet.
The label will ensure that IRS employees can easily and accurately read your personal information. Even if it's not correct because, for example, you moved, go ahead and stick it on your return; just cross out the wrong information and correct it by hand. The label is not a way for the agency to more easily track and audit you -- honest! In fact, if you're expecting a refund, you'll probably get it sooner if you use the label. And using the pre-addressed envelope will ensure that your return goes to the proper processing site. The IRS has reorganized its Service Center operations in recent years, so it's possible your return could be handled at a different location than where it went last year. Your envelope has the correct delivery data.
11. Signature required Sign and date your return.The IRS won't process it if it's missing a John Hancock. If you're filing electronically, this shouldn't be a problem. The software packages won't let you send a document until you complete every step. But if you're still mailing your return, don't be in such a hurry that you stuff your 1040 in the preaddressed IRS envelope without signing it. And if it's a joint filing, you and your spouse both must sign.
12. Missing the deadlineThis shouldn't be a problem this year since taxpayers now have an extra day to file. Tax day officially is April 15, which in 2007 falls on a Sunday. Usually that would mean forms have to be in the mail or electronically transmitted by midnight on Monday, April 16. But that day is an official holiday in Washington, D.C., and the IRS announced that taxpayers nationwide now have until Tuesday, April 17 to complete their 1040s. If that extra day still isn't enough time to finish your forms, make sure you buy six extra months by asking for more time. All you have to do is submit Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by the April deadline. Remember, though, that the extension is only for the forms; you still have to pay by the 17th any tax you may owe.
If you make the mistake of not filing or paying on time, you'll end up facing even more costs in late-filing penalty and interest fees.
