10 tax goofs many of us keep making

Misusing -- or not using -- the earned-income credit

This one I blame on Congress. It's a provision to help the poorest in our nation, but lawmakers designed it to be one of the most convoluted provisions in our tax code.

It's so bad that the IRS reports failure to claim the earned-income credit as its No. 6 top taxpayer mistake and incorrectly claiming the credit as No. 7.

Lots of crooks -- and unwitting but misinformed taxpayers -- illegally claim the credit. Many of those whom the credit was designed to aid lack the tax sophistication or the dollars necessary to hire a professional to claim those dollars.

Losing receipts

Receipts can mean deductions and tax savings. So, hunt down all those charitable organizations to which you contributed and make them give you a receipt for the donation. If you made more than one donation, get a receipt for each one. The receipt needs the date, the amount, the name of the charity. No receipt means no deduction.

Under current law, you need some form of written documentation for all your charitable contributions. So, if you just put cash in a collection plate and don't get a receipt, you're making a contribution, but you won't get a deduction. Bring a check or use an envelope where you can get a receipt from the charity.

We're not done yet. Start hunting down receipts for medical expenses. Perhaps you spent enough on health care that your expenses exceed the 7.5% income threshold. The total expenses that exceed 7.5% of your adjusted gross income are deductible. And don't forget: These can include health insurance premiums.

And don't forget the paperwork to prove property tax and mortgage deductions.

Failing to report domestic workers

Even if you don't want to be a Supreme Court justice or the U.S. attorney general, you still have to pay the payroll taxes on your nanny, housecleaner or in-home caregiver.

Sorry, it's the law. If you pay $1,600 or more in 2008 (or $1,700 in 2009) to any one household employee, you're going to have to withhold, and match, both Social Security (6.2%) and Medicare (1.45%) taxes. You must file Schedule H (.pdf) to compute and report the liability.

You'll owe federal unemployment taxes if you pay wages of $1,000 or more in any calendar quarter to household employees. You may also owe state employment and disability taxes.

If you pay certain related parties, or employees under age 18 who qualify, you may escape liability. See Publication 926 (.pdf) for details.

Failing to report all income

You can't avoid reporting all of your income just because you don't get a W-2 form or a 1099. Not all income is reported on 1099s. That doesn't excuse you from having to pay tax on it. The fact that there's no reporting to the IRS doesn't prevent the agency from auditing your receipts and reconciling your bank deposits with your reported income.

Unreported income can lead to civil and criminal sanctions. I don't care how lucky you feel. The potential consequences aren't worth the risk.

Failing to check for the alternative minimum tax

The AMT, or "awfully mean tax," was created to catch high-income taxpayers who used allowable deductions and credits to wipe out too much tax liability. It's an alternative computation of your tax, with different deductions, add-backs and flat rates.

You pay the higher of your regular tax or that computed under the AMT.

For 2008, Congress raised the exemption amount to $46,200 for singles and $69,950 for joint filers.

Unfortunately, because it hasn't been updated to reflect inflation since the original bill was passed, the AMT was projected to hit about 19 million families in 2007, including 64% of households earning $100,000 to $200,000. (The IRS said this week it didn't have final figures.) To keep the number of people paying AMT at tax year 2008 levels, the new law increases the AMT exemption amounts for tax year 2009 to $46,700 for individuals and to $70,950 for joint returns.

You might not think you're a victim, at least until you get that letter from the IRS with penalties and interest. The IRS has an AMT estimation calculator on its Web site, but, to be sure, run through Form 6251 (.pdf).

Updated Feb. 27, 2009

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