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CNN Sunday Morning

Smart Tax Tips

Aired March 24, 2002 - 11:25   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
KATE SNOW, CNN ANCHOR: Yes, we don't like it but it's a necessary evil, filing our taxes. We're less than a month away from the personal income tax deadline, and this morning our guest has some smart tax tips for us. Financial counselor Eric Tyson, co-authored the book "Taxes for Dummies." He joins us live from Stamford, Connecticut, and will be answering your e-mail questions. Thank goodness you're here. Thanks for helping us sort some of this out.

Let's start with the basics. Last year, Congress passed, and I cover Congress so I know this. They passed a huge tax bill, tax cut. How is that going to play out this year? Are there a lot of changes that people should look for and be aware of on their tax forms?

ERIC TYSON, CO-AUTHOR, "TAXES FOR DUMMIES": Well the good news, Kate, as I think you probably know is that the tax bill really is going to affect people's tax returns most heavily starting in the year 2002, and future years. So the good news is that when you sit down to prepare your 2001 return, which many people still haven't done -

SNOW: Right.

TYSON: ... because we're largely a nation of procrastinators, and I'm included in that group.

SNOW: I did mine already.

TYSON: OK, well good for you, but you're the minority though. You'll find that there are actually very few changes from that tax bill that will affect the 2001 return.

SNOW: What about the rebate that we all got, those checks that we got last summer. Every tax paying American got those. Do you have to report those on your tax form?

TYSON: You don't need to and actually that's a great source of confusion, because you'll find on the Form 1040, there's a line item that says rate reduction credit, which you know, in typical IRS bureaucratic speak is a very obfuscating name for the rebate check that you got.

And many people are confused because what some people are doing is they're actually writing in the amount of the rebate check that they got and actually what that line item is there for is to highlight to people who did not get a rebate check or the full rebate amount that they were entitled to, that you can actually claim the rebate amount if you did not receive it.

SNOW: What about the changes in the child tax credit, because I know that's one area where there was a change, right?

TYSON: Yes. The amount of credit for dependent children has been increased and it will increase again in the future years. That's a very straightforward item. I don't think most people have trouble with that on the tax returns.

SNOW: And anybody with children can claim that, or how does it work?

TYSON: The IRS has pretty long and involved criteria for deciding whether or not you can claim someone as a dependent. You know, for example, there are situations where grandparents in some households are providing support to raise children, and you have to go through basically a list of five different criteria, one of the most important of which is how much of that child's financial support you're providing. But you've got to go through all those five criteria to see whether or not you can actually claim someone as a dependent on your tax return.

SNOW: Let's throw in an e-mail here on a different subject. We've got an e-mail that reads: "If you have filed for bankruptcy protection, can you still file and get money back from the IRS?" It's from Jim.

TYSON: Bankruptcy protection is really a separate item from your tax liability with the Federal Government, unless of course, you're trying to absolve yourself of your tax bill through bankruptcy filings, which you generally can not do.

So, if someone has a discharged say credit card debt or auto loan debt through a personal bankruptcy filing, that's really a separate issue from being able to take tax credits or tax deductions on your IRS tax return.

SNOW: For parents who have college-age children or I guess school age kids, are there differences this year in what they can - tax breaks that they can get for having college age students or - I thought I heard something also about education IRAs and being able to save more money there.

TYSON: Yes, those big changes are going to kick in for 2002, and actually people should start thinking about those now. For example, the education IRA, the contribution amount is going to quadruple. For 2001, you could only put away $500 per year per child if you were eligible to put money away. And beginning in this current tax year, 2002, you can put away up to $2,000.

There's also going to be a new tax deduction for people to take off college costs for their children; however, like with a lot of the other recent goodies that have been added into the tax laws, high- income earners are generally prevented from taking that type of a deduction. You have to have an adjusted gross income below certain amounts to even be eligible to take those kinds of deductions. SNOW: I want to ask you one last very quick question. You, I think, had said it's better to file for an extension than to try to rush and get everything done by the deadline, why?

TYSON: Well, you know, a lot of people leave their taxes literally until the night before or two days before and they realize that they don't have all the documents that they need to complete the tax return or they simply don't know how the tax laws work, and they just do the best they can within that time limit.

It's sort of like cramming for a test, but the good news is that this is a test that you can actually legally and easily get an extension for. You can buy yourself an extra four months of time, fill our IRS Form 4868. It will take you 60 seconds to fill out the form. It's probably the easiest tax form that's out there. You just have to remember to pay your estimated tax, but you know, why rush when you can give yourself an extra four months of time.

SNOW: Sure. There's that procrastination again.

TYSON: Yes.

SNOW: Thanks so much. Thanks for joining us today to discuss some of this. We want to tell our viewers that they might also want to check out a website for some tax tips. We've got the address. It's http://taxes.virtualave.net. There it is at the bottom of your screen. Yes, virtualave.net.

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