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April 2002

Q. I prepare my own tax returns and would like to know how to avoid errors that lead to incorrect or delayed refunds.

A. Using tax preparation software goes a long way in cutting down errors on your tax forms. However, 30 million Americans still prepare their taxes by hand and often stumble into a number of common mistakes. You can avoid some of these errors by taking a few minutes to browse this list of common mistakes.

  1. Errors reporting the 2001 tax rebate. The number one error for the 2001 tax year centers on the rebate check that was issued to most Americans as the result of tax reform legislation. This rebate, most commonly in the amount of $600.00 or $300.00, was actually an advance rebate for the 2001 tax year, in addition to any refund you receive after filing your standard paperwork. Form 1040 addresses this rebate, but the terms have caused a lot of confusion. Line 47 of Form 1040 asks you to calculate a "rate reduction credit," which is based on whether or not you received the rebate check. But the term "rate reduction credit" has led people to believe this is some other tax credit, rather than the rebate check they have (in most cases) already received. The only reason to use the rate reduction credit line is if you didn't receive the maximum rebate amount you were owed or if you never received the check because of address errors or other mail processing problems. Page 36 of the Form 1040 instructions provides a worksheet that walks you through the necessary steps.

  2. Forgotten attachments or documentation. If you don't file electronically, you must attach all W-2s and 1099s that have withholdings. Also, nearly every number in the income section of Form 1040 requires a supporting schedule. For example, net business income requires Schedule C, capital gains and losses require Schedule D, and interest and dividends (mandatory if over $400) require Schedule B. Keep in mind that some of those schedules also require additional supporting schedules or other forms.

  3. Making an incomplete report on your general income. Almost any form of income is taxable. This means that you must report not only your wages, but also income from all other sources such as investments, lotto winnings and, in most cases, legal settlements. If you didn't receive a 1099 for one of your accounts, contact your bank or brokerage firm. An error in their mailings does not mean that your investment income isn't taxable.

  4. Making an incomplete report on social security income. Your social security payments may indeed be taxable. Form 1040 instructions include a sizable worksheet to help you make this determination. It may look daunting, but don't skip it.

  5. Tracking other retirement income incorrectly. If you received retirement distributions from a source other than social security, it will be reported on Form 1099R. The distributions may fall into one of three categories: 1) taxable (usually from traditional IRAs), 2) nontaxable (usually from Roth IRAs), or 3) "taxable amount not determined." This third category would apply if you make a post-tax contribution to a nondeductible IRA; in this case, the IRS knows that you owe money, but does not know the exact amount because it does not know the amount of your earnings. In this case, you are responsible for making an accurate calculation of the taxable amount.

  6. Choosing the wrong filing status. Filing as "head of household" is usually more beneficial than filing as "single" or "married filing separately." Many people who qualify for this filing status don't realize it. If your children live with you and you pay more that half the costs of your home, check out this option. Form 1040 instructions provide more details. If you live with a partner, this does not qualify you for "married filing jointly." Also, be sure to check carefully whether the standard deduction or itemized deductions are more beneficial. One clear benchmark is home ownership. If you own a home, you should probably itemize your deductions. Itemizing can put a lot more money into your pocket than simply taking the standard deduction.

  7. Errors in social security numbers. Providing the wrong social security number is one of the most common mistakes people make. Double-check and triple-check that the numbers are correct for you, your spouse, and your dependents.

  8. Omitting your signature. Don't forget to sign your return. This includes your spouse, if you are "married filing jointly." As simple as it seems, many people miss this part. Your filing will be rejected.

  9. Overlooking eligibility for tax credits. Tax credits include education credits, income credits, and childcare and dependent credits. Slow down and look at these items carefully. Many people don't realize that they qualify, or they miscalculate the amount of the credit they can claim.

  10. Failing to file while living overseas. Unless you give up your American citizenship, you must file a tax return every year and pay any applicable taxes. For more information, see IRS Publication 519 - U.S. Tax Guide for Aliens.

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