The Art of Tax
by P. James Wallace, Senior Tax Advisor, LRTP
“Lines and Forms, 2006”
Occasionally, I have the opportunity to help someone who has prepared a Form 1040A or
a Form 1040EZ wrongly because they did not see a line on the form to enter some
particular item. Sometimes, an item of income is simply omitted (big mistake).
Sometimes it is just misclassified (sometimes significant, sometimes you get away with
it). For instance, I’ve seen Form W-2G gambling winnings misreported as wages. That
time, there was no consequence, but that’s not always true. What if that taxpayer had also
claimed an earned income credit and incorrectly counted the gambling winnings as
earned income? The IRS might be real interested in that mistake.
Many people don’t realize that Forms 1040A and 1040EZ are amputated versions of the
full Form 1040. They are just Forms 1040 with a lot of the less frequently used lines
omitted. If there is an item that doesn’t have a line on your Form 1040A or 1040EZ, you
had better fill out the Form 1040. It is never a mistake to upgrade to a longer form.
Still, some people feel most comfortable with the same form they have filed every year
even when their situation changes. So what does the IRS do? The IRS keeps adding new
lines to the 1040A and the 1040EZ to give people the chance to see those items that they
would have seen if they had just moved to the next form up. This year, Form 1040EZ will
have 14 numeric entries on its page 1, plus for some taxpayers a page 2. EZ isn’t so easy,
is he.
So why am I harping on forms and lines as my February theme? First, it’s a new tax
season and there the traditional annual changes to the forms. In fact there is a brand new
alternative to the 1040, 1040A, and 1040EZ, called the 1040EZ-T, with which we will
conclude this column. But my second reason is that Congress, in their infinite wisdom,
screwed the IRS by changing the tax law after the IRS had already sent this year’s forms
to press! Hence, you, the taxpayer, have new opportunities to misunderstand the forms
this year.
Let me start my explanation with something that is actually clearer on the Form 1040 this
year. In the Adjustments to Income section (lines 23-37 of the Form 1040), line 24 is new
this year and states “Certain business expenses of reservists, performing artists, and feebasis government officials, Attach Form 2106 or 2106-EZ”. An army reservist, for
instance, can put his un-reimbursed army reserve expenses listed on his Form 2106 here
instead of on his schedule A where they might be limited. It looks like this is new tax
law, but no, it has been in effect for a number of years. Previously, this same item would
have been reported with a marginal note on the total adjustments line of this section of
the Form 1040.
Same thing with this year’s new line 34, “Jury duty pay you gave to your employer” –
also previously available with a marginal entry.
Now back to Congress. There were a number of tax breaks set to expire in 2006, such as
the adjustment to income for educator expenses, which many people expected Congress
to extend. Well Congress didn’t act to extend those provisions, the IRS took them off the
tax forms, and then went to press. Then Congress enacted the extensions. Thanks a lot.
So what do you do if you have qualifying educator expenses? You put it on Form 1040,
line 23, “Archer MSA deduction” along with any Archer MSA deduction and a marginal
note.
Another expired then extended adjustment to income is the tuition and fees deduction. Its
line was also eliminated. It is to be included on Form 1040, line 35, “Domestic
production activities deduction” along with any domestic production activities deduction
and a marginal note. Of course it could be more profitable to claim an education credit
instead. Hmmm, better calculate it both ways, including state consequences.
The sneakiest expired/dropped from the form/then extended provision is the sales tax
deduction in lieu of the income tax deduction on the Schedule A. So even though line 5
of the Schedule A only says “income tax”, state and local sales tax can be deducted on
this same line instead. A marginal entry of “ST” with line 5 is required when the sales tax
is taken.
Colorado is one of the trickiest states with respect to this provision. I recommend that
every Colorado taxpayer who itemizes compare the two alternatives. I will have more to
say about this in the March column.
I will wrap this column up with the telephone excise tax refund. Telephone companies
have collected a Federal excise tax for over a century. Now you can get a refund of these
excise taxes that you paid from March, 2003 through July, 2006. But you have to file a
tax return to get that refund.
If you file a Form 1040, you will report the amount of the refund on line 71; Form 1040A
on line 42; Form 1040EZ on line 9. These lines are in the refundable credits section and
are counted as part of the total payments you have made against your tax liability. If you
otherwise owe the government, it will reduce your liability. If you are getting a refund, it
will increase your refund.
What if your income is low enough that you aren’t required to file a tax return? Then the
Form 1040EZ-T was introduced this year just for you! It has just one numerical entry: the
amount of the excise tax to be refunded to you.
So how much excise tax do you get? You have two ways to figure it. First, you can dig
out your telephone bills for the last three years, put the info on the new Form 8913 to
calculate it, and file that Form 8913 with your Form 1040, 1040A, 1040EZ, or 1040EZT. Or you can skip the record keeping and the Form 8913 and use the IRS’s official
estimate (the “safe harbor” method, see your Form 1040, ect. instructions) and get zero,
$30, $40, $50, or $60. Hurray!
If you had a business, including a Schedule C business, at any time in 2003 through 2006,
be prepared for the headache of the special calculations that apply to businesses. Sorry.
<Need habitual, tag line here.
Examples:
“Now keep those pencils and wits sharp, y’hear?”
Or
“Remember, pigs get fat, but hogs get slaughtered.”
Or
“Keep it legal, now.”
Or >
The Art of Tax is a column by P. James Wallace who is solely responsible for its content
and is not approved by the IRS, his employers, or any other person or organization. The
purpose of The Art of Tax is to educate, raise awareness, and maybe even entertain. It is
not to be construed as legal, tax, or financial advice as the particulars of anyone’s
situation may differ and information disseminated in a public forum is never to be relied
upon without appropriate investigation of a person’s particulars and possible exceptions.
Furthermore, license issues prevent Mr. Wallace from issuing any but tax advice, and
that only under certain strictly limited circumstances not met in this publication.