Completing 1997 income tax returns without making costly mistakes will be more of a challenge this tax season as a result of the numerous tax law changes.
Here are some precautions to help ensure that you don't end up paying more tax than necessary or have your refund check delayed or receive a tax deficiency notice from the IRS:
Social Security numbers: If you don't have a Social Security number for each of your dependents, you'll need to obtain one before you file your return. The tax law now requires you to list on your tax return the Social Security number of every dependent, including infants born on or before Dec. 31, 1997. In the past, children born at the tail end of the year didn't need to have Social Security numbers. Congress extended the Social Security ID requirement to the youngest of dependents for 1997 returns to ensure that parents don't claim more personal exemptions than they are entitled. In years past, the IRS had found numerous instances where individuals had claimed personal exemptions for family pets and fictitious dependents.
If you fail to list a Social Security number for a dependent, the IRS can automatically disallow the dependency exemption, as well as the child-care credit and the earned-income credit. To apply for a Social Security number, contact your local Social Security Administration office and ask for Form SS-5.
Pending adoptions: If you are in the process of adopting a child who was in your care last year, you might have trouble obtaining a Social Security number before the adoption is final.
But the IRS is now offering adopting parents temporary identification while a domestic adoption is pending. Ask the IRS for Form W-7A, ''Application for Taxpayer Identification Number for Pending Adoptions.'' The temporary ID will allow parents who qualify to claim the dependency exemption and child-care credit on their tax return.
Verify W-2s and 1099s: Check for errors in your W-2, Form 1099 and other information reports you received from employers and financial institutions. Errors crop up frequently enough to make the tax statements worth checking.
''Very few people check, but I would not naturally assume the information is totally correct,'' said John Gardner, a senior manager in the Washington, D.C., office of the accounting firm KPMG Peat Marwick.
If you find an error, contact the issuer and ask for a corrected version. Don't just insert the amount you believe to be correct on your tax return without requesting a corrected information report. The reason is that the IRS gets copies of the reports and uses them to verify amounts reported on your return. Figuring out whom to call to get a corrected information report should be easier this tax season. Under legislation passed by Congress in 1996, issuers are now required to list on most types of information reports the phone number of the person at the company who can resolve your problem.
Effective dates: Be sure you understand what tax law changes are effective for 1997 returns and which aren't.
''There seems to be a good bit of confusion over what is going to be available when you file your tax return,'' Mr. Gardner said. Because the Taxpayer Relief Act of 1997 was passed last summer, he says, many people assume that all the new law provisions are incorporated in 1997 returns.
In fact, most of the new law benefits, including the child and tuition credits, didn't become effective until 1998 and can't be claimed until you file your 1998 tax-year return a year from now. In most cases, the confusion will be cleared up when taxpayers find no place on their 1997 returns to claim the new breaks.
But in other cases, what's effective for 1997 might not be so obvious. An example: The new exceptions to the 10 percent penalty that usually applies to Individual Retirement Account withdrawals made before age 59ï. Although a couple of new exceptions to the penalty (for certain medical expenses) became effective in 1997, the penalty waivers for withdrawals used to buy a first home or pay college expenses didn't become effective until 1998.
Charitable substantiation: If you made a charitable gift of $250 or more last year, be sure you have a written acknowledgement from the charity before you file your return. The law now requires a written statement from the charity disclosing the amount of your contribution and whether you received any benefits in exchange for your contribution. Although the substantiation letter doesn't get filed with your tax return, you need to have the letter in your possession before you file your tax return.
If you don't have it by then and you later get audited, the IRS agent can automatically disallow your deduction. A growing number of charities are automatically sending substantiation statements to donors. But if you don't receive one, contact the organization. The tax law makes the donor responsible for obtaining the statement. The substantiation requirement applies to any donation of $250 or more made on a given day to a particular charity. Donations made on different days to the same charity aren't aggregated for purposes of the $250 threshold.
Check your 1996 return: Review your 1996 income tax return to see whether there are any sources of income or deductions that you reported last year but which you forgot to include on your 1997 return. Form differences: Most of this year's tax forms look the same as last year's versions. In fact, major alterations were made to only a couple of forms. But be aware that there are differences. Some tax law changes won't be apparent until you read the instructions or the worksheets, such as for the increase in the special self-employed health insurance deduction. And while the law governing the child- and dependent-care credit hasn't been changed, the form for claiming the credit - Form 2441 - contains a new section for specifically identifying which dependents were cared for and how much was spent on each. In past years, you only needed to list the number of dependents cared for.
Direct deposit: Most taxpayers now have the option of getting their tax refund deposited directly into their bank account by the IRS instead of having a paper check shipped by mail. If you're married filing a joint return, be sure the bank account you designate for direct deposit will accept a refund check made out to both you and your spouse. That normally means a joint account. Many banks won't allow a joint refund to be deposited into an individual's account. In such cases, the bank will return the refund to the IRS, which will result in a delay in your refund.
Don't overpay Social Security tax: If you held more than one job last year, check your W-2 form to make sure that you didn't have too much Social Security tax withheld from your paychecks. No matter how many jobs you have or how much you earn, the amount of Social Security taxes any individual has to pay is limited. But because each employer will withhold tax up to the limit, a higher-paid worker who holds more than one job or switches employers during the year can end up having too much Social Security tax withheld.
For 1997, the 6.2 percent Social Security tax applies to only the first $65,400 in wages. So if your W-2 shows you paid more than a total of $4,054.80 in Social Security tax last year, you had too much withheld. You'll be able to claim a tax credit for any excess payments.
Leave enough time: Schedule extra time to work on your return this tax season if you face having to deal with some of the new law complications, such as capital gains. It will take longer. If you can't find enough time between now and April 15 to do a thorough job on your return, request a filing extension. Finishing your return by the deadline is no accomplishment if you end up making costly mistakes.
Audit yourself: Audit your return before the IRS has a chance. Check for math errors, missing entries, incorrect amounts transferred from your 1099 forms, the wrong figure selected from the tax tables and other mistakes and oversights that are routinely caught by IRS computers and can lead to delayed refund checks, discrepancy notices or assessments for extra taxes and penalties.
Also check your return as an IRS agent might to ensure that it can withstand scrutiny. Make sure you have receipts and other required documentation to substantiate your deductions in case you get audited. Pay particular attention to expenses that IRS examiners tend to give special scrutiny, such as business travel and entertainment expenses and home-office deductions. And double-check the eligibility guidelines to make sure you qualify.
