The 1986 Form 1040 could be called the ``Last Chance Tax Form.'' While the Internal Revenue Service is showing off its simplified new W-4A withholding form, a lot of people haven't done their taxes for last year. If not, they have a chance to say farewell to several tax-saving items that were eliminated by last year's tax reform law.
This will be the last chance to deduct your contribution to an individual retirement account (IRA), the last chance to use income averaging, the last chance to take the $100 or $200 exclusion for dividends, and the last chance for the 60 percent capital-gains exclusion.
As for lower tax rates, fewer deductions, and all the other changes of tax reform, you don't have to worry about them much now.
``When you're thinking about your 1986 taxes, most of what you read about tax reform doesn't apply to '86,'' says Joel Walters, tax supervisor with Grant Thornton International, an accounting firm. In most areas, he says, ``there's no effect on this filing.''
If you haven't opened an IRA for 1986 yet, you have until April 15 to do so, and should put as much as you can afford into it before filing your return.
There is a tax reform caveat, however. Under the new law, it's more costly to make early withdrawals, so if you think you might want to get at the money in a few years, consider some alternatives like municipal bonds or single-premium life insurance. If you do see the IRA as a long-term proposition, however, then take this last chance to get the full deduction.
Another last chance is available to people who saw their income take a big jump or a dive in the last few years. The sound theory of earlier Congresses was that the tax burden of these income fluctuations should be evened out through income averaging. The 99th Congress didn't see it that way and ended income averaging as of this year.
If you think you might be eligible for income averaging, get a copy of Schedule G. It has 28 lines, but you have to fill out only 14 of them to see if you're eligible. If you are, take advantage of it now - while you can.
This is also the last chance to exclude up to $100 of qualifying dividends ($200 for a joint return). Your tax return must show the total amount of dividends received, minus the amount you are permitted to exclude.
Qualified dividends can come from several places, including domestic corporations, mutual funds, taxable insurance companies, and savings-and-loans.
``This is also the last year for sales taxes,'' says Larry Goldstein, tax manager at Arthur Young & Co., the accounting firm. Again, thanks to tax reform, sales taxes will no longer be deductible, but they are for 1986.
When you're thinking about sales taxes, Mr. Walters points out, think about using your receipts instead of the sales tax tables. ``Look at any receipts you may have for major purchases,'' he says. ``If you bought some big appliances, like a stove and refrigerator,'' you may have paid more in sales taxes than the tax tables give you.
If buying those appliances was part of moving into a new home, you can also deduct the ``points'' you paid to get the mortgage, Walters points out. People who refinanced existing home mortgages will not have this privilege, however. The IRS has ruled that points paid to refinance existing mortgages are not deductible.
But all may not be lost, Walters says. ``There is legislation in Congress to make these points deductible. There's an argument that the IRS is in error.''
A somewhat risky strategy would be to deduct the points anyway and if challenged by the IRS, fight back. You might win in a tax court. Then again, you might not, so here's another tack: Save all records related to the refinancing and if Congress does overrule the IRS, file an amended return.
There are some other items that may save some money when you're filling out this year's tax form.
If you made a charitable donation or paid a medical bill by credit card before the end of 1986, you can claim the deduction, even if the credit card bill wasn't paid until this year.
If you worked for more than one employer, you may have had more than $3,003 withheld for social security taxes. That's the most that's supposed to be taken out, so any excess can be claimed as a credit on your return.
If your charitable work includes driving, you can deduct 12 cents a mile, plus fees and tolls.
While most couples will file a joint return, if one spouse had high medical expenses or casualty losses last year, separate returns may work better. ``Fill out your forms both ways and see which works best for you,'' Mr. Goldstein says.
If you are married, there's one more ``last chance.'' This is the last year to take the deduction for married couples when both spouses work. Schedule W ``could be worth $3,000 in deductions,'' Walters says.
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