To File or Not to File... a Taxing Question

Dear Readers —

I hope you remembered to send Nina Olson a box of chocolates for Valentine’s Day. Trust me, your real sweetie will understand: Olson holds the position of Taxpayer Advocate, which means she’s the government employee who’s job is to stand up to the IRS on behalf of the rest of us.

In her annual report, Olson told Congress something you’d think they’d already know: The most serious problem facing American taxpayers is the complexity of the tax code. Amen!

Right behind that, according to Olson, is the insidious Alternative Minimum Tax. So I’d like to humbly suggest that each one of us let Olson know we appreciate her efforts on our behalf. If you can’t sent chocolate, send a card, send an email. We need this brave woman!

Let me give you an idea of how just complex and cumbersome our nation’s tax code has become.

When the income tax was introduced in 1913 it consisted of 400 pages. Sixty-one years later — 1974 — it was 19,500 pages long. While that’s a five-fold increase, you have to remember it happened over six decades. That works out to an average of about 313 additional pages of new tax language every year over that time period.

By 1995, or roughly 20 years later, the U.S. income tax code took up 40,500 pages. It had doubled in size.

Today, just ten years later, we’re at 60,044. That’s 19,544 more pages — a 50-percent increase in just the past decade. It means that on average 1,954 pages were added each year.

In other words, you’re not imagining things: the tax code is like one of those nasty self-perpetuating creatures in some science fiction movie. Don’t be surprised if baseball commissioner Bud Selig has the thing tested for steroids.

Granted, much of the new ink spilled revising the tax code has reduced income tax rates, phased out the estate tax, given bigger tax breaks to parents, removed some of the “marriage penalty,” created incentives to save for a child’s education, reduced the taxes on capital gains and dividends, expanded tax breaks for small businesses, and granted additional benefits to those serving in the military. Most of us probably like those things.

Nonetheless, you gotta wish the folks in Washington would just come up with a way to write the new rules in language the rest of us can understand. Short. To the point. No ifs, wherefores, buts, “phasing ins,” or “phasing outs”. I suppose it’s too much to ask for. I think something happens to your brain when you drink too much from the Capitol Hill water fountains.

The good news is that despite several major new tax bills passed last year, as far as individual taxpayers are concerned, there are “No big changes in filing status,” according to Mark Luscombe, Senior Federal Tax Analyst at CCH. Oh, sure, the tax brackets have been adjusted for inflation and they (finally!) came out with a uniform definition of “dependant” that applies throughout the Code, but most of the changes are minor.

One significant change that applies for 2004 is the new rule that gives you the option of deducting your state and local sales taxes instead of your state and local income/property taxes. (We discussed that in this Dec. 13 column and this Dec. 27 column.)

One more word about deductions: The rules about making large gifts to charities changed in June of last year. If after June 4, 2004 you donated anything other than cash -- your used car, for example- you need proof of the value of your gift in the event you get audited. So hopefully you got the item appraised before you gave it away. If you are claiming a deduction of more than $5,000, you need to attach IRS Form 8283 to your tax return. If you were especially generous and made a donation of half a million dollars or more (or $20,000 if its artwork), you need to attach a copy of the actual appraisal.

The rules about donating a vehicle to charity got stricter starting this year, as we said last November. In order to get last year’s bigger deduction, a lot of folks rushed to make their donation before the Dec. 31 cutoff. “The IRS is expected to scrutinize return with vehicle donations more closely,” says Luscombe. “Whether they have the resources to do so remains to be seen.”

Now, not everyone who receives income has to file a tax return. It depends on how much income you had. Which probably has you wondering, what, exactly, counts as “income”?

It’s a fair question, but one that is more easily answered by re-phrasing it as, “What income is not taxable?” Here’s a partial list:

— Child support (careful: alimony is taxable income)

— Workers’ compensation

— Damages paid as a result of physical injury or illness caused by someone else

— Welfare benefits

— Cash rebates from a car dealer or a manufacturer of a product

— Adoption expenses that were reimbursed by your employer

— Gifts, inheritances (it’s the responsibility of the person giving/bequeathing the asset who is responsible for any gift or estate tax that’s due)

— Life insurance paid to you due to the death of the insured

— Educational scholarship/grant (part of the amount used for room and board [is] taxable income.)

For 2004, you only have to file a federal tax return if your income exceeds the following amounts:

Filing Status Gross Income Exceeds

Single $7,950

Married filing jointly 15,900

Married, filing separately 3,100

Head of Household 10,250

Please note that if you are self-employed and made more than $400 from your business last year you have to file a federal tax return, regardless of your total income. Also, if you are age 65 or older the limits are slightly higher than those above and also depend upon whether one or both members of a couple are 65 or more.

So, maybe you’re thinking, “Gee, I don’t need to file at all! Lucky me!” Maybe. But you might just want to file anyway.

According to the IRS says about 70 percent of the folks who file a tax return end up getting money back. While most of that is a refund due to the fact that you paid too much tax last year (the subject of a future column), thousands of people qualify for something called the “Earned Income Tax Credit.” If you meet the income requirements, the government owes you money. So it can pay — literally — to file even if you fall below the income amounts above.

If you don’t have children, you could be eligible to receive an Earned Income Tax Credit (EITC) of up to $390.

Kids up the ante. If you have one child and qualify for the EITC, you could receive up to $2,604. That jumps to $4,300 for two or more children. But because of the somewhat daunting chore of trying to figure out if you are eligible for this credit means that millions of dollars every year go unclaimed.

This year the Internal Revenue Service has developed an internet-based worksheet that walks you thru the process of figuring out whether you qualify for the EITC. According to the IRS it should take about 15-20 minutes to complete. You’ll find the so-called “EITC Assistant” (in both English and Spanish) at the IRS homepage, . You can also read or download the EITC rules in Fact Sheet 05-10.

Remember, to get what’s coming to you, you’ve got to request it. That means filing a tax return even if you’re not legally required to do so. If you don’t file, you’re leaving the money on the table.

On the subject of software, as we said earlier this year, millions of people are eligible to use free software to fill out and submit their tax returns. “The IRS tends to like people who use software,” says Luscombe, “because their returns include fewer mathematical errors.”

Whether you’re looking for forms, information about free software, answers to tax questions, or anything else you might need to complete your tax return, the best place to start is again the user-friendly IRS homepage where you’ll find “1040 Central.” (Who says the folks at the Internal Revenue Service don’t have a sense of humor?)

There’s also a handy link on this site for those of you itchin’ to know when your refund check will arrive. (I know who you are: you always manage to file your return two weeks into the new year, never run out of dental floss, and stock up on a year’s worth of birthday cards in January.) Just click on “Where’s my refund?,” answer some basic information such as your Social Security number and the dollar amount of the refund you expect (you did keep a copy of your return, didn’t you?) and you’ll find out the status of your check.

Hope this helps!


Next week: The annual questions about IRAs — how much, when is it deductible, and what about a Roth?

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