Changes in Code Could Trip Up Unsuspecting Filers
There are only a few new twists that taxpayers need to worry about when filing their 2001 taxes. But what the changes lack in numbers, they make up for in complexity.
Early filers already are making errors on the rate-reduction credit--the only new item on this year’s standard Form 1040. Some people who received this credit through refund checks last year are improperly claiming it again on their returns. Others, who didn’t get checks and are due a credit, have missed it completely, the Internal Revenue Service reports.
Here’s a guide to what taxpayers need to watch out for this filing season:
* Child tax credit: This credit is available to taxpayers with dependent children or grandchildren who were younger than 17 at the end of 2001. As a credit, it is subtracted from the taxes you owe rather than from your pretax income.
The credit has been increased to as much as $600 a child, up from $500. And if the amount of the credit you’re due exceeds the amount of tax you owe, the government will send you a check for the difference.
The bad news: Although the credit is more generous, it’s far more complicated for people at both ends of the income spectrum.
Lower-income parents, for example, could qualify for the refundable portion of the credit. But to claim it, they must fill out a worksheet--Form 8812--which takes into account the amount of Social Security taxes they paid, the number of children claimed as dependents and their income.
The IRS estimates that preparing, copying and filing this 13-line worksheet will add nearly an hour to the time it takes an average taxpayer to file a return.
“It’s complicated, but the benefit is worth the work,” said Brenda Schafer, senior tax research coordinator for H&R; Block in Kansas City, Mo.
For upper-income parents, the credit is means tested. Translation: Anyone who earns more than a set amount will lose all or a portion of the credit. The applicable income thresholds are $75,000 for single filers and heads of households and $110,000 for married couples filing jointly.
* Alternative minimum tax: Fewer taxpayers will be hit by the alternative minimum tax this year, largely because the exemption amounts have been increased. Nonetheless, those with large capital gains, unusually high state tax deductions or gains from certain types of stock options may have to grapple with this parallel tax system.
* New capital gains rate for a few: The long-term capital gains rate for taxpayers in the 10% and 15% brackets is lower this year, falling from 10% to 8%. This rate applies to profits from the sale of stocks, bonds or other investments sold after five or more years of ownership.
The new long-term rate doesn’t apply to higher-income taxpayers or extend to all types of asset sales. Rental real estate and collectibles sold at a profit may be taxed at a different rate, regardless of the holding period.
Those who can claim the 8% rate must fill out a 37-line worksheet in addition to the 40-line Schedule D.
* Investments in small companies: There’s another new capital-gains rule that applies to any taxpayer--no matter their tax bracket--who held a long-term investment in a small business. (This law isn’t new. Taxpayers could first take advantage of it in 1998, but tax experts believe more investors could qualify because of the large number of start-up companies in the mid-1990s.)
Those who realized a gain from the sale of stock in a “qualified small business” held for more than five years are allowed to exclude up to half of that gain from tax. But if they do, the remaining gain will be taxed at a 28% rate.
To qualify, the business must be a U.S. corporation that had $50 million or less in gross assets when the stock was issued. Service sector firms in health, law, engineering and architecture are excluded, as are hospitality, farming, insurance, finance and mineral extraction companies.
* Rate-reduction credit: Remember all those rebate checks the government mailed out last year? They were designed to give workers an immediate benefit from the new 10% tax bracket. The rate-reduction credit is for everyone who qualified for a refund last year but didn’t get a check.
Those who received rebate checks--or who qualified but the check was seized to pay a government debt, such as back taxes or child support--should skip this credit. They do not qualify.
Those who qualify can claim a credit of $300 if single; $500 if a head of household; and $600 if married, filing jointly.
* Estate-tax changes: The estate-tax exemption--the amount of money that can pass tax-free to heirs--rose to $675,000 last year from $650,000 in 2000. The gift-tax exemption remains at $10,000, which means that anyone can give anyone else up to that amount without having to file a gift-tax return.
* Deductions for student loan interest: Taxpayers can deduct more of the interest they paid on student loans. Up to $2,500 can be deducted by workers who earn less than $40,000 if single or $60,000 if married and filing jointly. The catch: The interest must be for loans that are in the first 60 months of repayment.
Deductions for those who earn more than the threshold amounts will be reduced or eliminated based on a formula spelled out in the 10-line Student Loan Interest Deduction Worksheet.
* Relief for victims of terrorism: Federal income taxes owed by persons killed in the Sept. 11 terrorist attacks, last fall’s anthrax scare or the 1995 Oklahoma City bombing were retroactively wiped away by a law signed in January. The law covers taxes for the year of the attackand the year before.
The estates of approximately 4,000 terrorism victims are due a minimum of $10,000 each. If a victim’s total tax bill for those two years was less than $10,000, the survivors or executors of their estates can get a refund check for the difference.
The IRS expects to have guidance--Publication 3920--on how to claim terrorism-related refunds posted on its Web site at www.irs.gov later this month.
* Inflation adjustments: Some tax thresholds have been adjusted for inflation, including the break-points for marginal tax brackets and the thresholds for phasing out deductions.
The two inflation adjustments that the majority of taxpayers will use are:
* The standard deduction--the deduction for taxpayers who don’t itemize--rises from $7,350 to $7,600 for married couples filing jointly; from $6,450 to $6,650 for heads of households; and from $4,400 to $4,550 for singles.
* The personal exemption--the tax deduction you get for yourself and each dependent in your household--rises from $2,800 to $2,900 each.
