Avoid These Common Mistakes on Your 2008 Return

(ARA) – The bad news? With so many changes made for the 2008 tax season, some taxpayers are bound to make a mistake on returns. The good news? You can save time and money by learning from the mistakes of others who have already filed.

Recovery Rebate Credit

The Internal Revenue Service reported that nearly 15 percent of 2008 tax returns filed by the end of January included errors involving last year’s federal stimulus payments. The recovery rebate credit is a one-time benefit for taxpayers who didn't receive the full economic stimulus payment last year and whose family circumstances may have changed (making them eligible for some or all of the rebate amount).

People who have filed returns erroneously claimed the recovery rebate credit, did not claim the proper credit amount or mistakenly entered their payment amount on the recovery rebate credit line. Making an error on your recovery rebate credit will result in a higher tax payment or smaller refund, and ultimately rejection of your return or a delayed refund.

Here’s what you need to know in order to correctly report your recovery rebate credit:

  • Only about 3 percent of taxpayers will receive a recovery rebate credit.
  • Although your 2008 stimulus payment amount will not appear on your return, you need to know the amount in order to figure your recovery rebate credit. You can find your payment amount on Notice 1378 the IRS sent to those who received the payment, by visiting www.IRS.gov or by calling the IRS at (866) 234-2942. Quality tax preparation software will determine your eligibility by simply asking you for your payment amount.
  • Any recovery rebate credit you receive will be added to your refund or subtracted from the amount you owe on your return.

Earned Income Tax Credit (EITC)

A quarter of those who qualify for the earned income tax credit don’t claim it. Qualified taxpayers could be entitled to a credit of up to $4,824. The EITC is for taxpayers who were paid wages or self-employed in 2008 but had lower incomes, and is based on the amount of earned income and qualifying children in the household (taxpayers without children may qualify).

Just because you didn’t qualify for the credit last year doesn’t mean you don’t qualify now. To be eligible this year, you must meet the following requirements:

  • Your filing status must be single, married filing jointly, head of household or qualifying widow.
  • You, your spouse and qualifying children must have valid Social Security numbers.
  • Your investment income must be $2,950 or less.
  • You must be a United States citizen or resident alien all year.
    1. $38,646 ($41,646 married filing jointly) with two or more qualifying children
    2. $33,995 ($36,995 married filing jointly) with one qualifying child
    3. $12,800 ($15,880 married filing jointly) with no qualifying children

Find out if you qualify at www.IRS.gov. Tax preparation software will also help you determine whether you’re eligible.

E-filing

The error rate for federal e-filed returns is about 1 percent versus 20 percent for paper returns because the software checks for math errors and missing information. In addition, e-filing allows you to receive your refund in about half the time as paper returns — in as few as eight days combined with direct deposit. If you owe money, you have the option of paying electronically.

Rest assured your information is protected through encryption, and the IRS will notify you when your return has been accepted within 48 hours.

In order to e-file, you must have either your adjusted gross income (AGI) from last year (line 37 on Form 1040, line 21 on Form 1040A, and line 4 on Form 1040EZ) or your self select PIN from last year. If you can’t locate your AGI or self select PIN, call the IRS at (800) 829-1040.

Many tax preparation software programs allow you to e-file your federal return for free. One of them, TaxACT Free Edition, allows anyone, regardless of income, to prepare, print and e-file your federal return for free.

Nontaxable income

Examples of items that are not included income on your return:

  • 401(k) contributions
  • Economic stimulus payment received in 2008
  • Pre-tax health insurance
  • Pre-tax child care
  • Adoption expense reimbursements for qualifying expenses
  • Child-support payments
  • Gifts, bequests and inheritances
  • Workers' compensation benefits
  • Compensatory damages awarded for physical injury or physical sickness
  • Welfare benefits
  • Cash rebates from a dealer or manufacturer

More information about taxable and nontaxable sources of income can be found at www.IRS.gov, and quality tax preparation software like TaxACT will also help you differentiate between the two types of income.

Unemployment, bankruptcy, foreclosure and natural disaster provisions

With so many Americans going through difficult financial times, it’s reassuring to know help is available. For example:

  • Severance pay, unemployment compensation and payments for accumulated vacation and sick time are taxable. Public assistance and food stamps are not taxable.
  • Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers can usually exclude income from the discharge of debt on their principal residence or mortgage restructuring.
  • If you were affected by a hurricane, tornado, flooding or natural disaster during 2008, you may be eligible for a number of special relief provisions.

Whatever your situation, be sure to file your return and pay as much as you can by April 15 in order to avoid penalties and interest. Contact the IRS immediately if you believe you will have problems paying your taxes because payment options are available. Additional information is available 24/7 at www.IRS.gov.

Courtesy of ARAcontent