Transcripts

"Kevin McCormally's Tax Tips"-Costly Errors

SUSIE GHARIB: There are just days to go until Federal income taxes are due, so we're continuing our tax tips right up until next week's tax deadline on April 17. Tonight, we look at a couple of very common and very costly mistakes to avoid. Here's our tax expert, Kevin McCormally, editorial director of "Kiplinger's Personal Finance."

KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER'S PERSONAL FINANCE": I want to warn you about a couple of costly mistakes to avoid as you rush to finish your 2006 return. The first one has to do with a relatively new tax form that more and more taxpayers are receiving, the 1099-Q. Now, you know that most 1099s alert you and the IRS to taxable income you're supposed to report on your return. The 1099-div reports taxable dividends for example and the 1099-miscellaneous shows freelance or consulting income. So, the 1099-Q must mean more income to report, right?

Not so fast. Actually, the Q reports distributions from a state college saving plans or Coverdale education savings accounts and the odds are very, very good that the pay-out is completely tax free. It is if the money was used to pay tuition or other qualifying college costs. Tax is due only if you used the money for other purposes and then it's only due on the earnings and even some of the earnings may be tax-free. So read the instructions very carefully before you pay tax on any part of a 1099-Q distribution.

The second potential mistake threatens parents who paid more than $5,000 in work-related child care costs during 2006. The law offers two ways to help with such costs -- flexible spending accounts that let you pay the bills with pretax money or a child care credit that refunds 20 percent to 35 percent of qualifying costs. The potential trap is that while there's a $5,000 limit on a flex plan, you can claim the credit against up to $6,000 of costs. So, even if you ran the max through a flex plan at work, you might deserve the credit on up to $1,000 of additional spending and that would save you a couple hundred extra bucks. I'm Kevin McCormally.