Second in a series
Your fate this tax-filing season was only partly sealed New Year's Eve.
Admittedly, the size of your 1996 tax bill will largely be determined by what transpired last year - how much income you earned and the amount of deductible expenses you racked up.
But the decisions you make when filling out your tax return can make a significant difference in your tax bill - sometimes hundreds or even thousands of dollars difference.
For example, the tax code provides alternative methods for figuring the tax on certain types of income and multiple options for computing various tax deductions. Which option you choose can make a significant difference in how much you'll owe the Internal Revenue Service this tax season.
''Every time you have an option, you should analyze it,'' said David Rhine, a New York tax partner at the accounting firm of BDO Seidman.
Investors: For example, many investors who sold part of their holdings in a mutual fund last year can take advantage of an alternative method, known as ''average cost,'' to minimize their capital gains tax. There are also a couple of different methods for computing write-offs for any foreign taxes you had to pay on your overseas investments.
Lump-sum pensions: Many retirees who received a lump-sum distribution from a company pension plan last year have a couple of options for sharply reducing the tax bite on the payout. One option is a special 10-year averaging method. The other is a five-year averaging formula. As a general rule, five-year averaging beats the 10-year method only in cases where the distribution is very large - in excess of $358,220 in 1996, according to Sidney Kess, a New York tax lawyer.
Annuity payments: Similarly, there is more than one method for computing the tax on annuity payments from employer retirement plans in cases where you made after-tax contributions of your own to the plan. Most retirees who started receiving distributions last year have the choice of using either a ''simplified'' or ''general'' formula to determine how much of the payments are tax-free. The simplified method is usually the best option. (Under the new tax law, individuals who started to receive annuity payments after Nov. 18 don't have a choice; most are required to use a new, less generous, version of the simplified formula.)
Savings bonds: An advantage of Series EE Savings Bonds is that you don't have to pay tax on the interest until you redeem the bonds. But if the bond is held by a child, it might pay to have the interest subject to tax each year. The reason: the first $650 a year in investment income earned by a child is generally exempt from tax. Thus, if the child is expected to earn only moderate amounts of investment income each year, little if any tax is likely to be paid on the bond's interest each year, thanks to the $650 exemption.
Business: There are several depreciation methods for writing off business equipment; two options for computing deductions for business use of a car (standard mileage rate or actual expenses); and two ways to write off meals and incidental expenses on business trips (actual expenses or a per-diem allowance).
What's your filing status?
Many individuals even have a choice of filing status, which can have a sizable effect on your tax bill.
Married couples will almost always pay less tax by filing a joint return rather than separate returns. But there are a few situations where it can pay husbands and wives to file separate returns. The most common case is when one spouse incurred exceptionally large medical or ''miscellaneous''
itemized expenses. Filing separately might also help some couples avoid part of the phaseout of personal exemptions and reductions in itemized deductions that apply to upper-income taxpayers.
If you're single or legally separated, check to see whether you qualify for ''head-of-household'' filing status, which will result in a lower tax than ''single'' filing status. Many individuals end up paying more tax than necessary because they don't realize that they're eligible to file as a head of household.
''There is an inclination for individuals to think of themselves as being either married or single,'' Mr. Rhine said. ''Head-of-household is sort of a hybrid of the two.''
Single parents can qualify if they had a child living with them and paid more than half the cost of maintaining the household. You might also qualify if you're providing financial support to an elderly parent - even if he or she doesn't live with you.
How much you'll be able to deduct on your tax return will also depend on how thoroughly you dig through your records for deductible expenses. Even if you're using an accountant or some other paid preparer, gathering your records of deductible expenses and toting them up will be your responsibility. It's a rare - and wealthy - individual who can afford to pay an accountant to rummage through a shopping bag full of tax records.
Many taxpayers miss out on valuable deductions simply because they don't search hard enough through all their records, including sales receipts, credit card statements, canceled checks, bills, calendars and diaries. ''Invariably, things will be missed,'' said Thomas Beneventi, a tax partner at the national accounting firm of McGladrey & Pullen.
According to tax practitioners, deductible expenses that are often overlooked include out-of-pocket expenses incurred in performing volunteer charity work, charitable contributions charged to a credit card, transportation to doctors' offices, various job and business-related expenses, expenses paid by check drawn on a money market fund and health-insurance premiums paid by the self-employed (which might be eligible for the special self-employed health insurance deduction).
Look through '95 records
When searching for deductible expenses, be sure to look through your 1995 tax records in addition to your 1996 records.
What you're looking for in the old tax records are expenses that you weren't allowed to fully deduct on your 1995 return but which are eligible to be carried over and deducted on your 1996 return.
A common example are ''points'' paid in a mortgage
refinancing. Deductions for these one-time lender fees usually must be spread over the life of the loan. So if you refinanced in a prior year, you probably have points eligible for deduction on your 1996 return.
Capital losses are another common source of ''carry-over'' deductions. In any one year, capital losses can be used to offset any capital gains you have plus up to $3,000 of other income. Any excess losses can be carried over to a future year.
Other potential carry-over deductions are multiyear subscriptions to professional and investment publications, home office expenses, investment interest, business depreciation, large charitable contributions, real estate losses, ''passive activity'' losses, net operating losses and alternative minimum tax credits.
Also check through your bank and credit card statements from early this year for expenses eligible for a 1996 deduction. Expenses incurred at the tail end of the year usually won't show up on credit card bills or in your canceled checks from the bank until January or February of the following year.
As a general rule, an expense paid by check qualifies for a tax deduction on 1996 returns if the check was mailed by Dec. 31. An expense charged to a credit card qualifies for a 1996 deduction if the expense was charged by Dec. 31.
