What if they gave a tax break and nobody came? More than 30,000 taxpaying parents have neglected to take the new $400-per-kid credit, says the IRS. The agency is filtering through returns to find deserving filers and sending them their credits anyway.
For those who remember, the credit, along with new Hope Scholarship and Lifetime Learning credits, has pushed the average refund up to $1,609, about 15 percent above last year. That’s a nice bonus, but if you get a bigger than expected refund, cut your withholding at work this year, and save or invest the difference.
And on the ouch side of the ledger, don’t forget the nanny tax. Fewer filers are following the rules that require them to withhold and pay taxes for their household employees and file Schedule H, which tells the Feds all about it. The IRS is checking returns that included that form in previous years or that are declaring child-care expenses, and sending “Why didn’t you file Schedule H?” letters to filers.
Audits: Down, But Watch Those Deductions
The mysteries of who gets audited grow every year, but the actual number of audits is going in the opposite direction. In recent years, audit rates have been dropping steadily. In 1998, fewer than 1 of every 100 returns was examined, a big drop from the 1.77 percent audit rate recorded two years earlier. This year it could go even lower; congressionally mandated reforms are shifting funding from the auditing departments to other parts of the agency.
With fewer resources and more scrutiny from cranky Congress members, IRS auditors have focused on targets likely to yield big bucks–such as well-heeled entrepreneurs in cash-rich businesses and taxpayers already in trouble with other arms of the government. But as many as two out of three audit subjects still land in the hot seat by declaring deductions that seem out of whack with their incomes. Stay within the norms: filers with adjusted gross incomes of $50,000 to $55,000, for example, claim average write-offs of $3,638 for medical expenses, $3,810 for taxes, $6,392 for interest and $1,728 for charitable contributions. If you’re above these averages, keep receipts.
The Pain Is Mutual
This time of year is more costly for mutual-fund investors than for average stock or bond investors. That’s because they pay taxes every year on any gains their funds realize, even if they don’t sell their own shares. It was even worse in 1998, when many fast-trading funds reported taxable gains that outstripped their actual year-end earnings. Mutual-fund holders are paying more than $40 billion in taxes on the income their funds distributed last year, more than double what they paid in 1995, according to The Colonial Group, a Boston-based mutual-fund company.
You can ease the burden by investing in index funds, which have the lowest spreads between their after-tax and pretax returns, says Weisenberger, a mutual-fund reporting firm. Or you can look for “tax-managed” mutual funds that restrict their trading and try to match up taxable losses with taxable gains when they do sell holdings. That’s getting easier: Morningstar follows 22 such funds, up from 13 two years ago.
Taxes in Cyberspace
This is the year electronic filing finally clicked with taxpayers. Computerized returns are up 22 percent, the IRS says. California preparer Carol Thompson says more than 90 percent of her clients are filing electronically. The advantages: faster refunds, instant accuracy checks, 48-hour receipts from the IRS, less time and paper, and the “zap now, pay later plan.” You file and get a receipt now, but mail your check on April 15.
All major tax software programs and private preparers can hook up with the IRS; check out www.securetax.com, where you can pay $14.95, fill out your own return, zap it, and not even buy any software.
