DON'T CRY UNCLE
THERE ARE WAYS TO KEEP MORE OF YOUR HARD-EARNED MONEY,
FINANCIAL ADVISERS SAY
By Dolores Kong
The Boston Globe
Just days before the annual tax filing deadline,
70-year-old George Assim came looking for free help
with a complicated tax form, and finally got the
"I'm getting a few hundred dollars back," said Assim,
a retired state employee from the South End, who
sought tax assistance last week at the Boston Public
Library. "They're using my money all year, and now I
have to file to get it back."
Fellow last-minute filer Ava, a 35-year-old financial
services contractor who would give only her first
name, hoped someone could help her reduce what she
estimated to be a $4,000-plus tax bill.
"The last 10 years, I've been paying every year," she
said."It's like nonstop."
It's almost enough to make her do something radical.
"I was thinking of getting property" to qualify for
the mortgage interest deduction, or even having a
child for the additional exemption, she said.
Assim and Ava were among the dozens of last-minute
filers who waited for hours at the library last week
for a session with volunteer tax preparers from the
New England School of Law.
Taxes are what everyone loves to hate, and what
millions put off filing till the 11th hour, either
because the forms are too complicated or because they
owe the government money.
Americans now pay an average of about one-third of
their income to federal, state, and local taxes,
according to the nonprofit Washington-based Tax
Foundation. This year, the foundation estimates Tax
Freedom Day - the day when the average taxpayer has
earned enough to pay the annual tax bill - will fall
on May 3, the latest ever, adding in leap day. In
Massachusetts, Tax Freedom Day is May 6 this year.
There are, however, ways people can keep more of their
hard- earned dollars, through tax-saving strategies
and often-missed deductions and credits, say tax and
financial specialists. But to avoid writing that
last-minute check to the Internal Revenue Service next
year, consumers should start preparing now.
"Today's tax code impacts on every aspect of life,"
said Mark Kaizerman, a certified public accountant and
certified financial planner and principal of Kaizerman
& Associates in Natick. But with proper planning and
an understanding of the law, taxpayers can minimize
what they shell out, he said.
For example, Kaizerman said, people with educational
expenses may qualify for one of three relatively new
features of the tax code: a deduction for a certain
amount of interest on student loans, a lifetime
learning credit, or a Hope credit.
But if IRS statistics are any indication, millions of
Americans who qualify for refunds, deductions, and
credits don't claim them.
For instance, nearly 1.6 million taxpayers qualified
for an estimated $2 billion in refunds for 1996, but
hadn't claimed them as of January 1999, according to
the IRS. Among them: More than 36,000 Massachusetts
taxpayers with approximately $61.4 million in refunds
at stake. If these taxpayers didn't get their late
1996 returns into the IRS by yesterday, they lost the
chance of ever seeing that money.
The IRS estimates that 60 percent of low-income or
entry-level workers who qualify for the Earned Income
Credit fail to file for it. The credit is worth nearly
$4,000 for some families for the 1999 tax year. Mayor
Thomas M. Menino held a news conference this month out
of concern that many Bostonians who qualify are not
claiming the credit.
And even taxpayers who do put in for what's due them
sometimes end up leaving the money in the IRS's hands.
Last year, more than 102,000 refund checks totaling
nearly $72 million - an average of nearly $700 a check
- were returned to the IRS, because either they
contained incorrect names and mailing addresses or
taxpayers moved without providing forwarding
Here are some tax-saving suggestions from tax and
financial specialists that could still come in handy
for real last-minute filers - Massachusetts taxpayers
have until April 18 to file because of the Patriots
Day holiday - or could be useful for next year's
- Earned Income Credit: If you have two or more
qualifying children, you could qualify for a maximum
credit of $3,816 for 1999 if your total earned income
was at least $9,500 but less than $12,500. If you have
no children, you could qualify for a maximum credit of
$347 if your total earned income was at least $4,500
but less than $5,700.
The credit phases out for wage earners with two or
more children and total earned income of $30,580 or
more, and those without children and income of $10,200
or more. If the EIC worksheet is too complicated for
you to figure out, you could request that the IRS
calculate it. Instructions are included in the EIC
Denise Lorenzo, 27, a Roxbury mother of two, claimed
the EIC for the first time this year and received a
total refund of about $4,000.
She learned of the credit through a welfare-to-work
program offered by her employer, Boston Marriott
Copley Place, and her tax preparer reminded her of it.
Considering the people who qualify for the credit but
may not know about it, Lorenzo said, "I think it would
be better to emphasize it, especially for people
coming out of welfare." She is now a sales and
catering administrative assistant for the Boston
The Marriott program for informing new employees of
the EIC was highlighted during Menino's recent news
Taxpayers who think they may have qualified for the
EIC as far back as tax year 1997 but didn't file have
three years from the original filing deadline to
retroactively claim the credit.
- Educational credits and deductions: Up to $1,500 in
interest on qualified student loans may be deducted
from income for tax year 1999, and up to $2,000 for
tax year 2000. The amount of student loan interest
paid is sent to people every year, but the deduction
is so new that "people get the form and they don't
know what to do with it," said Kaizerman. The
qualifying interest is an adjustment that is
subtracted from gross income.
Also relatively new are the Hope credit for the first
two years of college and the lifetime learning credit
for any qualifying education.
Taxpayers must use Form 8863 to claim these credits.
You can claim a Hope credit of up to $1,500 for each
student's qualifying educational expenses. But you can
claim a maximum lifetime learning credit of only
$1,000 a year, regardless of the number of students.
The credits are subject to other rules such as income
Ava, the 35-year-old financial services contractor who
sought tax assistance at the Boston Public Library
last week, said she didn't know about the educational
credits. She spent about $7,500 last year for tuition
for three courses at Harvard University. "School's
expensive," she said, adding that she's "really
looking for options" to trim her tax bill, and she may
look into whether she qualifies for the lifetime
Tax-efficient or tax-managed mutual funds: With the
heady stock market in 1999, some taxpayers may have
been surprised by the mutual fund capital gains
distributions on which they had to pay taxes, even if
they didn't sell shares.
That's because when fund managers sell stocks in the
portfolio for a profit, shareholders who hold the fund
outside of a tax-deferred retirement account have to
report the capital gain, whether they personally sold
any fund shares.
Last year, more than $200 billion - the highest ever -
was estimated to have been paid out in stock and bond
fund capital gains, according to the Investment
Company Institute. Perhaps as much as half of that was
in taxable accounts.
Some fund managers are emphasizing their tax-managed
or tax- efficient approach as a way to minimize
consumers' tax bills without affecting total
Duncan W. Richardson, vice president of Boston-based
Eaton Vance Management and portfolio manager of the
Eaton Vance Tax-Managed Growth fund, said: "We think
about taxes a lot, but people don't. They should when
it comes to mutual fund selection."
Indeed, the US Securities and Exchange Commission has
proposed requiring mutual funds to disclose after-tax
returns so that investors can better compare mutual
"Taxes can be the single-biggest cost," even bigger
than sales charges or other mutual fund expenses, said
Richardson, whose company is supporting the SEC
proposal. "It can take 2.5 percent a year out of your
Eaton Vance funds, both those that are tax-managed and
those that are not, are usually sold through a
financial adviser on a commission basis.
About three dozen mutual funds now consider themselves
tax- managed, specifically buying and selling stock
with the least tax impact in mind, but Richardson said
Eaton Vance was among the first.
Other funds, such as index funds, may not specifically
call themselves tax-managed, but may in fact be
tax-efficient, with the same effect of minimizing
But tax and financial planning specialist Kaizerman
advised against investors jumping on board the
tax-managed bandwagon just to save on taxes.
"As a consumer, you have to look closely at those
mutual funds. The number one thing is to maximize
portfolio return. If tax management and portfolio
management are in conflict, how does the mutual fund
manager handle that?"
Miscellaneous tax-saving strategies:
1) Boost your tax-deferred contributions to 401(k)
plans. For 2000, you can reduce your income tax bill
by deferring up to $10,500 of salary.
2) If you qualify for a deductible Individual
Retirement Account, you can reduce your taxable income
by up to $2,000. Technically, Massachusetts residents
have until Tuesday to fully fund a 1999 IRA.
3) If you itemize on Schedule A, you can plan ahead
and bunch certain medical or miscellaneous deductions
into one year so you surpass the threshold for such
deductions. For example, if you can pay a hefty
medical expense in December instead of January, you
can use that amount to help push you above the 7.5
percent of adjusted gross income for allowable medical
deductions, according to Kaizerman.
4) Kaizerman recommends people make use of tax
software to do their taxes, since the programs can
usually point out deductions and credits that you
might otherwise have overlooked.
For those who don't have computers and haven't filed
yet, Kinko's is offering 30 free minutes of computer
time for people to use the online Turbo Tax program by
Quicken. If you're filing the 1040-EZ form, the use of
the Turbo Tax program is free; otherwise it costs
$9.95 to use the software. Nationally, the last day of
the Kinko's free computer time offer is April 17, but
some Massachusetts stores will extend it through April
18 because of the later local tax filing deadline.