But as you race toward the finish line, be mindful of common tax-filing errors. Some mistakes could cost you money. Others could raise red flags at the IRS. Tax software will do math and point out tax breaks you might overlook, but these programs are only as good as the information you enter.
Here are some common last-minute blunders, and how to avoid them:
Automatically not itemizing.
A 2002 study by the Government Accountability Office found that more than 2 million taxpayers who claimed the standard deduction could have lowered their tax bills by itemizing.
Deductible expenses include interest on your mortgage, property taxes, charitable contributions and unreimbursed medical expenses that exceed 7.5% of your adjustable gross income.
Ordinarily, that threshold puts the medical-expense deduction out of reach for most taxpayers who have employer-provided health care.
But the economic downturn has led employers to shift more of the cost of health care to their workers in the form of higher deductibles, co-payments and co-insurance. That means more taxpayers could rack up enough unreimbursed expenses to claim the deduction, says Mary Canning, dean of the schools of taxation and accounting at Golden Gate University in San Francisco.
Automatically itemizing.
Some homeowners assume that they should always itemize because the interest on their mortgage is deductible, says David Bergstein, tax analyst for CCH CompleteTax, an online tax software program. But if you've paid off most of your home loan, your mortgage-interest deduction may be so small that you're better off taking the standard deduction.
For 2008, the standard deduction is $5,450 for single taxpayers and $10,900 for married couples who file jointly. If you're 65 or older or visually impaired, you're entitled to $6,800, or $13,000 for a married couple (assuming that both spouses qualify).
The general rule is that if your deductions exceed those amounts, you should itemize.
But this year, there's a new twist. The foreclosure rescue bill enacted last summer allows homeowners who don't itemize to increase their standard deduction by the amount of their property taxes. The maximum property tax deduction is $500 for single homeowners and $1,000 for married couples.
This could make the standard deduction a better deal for folks who usually itemize. If you've gotten out of the habit of saving your property tax bills — perhaps because your home is paid off and you no longer itemize — dig out those records so you can take advantage of this tax break, Bergstein says.
That's not the only way taxpayers will be able to increase their standard deduction this year. If you suffered casualty losses last year in a presidentially declared disaster area, you can increase your standard deduction by the amount of your unreimbursed losses.
To determine whether you live in a federally declared disaster area, go to www.fema.gov.
Claiming a deduction instead of a credit.
A recent survey by tax publisher CCH found that less than a quarter of taxpayers realize that tax credits are actually more valuable than tax deductions.
Tax credits provide a dollar-for-dollar reduction in your tax bill. Deductions only reduce your taxable income. For example, if you're in the 25% tax bracket, a $2,000 tax credit will reduce your tax bill by $2,000. A $2,000 tax deduction will lower your tax bill by $500.
Confusing deductions and credits could cost you, particularly when it comes to tax breaks for college.
In the CCH survey, 41% of taxpayers said that the $4,000 tuition and fees deduction was more valuable than the Hope or Lifetime Learning credits.
In fact, though, a parent in the 15% bracket who claims the full tuition and fees deduction would save $600, vs. up to $2,000 from the Lifetime Learning credit.
Incorrectly deducting property taxes.
Taxpayers who itemize can deduct real estate taxes, but only in the year they were paid. Often, though, taxpayers pay property taxes in installments that cross calendar years, Canning says, which can lead to filing errors. For example, if you paid the first installment on 2008 property taxes in December 2007 and your second installment in 2008, only the second installment is deductible on your 2008 tax return. However, the first installment toward 2009 taxes would be deductible on your 2008 tax return, if you paid it in 2008. Advance or late payments can further complicate matters, Canning says.
Fortunately, many counties now post property tax records on their websites, Canning says. You can use these websites to find a record of how much you paid in property taxes and, more important, when you paid them, she says.
Not reporting self-employment income.
The sharp rise in unemployment has forced many out-of-work taxpayers to go into business for themselves. If you did freelance or consulting work last year, make sure you report all your income on Schedule C when you file your tax return, Canning says. Don't rely on 1099s from clients or customers because not all payers are required to send you that form, she says. Review deposits in your bank or checking accounts for income that wasn't reported on a 1099, Canning says. If you're audited, she adds, "That's what the IRS will do."
At the same time, don't overlook deductions that will reduce taxes on your self-employment income. Potential deductions include everything from the cost of office supplies to transportation expenses when you visit clients. If you work in a dedicated space in your home, you may also qualify for a home-office deduction.
Some self-employed taxpayers worry that claiming the home-office deduction will increase the chance they'll be audited by the IRS. But if your deductions are legitimate, you shouldn't fear the feds, Bergstein says.
"Tax avoidance is perfectly legal, he says. "Tax evasion is not."
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