Updated: May 3, 2013 12:14PM
Originally published: April 8, 2004
There’s no place to run, no place to hide, and very few legitimate shelters. At tax time it’s difficult to avoid the consequences of your success. If you have too many deductions, you’ll get tripped up by the alternative minimum tax, once designed for the wealthy and now entrapping many two-income couples.
With only one week left to complete your tax return, here are a few last-minute reminders. The three easiest tax shelters are your home, your children and your retirement plan.
* Your retirement plan. Contributions you made to a 401(k) or 403(b) plan throughout last year reduced your taxable income. If you remembered to set up a Keogh plan for self-employed income before Dec. 31, you can still claim a deduction for contributions made by April 15.
The only remaining deal is a traditional (not a Roth) individual retirement account. If you’re not eligible for an employer-sponsored retirement plan, your IRA contribution is tax-deductible. You can put away $3,000 ($3,500 if you’re over age 50) by April 15 to get a deduction on the tax return you’re about to file. Even if you are covered by a company plan, if your adjusted gross income is below $44,000 on a single return, or $66,000 on a joint return, you can deduct the full IRA contribution.
* Your children. There are several ways to use your children as a tax shelter until they are no longer dependent. Each dependent child is worth a $1,000 credit on your tax return this year. But be careful. Last summer you might have received an advance check on that credit of $400 for each child. If so, you can claim only the remaining $600 per child when you file your 2003 return.
If you paid for child care, you may be eligible for a different kind of credit, larger this year than last. Basically, you can get a credit for 35 percent of your child care payments, up to a maximum of $3,000 of payments for one child and a limit of $6,000 of payments for two or more qualifying children or dependents. The amount you can deduct diminishes as your income rises, but it never completely goes away. There’s just one catch: To claim this credit on Form 2441, you must include the Social Security number or Taxpayer ID number of the child-care providers.
Be sure to include the correct Social Security number for each of your dependent children. The IRS warns it is matching returns this year, trying to catch divorced parents who claim children who are not dependents.
* Your home. Your mortgage interest may be tax-deductible, although if you refinanced, you may be paying less interest. Interest on mortgage loans of up to $1 million on a primary and secondary residence is deductible. Home equity loan interest is deductible only up to $100,000 of loan principal. But if the proceeds of a home equity loan are used to improve the property, that amount is included in the $1 million limit. Points paid to refinance a mortgage, even if paid by a separate check, are deductible only over the life of the loan. If you refinance again, you can immediately deduct any undeducted points on the first refi.
* New or better deals. Self-employed people can now deduct 100 percent of their health insurance premiums this year.
If you paid college tuition or other post-secondary educational expenses for yourself or your children, this year you can claim a higher lifetime learning credit of up to $2,000 for those with adjusted gross incomes up to $41,000 on a single return, or $83,000 on a joint return. Above those levels, the deduction starts to phase out. You may also be able to choose the higher education or the Hope Credit.
* The most complications. If you received a 1099 form indicating you received dividends, you’ve got a mess on your hands. There are two kinds of dividends: qualified, which means they get the lower 15 percent tax rate (or 5 percent tax rate if in the bottom two brackets), and non-qualified, which means you’re taxed at your regular marginal rate. But even if your 1099 form says it’s a “qualified” dividend, it might not be qualified if you don’t meet holding period restrictions!
Finally, just in case you don’t complete your return on time, you have to file Form 4868 to request an extension. And you must also send a check if you haven’t already paid 90 percent of the taxes you owe for the current year, or at least 100 percent of last year’s taxes. That means you have to calculate what you owe. So you might as well just finish that tax return this weekend. It won’t get any easier -- or less expensive. And that’s The Savage Truth.
Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast. Distributed by Creators Syndicate.