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Five Tax Tips

Tax day is just around the corner.  If you are an early-bird who has already filed her taxes, congratulations!  For everyone else, here are a few tips to save you money and time.

1.       Decide whether to itemize deductions.

This decision will cost you or save you money depending on your situation.  Deductions (unlike credits) allow you to reduce your taxable income.  For example, if you earned $40,000 last year and take the standard deduction of $4,300 for single filers, then your taxes are computed based on $35,700 not $40,000.  At a 20% tax rate, you save $860 in taxes.

For some people the standard deduction is sufficient.  If your deductible out-of-pocket expenses do not exceed the standard deduction of $4,300 for single filers and $7,200 for married couples filing jointly, then the standard deduction may be sufficient.  You may also be able to use the EZ tax forms that are much shorter. 

On the other hand, if the sum of your deductible expenses would be greater than the standard deduction, it will lower your tax bill to itemize.  Some conditions for itemized deductions are:

bulletYou own or purchased a home with a mortgage  -- Interest on your mortgage, real estate taxes and closing points for home purchases completed in 1999 may be deductible.
bulletYou have kids.
bulletYou have multiple investment accounts.
bulletYou own a business.
bulletYou paid high state taxes.

Note: If your adjusted gross income (AGI) exceeds $124,000, some deductions must be reduced by 3%.  See a tax advisor for specifics.

2.       Put $2,000 in your IRA account.

Individual Retirement Accounts or IRAs allow you to save money for your retirement and reduce your taxable income today.  The government allows you to contribute up to $2,000 annually.  Writing your check before April 15th can count as a deduction from 1999 income.

3.       Don’t forget these deductions.

In addition to the deductions listed in Tip #1 above, these newer rules may save you money.

bulletHealth care expenses – Medical and dental expenses exceeding 7.5% of your adjusted gross income (AGI) income are deductible.  As of June, 1999, medical expenses for inpatient and outpatient smoking or drug programs and prescription drugs can be deducted.  Also, women can deduct out-of-pocket expenses for prescription birth control pills and for Lamaze or other classes that prepare the mother for labor. These rules are a bit tricky; so, always check with a tax advisor to be sure.
bulletCharitable Contributions – Donations of money and property such as clothes or cars to a charity are generally deductible.  Additionally, expenses you incur for traveling to and from the place you volunteer and telephone calls to solicit donations may be deductible.  Charities should give you a receipt for any contribution over $75.  Keep very good records – receipts, mileage logs, and cancelled checks – in case you are audited.
bulletEducational Credits – The Taxpayer Relief Act of 1997 includes provisions for educational tax credits such as the new Hope Scholarship and Lifelong Learning credits.  For more information, see a tax advisor or http://www.irs.ustreas.gov/hot/tax-law.html

4.       File electronically.

In recent years the IRS has invested heavily in making electronic filing easier and faster. This year they estimate that more than 33.6 million Americans will use their e-file service.  You can use tax preparation software, websites or the phone to file your tax return.  The wizardry of electronics saves the government money and processing time.  If you are expecting a tax return, you may get your money back quicker than using paper forms and snail mail.

5.       Download the electronic forms.

Okay, so you have an uncontrollable need to sit at your dining room table filling-out form after form.  This ritual completes you.  Well, it’s the middle of the night April 14th and you just found a mistake on line 40, but you do not have another clean form.  Thanks to the miracle of the Web, you can download and print the federal and state forms (http://www.irs.gov/) or you can complete the new “Fill-in Forms” which allow you to type-in your answers then print.  Either way, the IRS has made it easier to continue with your nocturnal mission.

While the prospect of paying taxes and filing your tax return may cause a headache, following a few hints and tips may help you through the process.  The best tip of all is file your tax return on time – even if you file an extension, the penalties are VERY high if the IRS rejects your request later.  As always, everything may not apply to your individual situation.  Please seek the help of a tax professional if you have questions.