Preparing your taxes can be a difficult undertaking, whether you use tax-preparation computer software, do them by hand, or even hire a tax pro. Regardless of your preferred method, keep these 20 Foolish Tax Tips in mind before you sign your tax return and mail it to Uncle Sammy.

Income and Adjustment Items

1. File if you should: You, or your children, or even your elderly parents may not technically be required to file a tax return, but if you worked for wages and/or had federal taxes withheld, the only way you can recover those federal taxes is to file a return and claim a refund. For more information, see IRS Publication 4 (Student's Tax Guide) and IRS Publication 554 (Older Americans' Tax Guide).

2. Use the "Qualifying Widow/Widower" filing status: If you were unfortunate and lost your spouse in 1999 or in 1998 and have at least one dependent child in your household, and you have not remarried, you can claim a special filing status that will save you tax dollars.

3. Use the "Head of Household" filing status when your ex-spouse claims the child as a deduction: You may have negotiated the tax deductions available to your ex-spouse during the divorce (usually allowed when the ex makes timely child support payments). Nevertheless, you may still use the Head of Household filing status if the children actually reside with you and you have physical custody of them.

4. Don't report too much wage income: If you participate in a deferred compensation plan at your place of employment — 401(k), 403(b), etc. — remember to report as wages only the amount reported to you in Box 1 of your W-2 form. Don't report the salary that you actually earned.

5. Don't report interest earned on Series E, EE, or Treasury bonds/bills/notes on your state tax return: Remember that, while this interest is taxable for federal purposes, it is not taxable for state purposes. Remember to make the appropriate adjustment on your state tax return.

6. Segregate your mutual fund capital gains distributions from your regular distributions: Remember that long-term capital gains receive a special lower tax treatment. When you report your mutual fund dividends on Schedule B, pay particular attention to your capital gains distributions as reported to you on your mutual fund statement. Make sure to take any capital gains dividends and report them directly on Schedule D. Don't report your capital gain dividends on Schedule B and pay ordinary tax rates on capital gain income.

7. Add your broker commissions and other fees to the cost of your stock: When you buy stock, you'll pay broker commissions. You may also pay transfer fees. These expenses are added to the purchase price of the stock, and remain with the stock until sold. When you sell the shares, make sure to reduce your gross sales price by the amount of these expenses. And, don't forget to reconcile your sales to the Form 1099B that was provided to you by your broker.

8. Maximize your IRA contributions: Did you know that alimony received is considered "earned income" for IRA contribution purposes? Did you also know that even if your spouse is a homemaker with no W-2 earned income, you may still be able to make a full $2000 IRA contribution for him/her? (These contributions may or may not be deductible, depending on your individual circumstances). And, if you made Roth IRA contributions or conversions, be sure to keep track of them. It will be very important if you find that you ever have to take an "early" distribution from your Roth IRA. IRS Publication 590 covers all forms of IRAs.

9. Adjustment for Student Loan Interest: Did you pay interest on a student loan in 1999? If so, you may be able to reduce your income by the amount of the interest that you paid, to a maximum adjustment of $1,500. The interest must be paid in the first 60 months of the loan, and the loan must have been used for qualified education expenses. The beauty of this is that you do not have to itemize your deduction on Schedule A to claim the adjustment for student loan interest paid. For more information, read the instructions for Line 24 of Form 1040.

Itemized Deduction Items

10. Property tax deduction for second homes and/or investment property: Many people are under the impression that property tax deductions are available only for your primary residence. Nothing could be further from the truth. Property taxes are deductible for all real property -- third or fourth homes, vacant lots, raw land, etc.

11. Investment interest: Did you pay a little (or a lot) of interest to your broker on your margin account? Did you pay some interest to a finance company to buy that raw land investment property? If so, you may be the proud owner of deductible investment interest. The rules can get pretty complicated, so make sure to check out IRS Form 4952 and instructions.

12. Refinance points: Did you refinance your primary or secondary residence in 1998? If so, you may have paid loan "points." You may be able to amortize those points over the life of the loan and generate an additional interest deduction. For additional information, check out the instructions for Schedule A in your 1999 Form 1040 Forms and Instructions booklet.

13. Charitable travel: Do you use your auto for charitable purposes? If so, you can deduct 14 cents per mile for all qualified charitable travel. Not only that, you may deduct your out-of-pocket expenses when you are serving a qualified organization (for example, Scout leaders can deduct the cost of uniforms).

14. Non-cash charitable contributions: Did you give that old couch to Goodwill Industries? Or, how about those clothing items to the Salvation Army? Don't forget to get receipts and deduct the fair market value of those items as a charitable contribution. Not sure how to place a value on the stuff? Check out http://www.taxsave.com. For a fee, you can buy a list of prices for these goods. And, since most people underestimate the value of the goods, you might be able to recover the cost of the listing in the form of reduced taxes. For additional information, check out IRS Form 8283 and instructions.

15. Exchange students and foster children: You may deduct, as a charitable contribution, up to $50 per school month for housing an exchange student (grade 12 or lower) sponsored by a qualified organization. You may also be able to deduct, as a charitable contribution, expenses that exceed payments received from a charitable organization for providing support for qualified foster-care individuals placed in your home.

16. Investment expenses: Many investment expenses (such as legal and professional fees, fees for investment advice, fees for tax preparation/advice, investment and/or tax books, magazines, subscriptions, safe deposit box fees, IRA custodial fees, certain investment travel expenses, and certain investment entertainment expenses) may be deducted as a miscellaneous itemized deduction on Schedule A. For additional information regarding investment expenses, see IRS Publication 550.

Tax Credits and Other Items

17. Child and dependent care credit: Mom and Dad both work? Had to pay somebody to watch Junior while Mom and Dad are at work? Well, if Junior is under age 13, Mom and Dad may qualify for the dependent care credit. How about if Mom works but Dad is a full-time student with no earned income? The dependent care credit may still be available. Don't forget about a spouse who is disabled and can't care for him/herself. Even if there are no children involved, the dependent care credit may still be available. For additional information, check out IRS Form 2441 and instructions (for Form 1040) or Schedule 2 (for Form 1040A). Also, see IRS Publication 503 for details on Child and Dependent Care Expenses and IRS Publication 903 for information on tax credits of interest to people with disabilities and their caregivers.

18. Foreign tax credit: Do you have mutual funds that invest in foreign stock? Or do you own individual stocks in overseas companies? If so, you probably are charged a "foreign tax" on the dividends that you receive. Not sure how to report those foreign taxes? You can certainly take them as an itemized deduction. But for those of you who don't itemize, or find it more valuable to take the credit, you can complete IRS Form 1116 and take those foreign taxes as a credit against your U.S. taxes.

19. Education Credits: Did you know that you may claim a credit for qualified education expenses paid for yourself, your spouse, and your dependents? It's true. And you can even claim credits for your child's college education. The HOPE and Lifetime Learning credits can be valuable tax busters for you. The rules can get a bit complex, and there are certainly restrictions. But if you or anybody in your family attended a higher education facility last year, it's something that you should take a closer look at. Review the instructions for line 44 on Form 1040 and also review IRS Publication 970 for more information.

20. Child Credit: If your dependent is under age 17 at the end of 1999, you may qualify for a $500 credit? Why? Just for putting up with the kid. Really. There are no special qualifications other than the age of the dependent and your total income (high-income taxpayers don't receive the benefit of this credit). But if you qualify, don't forget to reduce your taxes by the full $500 for each qualifying dependent. Check out IRS Publication 972 for more information and qualification worksheets. This credit is in addition to any child care credit that you may be able to claim, so don't confuse the two since they are completely different issues.

So there you have it. If you recognized all of these issues, you get the Foolish seal of approval.

If you like the way Roy Lewis simplifies confusing tax issues, check out his just-published book, The Motley Fool's Investment Tax Guide 2000: Smart Tax Strategies for Investors. This handy 360+ page guide covers just about every tax aspect of a typical Fool's life: investing, marriage, children, education, homes, home offices, retirement accounts, medical expenses, and much more.)

March 3, 2000

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