12 tips to Cut Your Taxes

The first half-dozen weeks of the year are a no-man's-land for taxpayers. It's too early to tackle the forms, but too late for most transactions that can improve your fate. But don't hang up a "Gone Fishin'" sign yet. Instead, make sure you're ready to reel in these tax breaks.

1. Claim your credits and don't sweat the AMT. A last-minute change defused a time bomb that threatened the savings promised by the new child and education credits. Until the change, millions of taxpayers faced the prospect of wrestling with the notoriously complex alternative minimum tax (AMT) forms. That's because, after figuring the size of their child credits, they would have had to determine whether the AMT would take back all or part of their credits. The new education credits (see the next item) were threatened, too.

The change means that for 2000--and 2000 only, unless lawmakers change their minds again--the AMT can't dilute the power of the child and education credits, the child-care credit or the credit for the elderly. The child credit knocks $400 off your tax bill for each dependent child who was under age 17 when 2000 ended. The credit phases out as adjusted gross income (AGI) rises above $110,000 on a joint return and $75,000 on a single return.

2. Save on education expenses. If you paid college tuition in 2000, watch for a new form in the flurry of tax paperwork that arrives in January: the 1098-T. It's a reminder that you may qualify to receive the new Hope or Lifetime Learning credit. The size of those credits--a maximum of $1,500 per student for the Hope and $1,000 per return for the Lifetime Learning--is based on what you paid in tuition and fees, and on your AGI.

Another new form--the 1098-E--will show how much interest you paid student-loan lenders. Up to $1,000 of that interest can be deducted on your 2000 return, even if you claim the standard deduction, assuming your income is not too high. But don't rely solely on your 1098-E to jog your memory. You can also deduct the interest on standard bank loans (or almost any other kind of loan, except loans from relatives or company retirement plans) used to pay tuition or room-and-board expenses, even though such lenders won't be sending out the new form.

3. Cash In on refinancing again. If you slashed your carrying costs with a new loan in 2000, congratulations. Any points you paid to get the new loan are deductible, but only over the life of the loan. If you got, say, a 15-year mortgage, then you can deduct one-fifteenth of the points you paid each year.

Serial refinancers get a much better deal. If the loan you refinanced in 2000 is one you had previously refinanced, all the as-yet-undeducted points on the first refinancing are now deductible on your '98 return.

4. Get a tax bonus from your business purchases. Many people who moonlight out of their homes don't claim home-office deductions--either because they don't meet the stringent tests required or they worry that doing so could jeopardize their right to tax-free profits when they sell their houses. Remember, though, that you don't have to take a home-office deduction to claim legitimate expenses for a business run out of your home. For example, if you purchased new business equipment in 2000, you can deduct up to $18,500 of the cost right away rather than depreciating it over several years. A $2,000 computer used, say, 80% of the time for business would mean a $1,600 deduction on your Schedule C, saving you up to $245 in self-employment taxes on top of the $414 income-tax savings in the 28% bracket.

5. Let your kids report their own income. Thinking of reporting your child's interest or dividend income on your return rather than tussling with the onerous "kiddie tax" form? Think again. The kiddie tax applies to dependents under age 14 who have more than $1,400 in unearned income. The first $700 is covered by a standard deduction; the second $700 is taxed at the child's rate. Any amount over that is taxed at the parents' top rate. If the child's only income is from interest and dividends (including capital-gains distributions from mutual funds) and is less than $7,000, it can be reported either by the child on Form 8615 (the kiddie-tax form) or on Form 8814, which is attached to the parents' 1040. Since phaseouts for credits and deductions and eligibility for deductible and Roth IRAs hinge on the income reported on your return, adding your dependents' income to your own could cheat you out of some lucrative breaks.

6. Deduct your traditional IRA. If the choice between opening an old-fashioned IRA or a new Roth depends on whether you can deduct your deposit, remember this: You are no longer considered to be covered by a retirement plan at work just because your spouse is. If you are not covered by a plan, the income phaseout range for your right to write off your contribution to a regular IRA is $150,000 to $160,000. If you haven't already made a contribution for 2000, you have until April 15.

7. Don't overpay capital-gains taxes. If you sold mutual fund shares in 2000, be sure to report the right basis for calculating your capital-gains tax. Reinvested dividends and capital-gains distributions raise the basis and lower the tax bill on shares you sold; double-check your calculations using year-end statements that show each investment. If you're not sure of your basis, call the fund and ask if it can provide average-basis information.

8. Minimize the cost of a Roth conversion. Form 8606, once the exclusive province of nondeductible IRAs, has been given an additional role as keeper of Roth IRA conversion calculations. If you made a conversion in 2000, dig out your last 8606 form to establish your total nondeductible contributions. Divide that figure by the total of all your IRA holdings. That's the percentage of your conversion that is nontaxable.

9. Document your generosity. Make sure you have documentation for all charitable gifts worth more than $250. A canceled check won't do if you're audited, so get written confirmation from the charity. Now.

10. Let Uncle Sam underwrite your move. If you moved to take a new job in 2000--or relocated because your job moved--the cost will probably cut your tax bill. The rules are a little tricky, but basically if you moved more than 50 miles, your moving expenses are probably deductible--even if you don't itemize. New grads who moved to take a first job can cash in on this tax-saver.

11. Put your refund to work faster. If you're due a refund, fill in the bank-account information on your 1040 to have your money deposited directly to your account rather than waiting for a check in the mail. Not only will you receive your money more quickly, but you'll also avoid the fate of the almost 100,000 people whose 1997 retired checks were returned to the IRS by the post office

12. Withhold less this year. The IRS swears it won't suffer from any year 2000 glitches. But do you really want to take the chance that your big, tat refund check might be caught in the agency's computers next year? Take the money in each paycheck this year and you won't have to give it a second thought. Trim your withholding by filing a new W-4 form with your employer. You'll see the benefit long before you prepare next year's tax return.

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