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Alleviating tax-prep pain

This year giving Uncle Sam his due may be even more complicated thanks to mid-year and late-year tax code changes. By Gayle B. Ronan.

This year giving Uncle Sam his due may be even more complicated thanks to mid-year and late-year tax code changes.

Here is a rundown of where the potential for confusion — and ingestion of extra aspirin — lies:

Hidden deductions
Many taxpayers are stumped about where to enter their state sales tax, higher education and educator expense deductions based on the questions being submitted to the online companion site to .

It is understandable. Those lines are missing from the tax forms because Congress failed to extend these deductions until after the returns were printed.  Worse, how to take them is far from obvious as Donna LeValley, a contributing editor to Lasser’s explains. 

The State and Local General Sales Tax Deduction now goes on line 5 of Schedule A (Form 1040). But taxpayers need to enter an "ST" notation to the left of line 5 to indicate they are claiming the sales tax deduction instead of the deduction for state and local income taxes, which is what the line is intended for.

The Higher Education Tuition and Fees Deduction may be claimed on Form 1040, Line 35, which is for the Domestic Production Activities Deduction.  A "T" needs to be entered to the left of the line if only the tuition and fees deduction is claimed.  If both the tuition credit and the domestic production deductions are being claimed, a "B" is required instead.

Educators claiming a deduction for out-of-pocket classroom expenses are referred to line 23 of Form 1040, which is used for the Archer MSA Deduction.  Here a side notation of  "E" for educator expenses or a "B" to claim both the MSA and classroom expense amounts is required.

A day later if you’re a tax form short
Another printed point of confusion in the IRS’ materials has to do with the filing date itself.

“Much of the IRS material went out showing April 16 as the filing date this year, but it is actually April 17,” says LeValley.   Filers have two extra days because April 15 falls on a Sunday and Monday, April 16 is a legal holiday in Washington D.C.

Overly energetic credit claims’s tax experts are also reporting confusion over this year’s energy tax credits.

“Many taxpayers are confusing the ‘energy-efficient’ stickers that come on their appliances with qualification for the credit. It doesn’t work that way,” explains Andy Kurtzig, CEO of the fee-based tax question and answer Web site.

The energy improvements the IRS is giving credit for involve new purchases of items like solar panels and air conditioning units or some windows — not refrigerators or washing machines.  “Taxpayers need to read the instructions carefully to see what qualifies,” he adds.

"Kiddie tax" questions have been anything but child’s play at the online Ask A CPA program run by the Pennsylvania Institute of Certified Public Accounts (PICPA).

“Parents are confused about whether their children with part-time jobs should still file their own returns,” says Jeffrey Berdahl, CPA, of Center Valley, PA, and a PICPA board member.  The short answer is yes since it is the only way they can reclaim any federal withholding tax due them. 

Parents seem to be confusing earned income reporting with the changes in the unearned income tax rate children face on their investment income.

“A mid-year law change raised the age at which a child’s unearned income — income from interest, dividends and capital gains — can be taxed at the child’s presumably more favorable lower rate instead of the parents’ tax rate,” explains LeValley.  That age rose from fourteen to eighteen during the year, impacting not just this year’s tax returns but college savings strategies for many families. 

Telephone-tax rebate wrong numbers
While LeValley reminds taxpayers to claim their telephone tax rebate, many early filers were apparently claiming more than their share.

“The early word from the IRS is that some taxpayers are mistakenly claiming the total taxes paid on their phone bills.  Others are trying to claim the actual cost of their phone bills—they can’t do either. The rebate only refers to the excise tax on long distance and bundled services,” explains LeValley.

“The instructions are clear,” she adds. But they are cumbersome and involve pouring through several years of old phone bills.  Instead, the IRS offers individuals the option of using fixed amounts to avoid the hassle.

That is not the case for small businesses, however.

“Initially, even we were confused,” admits Berdahl about even being able to isolate the excise tax on some of his firm’s small business clients’ old phone bills to calculate their telephone-tax rebates. “It is painfully time-consuming.  The cost of our calculating it is more than the rebate in many cases. It’s as if the government is banking on the same concept many retailers do when they offer rebates — that small business taxpayers will conclude claiming the rebate isn’t worth the hassle and expense.”

Hybrid-car credit curtailed
“Last year, the Alternative Minimum Tax affected some 3 million returns.  This year it could impact 26 million,” says Kurtzig.  His site is hearing from taxpayers incredulous over having triggered this tax and assuming they have miscalculated.

LeValley adds that while AMT can potentially affect anyone, no longer just the wealthy, it will pack a particularly unpleasant surprise for those who bought a hybrid car expecting to take a tax credit on their returns. “If they are subject to AMT, they are not allowed to claim the hybrid car credit,” she says.

IRS steps up cross-checks
While it is not a cause for confusion, upgrades to the IRS’s data-matching program may still cause headaches for sloppy filers.

“The IRS has become very efficient about identifying matching errors,” warns Edward Smith, a tax partner in the Boston office of BDO Seidman, LLP, referring to the computerized program that matches amounts submitted by employers and financial institutions on W-2s and 1099s for instance, with what a taxpayer is reporting.  Mismatched amounts ‘flag’ a return for human intervention and possible audit.

But while the abundance of confusion this year may be bad for taxpayers, it could be good for those in the tax advice business. Kurtzig reports more of his site’s users are using tax preparation software rather than going it alone this year.