Get ready for another tricky tax season.
Some last-minute tax legislation by Congress has once more turned something predictable and tedious into something that's confusing and, well, tedious.
This time, it waited so long to pass legislation to stop the spread of the alternative minimum tax that the IRS hasn't fully updated its systems yet. Millions of taxpayers who file certain forms must wait until Feb. 11 to get their returns processed. That's sure to delay some refunds.
On the upside, Congress created new tax breaks for homeowners. One is designed to help people hit by the subprime lending crisis.
Some tax breaks are here only for this tax season. They may be resuscitated later, though. Appearing and disappearing tax breaks have become the norm in recent years. It keeps tax book writers busy, but confuses everyone else.
"This is just no way to run a tax system. People can't follow this. You can't
plan," says Barbara Weltman, author of J.K. Lasser's 1001 Deductions & Tax Breaks. "You need some kind of permanence."
To help you navigate taxes this season, here are things you need to know:
Think twice about filing early
The IRS won't be able to process five forms related to the alternative minimum tax legislation until Feb. 11. You don't have to owe AMT to be affected.
The forms: Form 8863 for education credits; Form 5695 for residential energy credits; Form 8396 for mortgage interest credit; Schedule 2, Form 1040A for child and dependent care expenses, and Form 8859 for a first-time homebuyer credit for D.C. residents.
The IRS will reject returns with one of these forms if they are electronically filed before Feb. 11. File a paper return early with one of these forms and your return will be held by the IRS and processed later. About 13.5 million taxpayers file these forms, although most aren't early filers, the IRS says.
There are other reasons not to rush.
More financial institutions than usual may be asking for extra time to get 1099 investment income forms into the hands of taxpayers. The deadline is Jan. 31.
Also, Social Security said last week it will be sending out corrected 1099-SSA forms to about 2.7 million beneficiaries - including 32,936 Marylanders - by the end of the month. The incorrect forms over-reported benefits received for some in Medicare's Part C and D programs.
Mortgage debt forgiveness relief
It's a tragic scenario: You owe $300,000 on your home when the bank forecloses. The lender sells the house for $250,000. You owe income tax on the $50,000 difference.
Congress created a temporary break to homeowners in foreclosure or others who have negotiated forgiveness of mortgage debt. Homeowners won't have to pay taxes on up to $2 million in forgiven debt on a principal residence.
The tax break is good for debt erased last year and through the end of 2009.
Debt forgiven on a second home would still be taxed. And if you took cash out during a refinancing and used it for purposes other than improving the home, that money too would be subject to tax if it's forgiven, says Mark Luscombe, a principal at CCH, an Illinois provider of tax information.
Be aware, if you take advantage of this tax break, you will have to reduce the cost basis in the house by the amount of forgiven debt. So, if you bought the house for $350,000 and the lender forgave $30,000, your new cost basis would be $320,000. If you later sell the house for $380,000, your gain would be $60,000.
Luscombe says homeowners might not have any tax consequences anyway because singles generally can exclude $250,000 of gain from the sale, while joint filers can exclude twice that amount.
Mortgage insurance deduction
You may be able to deduct mortgage insurance premiums under another new tax break. This applies only to mortgage insurance contracts issued after 2006. The deduction runs through 2010.
Income limits apply. The full premium deduction is available to singles and married joint filers with adjusted gross income up to $100,000. The deduction is gradually reduced and disappears once income tops $109,000.
Alternative minimum tax relief
More than 20 million taxpayers dodged the AMT bullet because of the last-minute legislative fix that raised the amount of income exempted from the tax. The new exemption is $66,250 for married joint filers and $44,350 for singles.
The AMT was created decades ago to make sure the rich didn't escape taxes. Filers either pay AMT or regular income tax, whichever is higher. President Bush's tax cuts to the regular income tax years ago meant more filers suddenly owed more under the AMT formula. Plus, AMT was never adjusted for inflation so even some middle-income families are trapped by it.
The fix is good news for Marylanders, who tend to get hit by the AMT more than residents in most other states because of high taxes.
Two years ago, 134,222 Marylanders paid AMT, the IRS says. Thanks to the fix, 651,400 Marylanders are spared this season from the AMT and from paying an average of $2,181 more in taxes, according to the Citizens for Tax Justice.
This is a one-year patch, so Congress will need to tackle the problem again this year.
You now need to document cash donations, no matter how small. You can use a receipt from the charity, canceled check and credit card or bank statements.
This can be inconvenient if you're used to deducting loose change dropped into donation jars or the few bucks thrown into collection baskets at weekly religious services.
"You don't want to disrupt the service. 'Ahem, can I have a receipt?' That's seems a little unseemly," says Harris M. Abrams, a tax analyst with Thomson Tax & Accounting in New York.
Last chance deductions
Several tax breaks expired at the end of last year. Congress may resurrect them, but for now this is your last chance to claim:
School supplies deduction: Teachers from kindergarten through high school can deduct up to $250 for classroom supplies paid out of pocket.
College tuition and fee deduction: Singles with adjusted income up to $65,000 and joint filers with income of up to $130,000 can deduct up to $4,000 in tuition and fees paid. Higher-income filers can deduct up to $2,000 as long as income doesn't exceed $80,000 for singles and $160,000 for joint filers.
Tax-free IRA distributions: You don't have to pay taxes on up to $100,000 in distributions last year from a traditional IRA if you donated the money directly to charity. You must be 70 1/2 or older.
Sales tax deduction: You can deduct either state sales tax or state and local income taxes paid last year. Marylanders usually are better off deducting state income taxes unless they've made a big purchase.
Telephone tax credit
Remember last year's rebate for federal phone taxes paid? The standard credit ranged from $30 to $60, depending on the number of people in the household.
The credit isn't on this year's forms. But if you didn't claim the credit last year, do so now by filing an amended return using Form 1040X. If you aren't required to file a tax return, you can still claim the credit by filing a 1040EZ-T. "It's worth doing even if it isn't a huge amount of money," Abrams says.
Maybe you've been shut out of the Roth IRA or from deducting contributions to a traditional IRA because you made too much money. Check again. Income limits have gone up. "It's possible you're now within range," Luscombe says.
Full or partial contributions to a Roth can be made by singles with adjusted income under $114,000 and by joint filers with income under $166,000.
Are you covered by a retirement plan at work? If so, singles can still deduct some or all of their contributions to a traditional IRA if adjusted income is under $62,000. Adjusted income for joint filers must be less than $103,000.
You have until April 15 to make your 2007 contribution. The maximum contribution is $4,000, or $5,000 if you're 50 or older.
Income limits also went up for the saver's credit that rewards low- to moderate-income workers saving for retirement.
You can get a credit worth 10 percent to 50 percent of your contributions to an IRA, 401(k) or similar workplace account. The maximum credit is $1,000 for singles and $2,000 for joint filers. A credit will reduce your bottom-line tax bill dollar-for-dollar. This credit disappears once income tops $52,000 for joint filers and $26,000 for singles.
Standard deduction increase
Often taxpayers get into the habit of filing an itemized return, not realizing that their situation has changed and they would be better off taking the standard deduction, says Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants.
It could be that they no longer have much mortgage interest to deduct or they retired to a state with lower or no income taxes, he says.
The standard deduction is now $10,700 for joint filers and $5,350 for singles. That's a $400 increase for joint filers and $200 for singles.
Last, don't forget the deadline
We got spoiled in recent years with extra days to file because the usual deadline fell on a weekend or holiday. Not so this year. April 15 falls on a Tuesday.