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MONTHLY MONEY SENSE

Time to beat the clock before tax deadline

Some tasks, such as baking a cake and performing open-heart surgery, shouldn't be rushed. It's wise to take your time doing your taxes, too. Otherwise, you risk overlooking valuable tax breaks, which means you'll pay too much. Or you might fail to report all your income, which could trigger a sternly worded letter from the IRS.

 Taking your return to a tax preparer is no guarantee that you'll file an error-proof return. Investigators for the Government Accountability Office, the watchdog arm of Congress, recently had tax returns prepared at 19 outlets of several tax-preparation chains and found errors in all of them. So with less than two weeks until the deadline, here are some common tax-filing blunders to avoid:

TAX DIGEST: Get your tax tips

Itemizing when you should take the standard deduction. If you've itemized your deductions for years, you might assume that itemizing will always produce the lowest tax bill. But that's not necessarily so, particularly if you're getting on in years, says Tom Ochsenschlager, vice president-taxation for the American Institute of Certified Public Accountants.

For example, homeowners who are close to paying off their mortgage probably don't have much mortgage interest to deduct. In that case, you might get a lower tax bill by taking the standard deduction, which is increased annually to account for inflation. This year, the standard deduction is $5,000 for single filers and $10,000 for married couples filing jointly.

Reporting investment income in the wrong place. In the tax wilderness, something that looks like a duck and walks like a duck may actually be an egret. Such is the case with earnings from money market funds, which many taxpayers mistakenly report as interest income. The IRS considers these earnings to be dividends, and that's how they should be reported on your tax return.

The error won't affect how much you owe in taxes, Ochsenschlager says. But the IRS will receive a 1099 form from your brokerage or mutual fund company that says you received the money in dividends, and that won't match the information on your tax return, he says. There's a good chance you'll get a letter about the discrepancy, he says, "And you'll end up using a bunch of stamps straightening it out."

Leaving losses on the table. If you sold some stocks or mutual funds several years ago that were real stinkers, you probably already know about the limits on capital losses. After you've used your losses to offset capital gains, you can deduct up to $3,000 in losses against ordinary income - but no more, even if your losses exceed that amount.

You can, however, carry over unused losses to future years, when you can use them to offset capital gains. If you don't have any capital gains, you deduct up to $3,000 against your ordinary income every year until you've exhausted your losses.

To take advantage of carryovers, you must keep track of your leftover losses. That means keeping good records. If you don't use a tax preparer, try tax software, because most programs will keep track of your losses, Ochsenschlager says.

Overlooking the alternative minimum tax. You may think the AMT is a problem for people who own yachts and polo ponies. And when the AMT was originally created, that was the idea. But because the tax was never indexed for inflation, the number of people who have to pay it has increased every year.

If you earn more than $100,000 a year, have several children and live in a high-tax state, you could be AMT bait. Taxpayers who exercised incentive stock options are also vulnerable.

Tax software programs will automatically calculate whether you owe the AMT, and an experienced preparer will be on the lookout for it.

But if you continue to do your taxes the old-fashioned way, the AMT is easy to miss. The only way to figure out whether you owe it is to prepare your taxes twice - once using the standard method and a second time using AMT Form 6251.

Even if you ignore the AMT, the IRS won't. "Two or three months down the road, after you've already spent your refund, you'll get a notice from the IRS saying you miscomputed your taxes," Ochsenschlager says. You'll have to make up the difference, plus interest on your underpayment.

Omitting Social Security numbers for your dependents. Having children can reduce your tax bill, but the IRS wants evidence that the little people on your tax return are real. You must include Social Security numbers for all your dependents on your return.

If you claim the Child and Dependent Care Credit, which helps offset the cost of child care, you're also required to complete Form 2441 and provide the caregiver's name, address and taxpayer identification or Social Security number.

If you can't pay

Taxpayers who don't have time to file their tax return by April 17, this year's deadline, can file for an extension that will give them until Oct. 16 to file. But sadly, an extension doesn't give you more time to pay. If you owe the IRS and fail to pay by April 17, you'll owe interest and penalties.

Taxpayers who can't figure out how much they owe by the deadline are expected to come up with a good-faith estimate of the amount, says Donna LeValley, contributing editor of J.K. Lasser's Your Income Tax 2006.

Two options if your bank account is empty:

Charge it. You can charge your taxes by going to Pay1040.com or OfficialPayments.com to process your payment. Both accept major credit cards. You'll pay a "convenience fee" of 2.49% of your payment, plus interest if you don't pay off your balance.

Set up an installment plan. If you owe $10,000 or less, you can ask the IRS for an installment agreement. This allows you to make monthly payments. You'll pay an interest rate, currently 7%, plus a $43 setup fee. Use Form 9465 to request an installment plan.

So which option is better for you? If you have a low-interest-rate credit card and expect to pay your balance off quickly, charging it might be the way to go, especially if you receive frequent-flier miles, LeValley says. But if your credit card carries a high rate and you need to take several months to pay off the balance, an installment plan may be less costly.

Whatever you do, if you owe, make sure you file a return by the deadline. Otherwise, the IRS will hit you with penalties of up to 5% a month of the amount due, plus interest and penalties.