Think you’re ready to tackle your 1996 tax return? Think again.
Congress and the courts wrought more than 655 changes in the tax code for 1996 and ’97, according to CCH Inc., the Riverwoods, Ill.-based tax information service.
That’s the most revisions since the last major tax overhaul, in 1993. The changes affect every tax return and stretch from cradle to grave.
This quiz will help sharpen your tax IQ and get you ready to tackle that 1040.
1. Taxpayer identification numbers or Social Security numbers are now required for all dependents.
A) True; B) False; C) True, but you can write in the phrase “application pending” if you haven’t received the number yet.
2. What changes have been made in the earned-income credit?
A) The credit has been increased; B) People with more than $2,350 in investment income aren’t eligible; C) The credit has been repealed.
3. You don’t have to pay taxes if you won punitive damages in a personal-injury lawsuit.
A) True; B) False.
4. Employer-provided education assistance, such as tuition payments, has to be counted as part of your income.
A) True; B) False.
5. If you use a car, van or truck for business, how much can you deduct per mile?
A) 10 cents; B) 28 cents; C) 31 cents.
6. What are the new amounts for standard deductions?
A) $4,000 for singles, $8,000 for married couples; B) $4,000 for singles, $6,700 for married couples; C) $3,800 for singles, $6,000 for married couples.
7. Which tax credit is new for 1997?
A) Earned-income credit; B) Rehabilitation credit; C) Adoption credit; D) Reforestation credit.
8. If you’re married and don’t work, how much can you contribute to an IRA in 1997?
A) $250; B) $2,000; C) As much as you want.
9. Congress waived the usual 10 percent penalty on IRA withdrawals before age 59 1/2 when the money is used for:
A) Medical expenses; B) Health insurance premiums paid while unemployed; C) A down payment on a home.
10. You are self-employed and want to set up a medical savings account. How much can you contribute in 1997?
A) $2,000; B) $3,375; C) As much as you want.
11. Your small business can open what kind of retirement account in 1997?
A) SARSEP; B) Keogh plan; C) SIMPLE plan.
12.Congress waived the usual 15 percent penalty on large withdrawals from retirement accounts. When is the tax scheduled to be reinstated?
A) 1998; B) 2000; C) Never.
Answers:
1. A) No number, no deduction. Most hospitals automatically enroll newborns for a Social Security number. If you haven’t received one for your dependent, call the Social Security hot line at 800-772-1213 or visit a local office. Those not eligible for Social Security numbers must apply to the IRS for taxpayer identification numbers using form W-7.
2. A) and B) The earned-income credit amount will increase for working people who qualify. But no one who has more than $2,350 in investment income will be able to claim the credit, regardless of other income.
3. B) Court-ordered punitive damages for personal injury or sickness are no longer tax exempt.
4. B) The tax break for employer-provided education assistance help was restored, retroactive through 1995 and 1996. People who paid tax on tuition help can file an amended return for a refund.
5. C) The standard mileage rate for 1996 is up 1 cent, to 31 cents a mile.
6. B) In addition, personal exemptions are worth $2,550.
7. C) People who adopt children after Dec. 31, 1996, can qualify for a tax credit of up to $5,000 to offset adoption expenses. Adopting a special-needs child increases the tax credit to $6,000.
8. B) Starting Jan. 1, a spouse who does not work outside the home can make a full $2,000 contribution to an individual retirement account. Previously, the contribution was limited to $250.
9. A) and B) The medical expenses must exceed 7.5 percent of your adjusted gross income. To use the money for health insurance premiums, you must be eligible for unemployment compensation or eligible except for the fact that you were previously self-employed.
10. B) Medical savings accounts function much like IRAs, but the money can be used to pay medical expenses. Right now the accounts are limited to businesses with fewer than 50 employees and the self-employed; Congress said it would cap the number of plans at 750,000, but any eligible person or business who opens an MSA account by Sept. 1 will be allowed to keep it for life.
11. C) SIMPLE stands for Savings Incentive Match Plan for Employees and allows employers to set up SIMPLE IRA or SIMPLE 401(k) retirement contribution accounts under simplified rules. These plans replace the salary reduction plans or SARSEPs, although existing SARSEPs will be allowed to add new employees.
12. B) For the next three years, retirees who take out more than $155,000 a year or $775,000 in a lump sum from their retirement accounts won’t have to pay the 15 percent excise tax that used to apply on these big withdrawals. Ordinary income tax is still due. Financial planners are urging their well-off clients to make these big withdrawals now and give the money to their heirs or charity, rather than risk exposing the money to after-death taxes that could eat up 80 percent of the total.
Scoring:
0-3 right: You’re probably new to the world of itemized deductions, Schedule C’s and other tax law intricacies. A good book on taxes–or even reading the front part of your 1040 form–will get you started.
4-6 right: You’ve been paying attention, but you need some brush-up work.
7-9 right: Impressive. You can improve your knowledge by paying closer attention to tax changes as they work their way through Congress.
10-12 right: You’re ready to tackle your tax return!
