preparing your own US Federal income tax return, there is a very good chance that you may have overpaid your income taxes. In preparing income tax returns for new clients, we have noted several common errors.

Amended Income Tax Return If you made an error in preparing your tax return, you have 3 years from the date the return was filed to amend the tax return and claim a refund. The 3 year period starts with either the date you filed your tax return or the due date of your tax return, whichever is later. For example, if your 1997 tax return was due on April 15, 1998, and you filed it on March 1, 1998, you have until April 15, 2001 to file an amended 1997 tax return. If you took advantage of the automatic two month extension in which to file your 1997 tax return, and filed on June 15, 1998, you have until June 15, 2001 to file an amended tax return.

A tax return can be amended by filing Form 1040X, and explaining on the form why you are requesting a refund. If the reason seems valid, the Internal Revenue Service will issue a refund within 6 to 8 weeks. If there is a technical issue involved, they may hold up the refund until the issue is resolved.

Foreign Earned Income Exclusion If both spouses work, each is entitled to a separate $72,000 foreign earned income exclusion, provided that each spouse earns at least $72,000. We have noted that many tax returns only claim the one exclusion. For example, if spouse A earns $100,000 and spouse B earns $44,000, you are entitled to exclusions of $72,000 and $44,000, respectively. If each spouse earns $100,000, you are each entitled to the $72,000 exclusion. The exclusion is claimed by each spouse filing a separate Form 2555 and attaching it to the Form 1040.

Self-Employed Individuals and Health Insurance A self employed individual is allowed to reduce gross income by 45% of the health insurance premiums paid for themselves, spouses and dependents. This adjustment to gross income will gradually increase to 100% in 2007. The remaining 55% can be taken as an itemised medical deduction. The two more common errors we find is that individuals usually claim the entire amount as an itemised deduction, where it is subject to the 7.5% ceiling, or do not claim it at all.

Medical Expenses Paid for An Elderly Parent If you are paying for the medical expenses for an elderly parent, but your parent does not qualify to be your dependent, there are circumstances under which you may be able to deduct these medical expenses on your own tax return as an itemised deduction.

Home Office Deduction With the advent of telecommuting, and years of litigation in the area of home office deduction, the Internal Revenue Service has relaxed the rules dealing with taking a deduction for a home office. A deduction can be taken if a portion of the home is used exclusively on a regular basis as the principal place of any business of the taxpayer. If the taxpayer is an employee, the business use of the home must be for the convenience of the employer. The deduction is claimed on Form 8829.

Beginning in 1998, the term principal place of business has been expanded to include a place of business exclusively used by the taxpayer for administrative or management purposes. Thus, if you normally meet with clients at their place of business, but use a room in your home exclusively for business, you are entitled to a home office deduction. Once you qualify to take the deduction, you can take a deduction for depreciation of your home, utilities, real estate tax, maintenance, etc.

Sale of Your Principal Residence Congress recently passed legislation amending an error in last year's legislation dealing with the tax on the sale of your home. If you sold your home after May 6, 1997, you are allowed to exclude from income (married filing joint) up to $500,000 of the gain if you owned and lived in your home for 2 of the last 5 years. The old law implied that if you did not meet the 2 year rule, because of a change in the location of your employer, a portion of the gain could be excluded. The example offered is a couple who purchased a residence for $100,000, had to move 18 months later because of a job change, and who sold the residence for $160,000. The implication was that if only met 18/24 of the test, that 75% of the gain ($45,000) could be excluded, and that $15,000 of the gain was taxable at capital gain rates. The law has now been properly amended and you are actually eligible to use 75% of the exclusion, or $375,000.

United States Tax Seminar GulfStream Financial Ltd., and Expatriate Tax Services will be hosting a United States Tax Seminar at the Bermuda Princess on Tuesday, November 14.

Look for our advertisement in the Gazette in about one month.

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