Get the 2007 Tax Refund You Deserve

Procrastinators, rejoice! you don't have to feel quite so guilty if you get a late start on your income taxes this year. Thanks to Congress's tardiness in passing tax legislation, the IRS couldn't begin to process some returns until mid February -- about a month later than usual. Unfortunately, that delay will also postpone refunds for millions of taxpayers who usually file simple returns early in the season.

But if your tax situation is complicated, you probably won't even notice the slowdown. You may be waiting for the stragglers among your 1099s to arrive from brokers, mutual funds and IRA sponsors. By the time you've gathered all of your paperwork, the IRS backlog should be cleared out. At least, that's the plan.

The stealth tax

Why the holdup? Blame it on the alternative minimum tax. Congress created the AMT back in 1969 to ensure that 155 wealthy Americans paid their fair share of taxes. But the tax was never indexed to inflation. Lately, it's been entrapping millions of unsuspecting taxpayers -- mainly upper-middle-income Americans with big families and fat state write-offs.

That's because this parallel tax system requires you to figure your taxes twice. First you calculate your taxes under the regular rules, claiming all your allowable credits and deductions. Then you do it again under the AMT rules, which don't allow many of those adjustments. You owe whichever tax is higher (the table on page 61 shows which taxpayers are most likely to pay the AMT). Although the AMT taxes more of your income, it does so at a rate of 26% or 28%. So wealthy taxpayers in the 33% and 35% tax brackets are often unaffected by the AMT.

Last year, the AMT snared four million people, whose tax bills increased by an average of about $2,000. Without congressional intervention, another 20 million taxpayers would have been hit by the AMT when they filed their 2007 tax returns this spring. After prolonged squabbling, Congress finally approved a one-year patch that boosted AMT-exemption amounts slightly above 2006 levels to prevent the expansion of this stealth tax.

That means that if you didn't pay the AMT in 2006, you're probably safe for 2007. But if you paid the AMT in 2006, and your financial situation is essentially unchanged, you can expect to pay it again in 2007.

Ironically, many people affected by this season's delay won't be paying the AMT. They file certain tax forms that can't be processed until the IRS reprograms its computers to reflect the AMT change. For example, if you claim the Hope or Lifetime Learning credit for college tuition -- which is available only to individuals whose income is less than $57,000 and to married couples with incomes less than $114,000 -- mid February is the earliest you can file your tax return.

The delay also applies to taxpayers with incomes less than $100,000 who claim child-care or elder-care credits on the 1040A form. (They can skip around the delay and claim the credit, though, by filing a standard 1040.) Also affected: anyone, regardless of income, who claims a tax credit for installing energy-efficient windows and doors. In either case, if you try to file your return electronically too early, it will be rejected. Paper returns mailed too soon will languish in the to-be-processed pile.

Filing made easy

If you are still filing a paper tax return, this may be a good year to switch to electronic preparation and filing to reduce errors and speed your refund. With direct deposit, you can expect your refund in as little as ten days, the IRS says, compared with four to six weeks in the case of a paper return. If you buy tax-preparation software in a box (such as TurboTax, which includes tax advice from Kiplinger's), download all the latest updates to ensure that you are using the correct forms. If you use the online versions, the programs are updated automatically.

If your adjusted gross income is $54,000 or less (as it is for 97 million taxpayers), you can prepare and electronically file your federal tax return free (go to www.irs.gov and click on "Free File" for details).

When it comes to filing tax returns, the majority of Americans take the easy route. Only 35% of us itemize our deductions; the rest claim the standard deduction. For 2007, that's $5,350 for individuals, $7,850 for heads of households, and $10,700 for married couples filing jointly, all up slightly from 2006.

But don't let habit (or just plain laziness) cost you money. If you bought your first home in 2007, that could be the trigger that makes itemizing make sense. You can deduct your mortgage interest and property taxes, which, along with state income or sales taxes and charitable contributions, may push your total write-offs over the standard deduction.

If you had a baby or adopted a child, you can claim a $1,000-per-child tax credit for each child under 17 whether you itemize or not.

If you turned 65 in 2007, you may benefit by switching from itemizing to taking the standard deduction -- particularly if your mortgage is paid off -- because you are now entitled to a larger standard deduction than younger taxpayers.

And if you have paid the AMT in the past but recently became an empty nester, losing the $3,400 personal exemption for your former dependent might be enough to slip you back into regular-tax territory, says Donna Cocovinis, a tax lawyer and contributing editor to J.K. Lasser's Your Income Tax Guide series.

If you itemize, you need to know about a tough new rule for charitable contributions: You now need documentation -- in the form of a bank record, credit-card statement or acknowledgment from the charity noting the date, amount and recipient -- for every contribution you deduct.

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