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Have any burning tax questions?

Becky Bosshart
Appeal Staff Writer

With W-2 and other important documents in hand, taxpayers are starting the annual paper-shuffling, calculator-punching event known as filing their income-tax forms.

Many will bypass the paper-and-pen method and turn to their computers, because of the availability of Free File through the Internal Revenue Service. These taxpayers will burn through the forms online.

Last year, 5.1 million taxpayers used Free File, which is expected to increase by at least 3 million this year because Telefile is no longer available.

“Because of declining usage as the years have gone by, and the prominence of e-filing, Telefile is no longer available,” said IRS spokesman Raphael Tulino. “We hope those folks who used Telefile will move to Free File online if they qualify.”

Reasons to file now:

• Most employees already have their W-2 form. Employers are required to have them in mailboxes by Feb. 2.

• The earlier you file, the sooner you receive the money the government owes you. Or, the sooner you get to pay the government what you owe.

• Standard deductions increased in 2005 by $150 to $300, so you may have a surprise in store for you this year.

First, a warning: Avoid a costly tax scheme

The refund anticipation loan is an avoidable tax-time expense that targets minority, low-income working families claiming the Earned Income Tax Credit.

About 12.3 million American taxpayers spent an unnecessary $1.6 billion in 2004 paying back unnecessary loans at cut-throat interest rates. Often these taxpayers take out the high-interest rate loans to receive their refund money faster, according to analysis of IRS data done by the National Consumer Law Center and the Consumer Federation of America. These Americans obtain their refund money faster by two weeks or less than if they used electronic filing and direct deposit.

“Refund anticipation loans drain money away from the earned income tax credit, which is from the pockets of working poor families into the coffers of multi-million dollar corporations,” said National Consumer Law Center staff attorney Chi Chi Wu.

The problem is getting worse. The number of Americans who took out such loans increased by 230,000 from 2003 to 2004, according to the consumer law center.

Refund anticipation loans are high-cost bank loans secured by the taxpayer’s expected refund. The loan will last one to two weeks until the IRS refund repays the loan. The loans cost from $29 to $120 in fees and are offered by bankers and lenders that are nationally known, or from small lenders who set up in lower-income neighborhoods for a few weeks around tax time.

The annual interest rate for a refund anticipation loan can range from 40 percent to more than 700 percent. This year, a loan for the average refund of about $2,150 will cost the taxpayer about $100 in fees. That means the annual interest rate of that loan would be 178 percent.

Taxpayers can save on these expensive fees by filing tax returns electronically and having refunds direct deposited into their own bank accounts, which is free.

Earned Income Tax Credit is the refundable federal income tax credit for low-income working people and families. When the credit exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit, according to the IRS.

For more information: Visit http://www.consumerlaw.org for the “Don’t Pay to Borrow Your Own Money” brochure, or call 617-542-8010.

Visit http://www.irs.gov/individuals/article/0,,id=96406,00.html to find out if you qualify for the Earned Income Tax Credit.

How do I pay my taxes electronically without being charged a fee?

The IRS partners with private-sector tax services to offer Free File, which is the free tax preparation and electronic filing for most taxpayers. More than 70 percent of taxpayers – those with an adjusted gross income of $50,000 or less – qualify for Free File this year. Each company that partners with the IRS has its own criteria. Some offer Free File to those with a larger income, but it varies by state. You have to check out each company.

Taxpayers who qualify for Free File do not have to purchase any product in order to qualify, but you must access it through the IRS Web site at http://www.irs.gov. By going directly to a company’s web site, you may not get the free service.

New (mostly) for 2005

A benefit for (some) business

A new special deduction for manufacturers that starts in 2005 (and gets bigger in 2006 and later years) is available to engineers and architects. Certified Public Accountant John Bullis said this deduction is available to them as long as their services are involved in real estate and in the U.S.

“The key thing is that it’s a manufacturers’ deduction and engineer and architects can get in on it,” he said.

The statute is also significant because those who qualify can deduct up to 3 percent of qualified production activities income, said Steve Johnson, an E.L. Wiegand professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas.

The health savings account

The health savings account started in 2004, but it became more popular this past year. Bullis, who owns Bullis and Company CPAs, said they are used by those who have a medical insurance policy with a high deductible and premium.

“You are allowed to put money into a custodian account and when you take money out of the custodian account to pay for medical expenses it is not a taxable income,” he said. “But money you put into it is a tax deduction, whether you itemize or not. I think there is going to be more health savings accounts in 2006.”

If you do not use the balance in your account in a year you don’t lose it – like a flex account – it just carries over.

Extensions

This is the first year taxpayers can get an automatic six-month extension on filing, said IRS spokesman Raphael Tulino.

“Before 2006 it was a two-extension system,” he said. “The first one was four months long through Aug. 15. If you wanted the second extension – which was two months- you needed permission from the IRS plus a hardship.”

DMV rebate

All Nevadans received a minimum of $75 on their vehicle registration this year, even some people who did not did not own a vehicle, said Gil Yanuck, assistant state director for the AARP’s Tax-Aide program.

“The person who received $75 and did not pay any registration fees has to take that $75 and include it as miscellaneous income because they didn’t have any expenses,” he said. “On the other hand, if a person got the $75 but their registration fees totaled $65 they only had $10 of miscellaneous income to report.”

The rebate was for 2004 registration fees, so the taxpayer would have to go back into their records to see what they paid for registration. If the taxpayer itemized deductions and included the car registration fee as a deduction in Schedule A, he or she must complete a worksheet in Publication 525 to determine the extent of what they may have to include as income in 2005, he said.

If the person does not itemize and the check is greater than what he or she spent in 2004, the difference in the amount needs to be listed as miscellaneous income for 2005 taxes.

What exactly is a child?

One significant change as a result of late 2004 legislation is a new definition of “qualifying child.”

Tax professor Steve Johnson said that matters for a number of reasons. If a child is a dependent, the filer can get a dependency exemption. A child tax credit can be taken. If single with a child, the taxpayer can get a better filing status as head of household. Children affect the amount of earned income credit a person receives if the person is low income. A taxpayer can also receive the child and dependent care credit.

“In legislation that became effective in 2005, Congress adopted a uniform definition for most people,” Johnson said. “It won’t change what they can take, but it’ll make it easier for them to understand.”

Ernie Mayhorn, a tax specialist and owner of Mayhorn Financial Services of Carson City, said the change in the dependency definition has affected a few of his customers.

“There used to be seven definitions of a child, according to the IRS, so it was very confusing,” he said. “Now they’ve compiled it into one. However, whenever you compile something, stuff gets lost. Let’s say you have a step-nephew who moved in in April. You can’t claim him now because he would have had to live with you for all 12 months. Before it had been more than six months.”

Standard mileage deduction change

The standard mileage rate changed, and for those who are self-employed and use their car for business that will be a significant bonus. The standard deduction amount for January to August 2005 is 40.5 cent a mile. On Sept. 1, 2005 that amount became 48.5 cents.

Hurricane relief

Special Hurricane Katrina tax relief provisions that affect charitable contributions, and other items, are detailed in IRS Publication 4492, Johnson said.

“For example, let’s say that I organized a food drive for victims so I drove around in my car collecting food,” he said. “I can take a charitable contribution deduction for that mileage. There was an increased rate for Katrina relief not available for other charitable causes.”

Other forms you may need:

1098 – Homeowners who paid at least $600 in interest will receive this form from their mortgage company.

1098-E – For taxpayers who have student loans, if the interest they paid for the year is at least $600

1099-INT – For those who cashed savings bonds or earned more than $10 in interest on a bank account

1099-DIV – For taxpayers who have earnings from stocks and mutual funds, this outlines dividends and capital gains more than $10.

1099-B – Brokers send this form for those who sold stocks, bonds or mutual funds in 2005

– Source: Yahoo! Finance at taxes.yahoo.com

— Contact reporter Becky Bosshart at bbosshart@nevadaappeal.com or 881-1212.