10 MISTAKES THAT CAN COST YOU MONEY.

• Position: Income tax preparation - Brief Article

To avoid mistakes when preparing your income taxes, the Financial Planning Association, Denver, Colo., recommends being careful not to make these 10 errors:

1. Assuming you don't have to pay the AMT. The alternative minimum tax was designed to make sure wealthy earners can't take advantage of so many tax breaks that they end up paying little or no tax. However, each year, more and more middle-income taxpayers are being snared in AMT's web. Calculate your taxes by regular rules and by AMT regulations to see if you fall under AMT. If you do, see what is triggering it so you can minimize the bite in future tax years.

2. Forgetting to five-year average. If you took all the money out of a qualified retirement plan in 1999 and didn't roll it over into another retirement plan or individual retirement account (IRA), you may qualify for five-year averaging. You pay the entire tax bill on your withdrawal, but compute it as if the payout was spread out over five years. It may save you a lot of money. The last tax year in which you can use five-year averaging is 1999, though 10-year averaging will remain available to tax-payers born before 1936.

3. Forgetting to include your mutual fund reinvested dividends. Shareholders often have any dividends and capital gains automatically reinvested in more shares. In taxable accounts, these dividends and gains are taxed in the year they are distributed. Therefore, when shareholders sell their fund shares, they should add the dividends and gains into their original investment. Otherwise, they will pay taxes twice on these profits.

4. Claiming your home-office deduction. When you sell a home, you generally don't have to pay taxes on up to $500,000 in profit you have made since you bought it. You may have to pay capital-gains taxes, though, on that portion of the house for which you have taken a home-office deduction. Say you have claimed 10% of your home for your office. If the sales profit is $200,000, you will pay capital-gains taxes on $20,000 of it--as much as $4,000. If you don't take the home-office deduction for two years before the sale, you won't pay that capital-gains tax. The main stickler here is that you may have to pay something known as a "depreciation recapture" tax, a complex area you...