All is not lost for taxpayers who realize they neglected to claim a deduction on a previous year's return, as long as they don't wait too long.
"Tax returns don't close until three years after the due date," said Joe Equale, a partner in Equale & Cirone, certified public accountants in Danbury, Conn. That means you have until April 15 to amend your return for the 2000 tax year.
Not surprisingly, most people don't submit a 1040X form if they forgot to include some income or wrongly claimed a deduction, he said. Most amended returns claim or increase a neglected or underestimated deduction.
One possibility: If you paid capital gains taxes on a home sold in 2002 because you didn't live in it long enough to claim an exemption, you may be able to recoup some of your payment.
Federal law says you can escape capital gains taxes on a home sale if you owned and used the home as a principal residence for two of the five years before the sale. You can exclude up to $250,000 of the gain if you are a single tax filer, $500,000 if you are married filing jointly.
Let's say you, a single filer, bought a house for $250,000 in 2001 and, for health reasons, sold it 12 months later for $280,000. You followed the rules and paid capital gains taxes on the $30,000 profit.
Now the residency rule gives you more leeway, Equale said. If you moved because of job, health problems or other unforeseen circumstances, you might be able to recoup a portion of what you paid in taxes.
Divide how long you lived in or owned the home, whichever is less, by 730 and multiply that number by $250,000 to figure out your maximum exclusion. In the example, the $30,000 gain falls below the $125,000 maximum exclusion, so you would not owe tax on that amount.
Next week: Education credits