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Returns, Refunds and Relief

Tax refunds are bigger - averaging 12 percent more - but the returns are proving far more complicated than in years past.

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published March 10, 2002

Settling up with Uncle Sam is never fun, but this year it could be more rewarding than usual.

Federal income tax refunds are bigger this year thanks to expanded tax credits, lower tax rates and, in some families, shrunken incomes. The down side: Returns are so complicated that hundreds of thousands of taxpayers are making mistakes trying to complete them.

"Everybody is very pleased with the child tax credit. That's been a big help for families," said Tampa accountant Sarah Wilhite, who has her own firm.

In time for this year's tax forms, the child credit rose to $600, a $100 increase, and became partly refundable for more low-income families. That means they can take advantage of the credit even if they owe no taxes, although filling out the form has become more challenging. Working families with modest incomes also are benefiting from an expansion of the Earned Income Credit. Couples with two or more children can now qualify with incomes of up to $32,121.

In addition, tax season is giving investors a little salve for the wounds inflicted by a painful year in the financial markets.

"There are a lot more capital losses than capital gains being reported this year," Port Richey accountant Michael Stone said. "We've got a lot of folks who have losses because they decided to change their portfolios around rather than weathering the storm."

Capital losses can be used to offset capital gains, if you are lucky enough to have any gains. After that, up to $3,000 a year in losses can be used as a deduction against other types of income. Any excess can be carried forward to future years.

On the income side, investors are reporting less interest income as a result of declining yields on bonds and bank certificates of deposit, Stone said. The result: Many of those who paid 2001 estimated taxes based on their 2000 incomes are finding themselves eligible for refunds.

The IRS reported that through March 1, the average refund was $2,091, about 12 percent higher than the same time the previous year.

But figuring out how much you owe Uncle Sam or he owes you is even tougher than usual this year.

The biggest culprit is last year's tax rebate, which the IRS has more recently taken to calling a "rate reduction credit." Congress ordered checks mailed last summer in an effort to stimulate the sluggish economy. The amount, up to $300 per person, $500 for a head of household or $600 for a couple filing jointly, was based on taxes paid in the year 2000. But it wasn't actually a refund of 2000 taxes. Instead, it was a way to deliver in advance the projected tax savings from a reduction in the 2001 tax rates.

Now it's time to settle up with the IRS, and that's what's causing the problem. If you received the maximum check, you are supposed to ignore the rate reduction credit, skipping over the line that lists it on the various tax forms. Even if you received more than you deserved, the IRS says you can keep it.

But if you did not get the maximum, you are supposed to calculate how much more you should get, using a worksheet in the tax forms. And that's not all: There's an exception if you can be claimed as a dependent on someone's return. In that case, you are supposed to skip the credit and instead complete the "tax computation worksheet for certain dependents" found in the tax instructions.

More than 1-million taxpayers got it wrong in just the first few weeks of filing. They claimed the credit when they shouldn't, failed to claim it when they should or calculated it incorrectly. Even people who turned to professionals for help with their returns have been finding the credit bewildering.

"All we need to know is whether they received the money or not, but some people just don't remember," said St. Petersburg accountant William Becker of Cherry, Beckaert & Holland. "Their checks came in August or September and they've forgotten all about it."

St. Petersburg accountant Louis Ortiz of Garcia & Ortiz said forgetfulness is just one of the problems.

"Sometimes one spouse got it, deposited it and spent it and the other spouse didn't know," he said.

So many people are so confused that the IRS set up an automated system to provide taxpayers with the amount they received from last year's checks. Call 1-(800) 829-4477 to hear your information.

The IRS says it is correcting the problem returns, although the process may cause a short delay in receiving a refund.

"Where someone has given us the wrong figure, the IRS is making the correction pretty quickly," said Julie Rowan, district manager for H&R Block tax preparers in St. Petersburg.

While the reduction in the lowest tax bracket was reflected in the rebate, higher income taxpayers also are getting the benefit this year of a half percentage point reduction in upper bracket tax rates. The 28 percent bracket, for example, has become the 27.5 percent bracket. The lower tax rates already have been reflected through reduced tax withholding for working taxpayers, but those who paid estimated taxes based on last year's rates may be due a refund. Another half percentage point reduction will apply to 2002 returns.

Even those who have the rebate issue down pat may find other aspects of tax preparation daunting this year.

Port Richey accountant Stone said it is the capital gain and loss calculations that are giving many of his clients headaches this year.

"With all the divestitures, mergers and spinoffs that have occurred, it's hard for people to keep track of their cost basis," he said. Some of the thorniest cases involve retirees who bought company stock through payroll deduction and dividend reinvestment programs while they were working and discarded their purchase records. People who do not have records are supposed to make a good faith effort to reconstruct them or to pay tax on the entire amount of the sale rather than the gain.

The capital gains calculations also are more complex this year because of new rules reducing rates for some taxpayers on investments held at least five years. For the most part, only those in the lowest tax bracket will be able to take advantage of the change this year. But the new rules do offer a this-year-only tax planning opportunity that will appeal to some investors in higher brackets.

More taxpayers also are having to calculate their taxes twice this year, working through a regular return, then figuring out if they are subject to the alternative minimum tax.

The AMT, designed to make sure the wealthy pay at least some tax, trips up more middle-income taxpayers than it did in the past. Couples with incomes of more than $70,000 who claim lots of credits, deductions or personal exemptions are prime candidates.

"Trying to explain the AMT to people who have never had to pay it before is difficult," Tampa accountant Wilhite said. "They say 'This is the most unfair thing I've ever heard of. Just when I've got something to bring my tax down, they bring it back up again.' "

On most other points, the tax preparation process should be pretty similar to last year. Although Congress has once again been tinkering with the tax law, the major revisions do not take effect until the 2002 tax year.

However, some changes apply to the returns filed this year. Here are a few:

Most taxpayers will benefit from inflation adjustments built into the tax code. For 2001 returns, personal exemptions increase to $2,900 per person, up $100. Standard deductions also increase. The new amounts are $4,550 for a single person, $6,650 for a head of household and $7,600 for a married couple filing jointly.

Up to $2,500 in student loan interest is now deductible during the first five years a loan is in repayment. That's a $500 a year increase from last year.

Self-employed people are the beneficiaries of some additional tax breaks. They can now write off $24,000 in equipment purchases, up from $20,000, without depreciating it over several years. In addition, the limit on Keogh Plan contributions increased by $5,000, to $35,000.

Victims of the Sept. 11 terrorist attacks and the anthrax mailings, as well as victims of the 1995 Oklahoma City bombing, are eligible for substantial tax refunds. For those who think they might qualify, IRS Publication 3920 explains the details.

Even though the news is not always good, taxpayers seem more eager this year to find out where they stand, said Tampa accountant Gregory Rosica with Arthur Andersen. He attributes that to the downturn in the economy.

"People are a little anxious to figure out where they are, whether they owe money or are receiving money back," he said. "They want to refine the number."

Returns are coming in slightly earlier than last year. The IRS said 46.8-million returns had been filed through March 1, 2 percent more than the same time last year. Electronic filing is up 11 percent.

Some of the slowest to file are the tax preparers.

Brandon accountant Andrew Mason of Durkin & Mason said he always asks the IRS for an extension, which gives him until Aug. 15 to file, although any tax due still has to be sent in by April 15.

"You don't worry about your own returns; you worry about the 800 people whose returns you are doing," he said. "It gets busy in January and that goes straight through until April 15. I estimate it, then I go back and make sure it's right before I file it."

-- Helen Huntley can be reached at or (727) 893-8230.

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