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TAX TIPS FOR WEEK

WHEN HOUSEHOLD HELP ISN'T SUBJECT TO EMPLOYMENT TAXES

If you paid a housekeeper or other household helper $1,000 or more last year, you're generally required to fill out Schedule H and pay employment taxes with your 1997 income tax return. But there are several major exceptions. Babysitting and other domestic services performed by students under the age of 18 are exempt from employment tax obligations, no matter how much you pay them. What's more, not every adult who may do work at your home is considered your employee for employment tax purposes. For instance, if you contract with a cleaning service to have someone clean your home every week and the agency treats that person as its employee, you won't need to pay employment taxes for the cleaning person. Nor do you have to pay employment taxes on behalf of workers who are considered self-employed "independent contractors." Generally, workers are considered independent contractors when they work for several homeowners, provide their own tools and supplies, and control how the work is to be done.

Tribune News Service

QUALIFYING FOR HOME-OFFICE DEDUCTIONS

There are essentially three ways to qualify for home-office deductions. The office must be either your principal place of business, a place where you regularly meet with customers, or be located in a separate structure on your property. The principal-place-of-business test is the most common way to qualify since few people have customers coming over to their houses or have detached garages or other structures sitting in their back yards. Most employees can't claim their home-office is their principal place of business because their desk at their employer's office is normally considered their principal place of business. Self-employed individuals, including employees with sideline businesses, have an easier time qualifying if they base their businesses at home. But a 1993 U.S. Supreme Court decision has made it tough for home-based entrepreneurs to pass the principal place of business test if they typically perform their services outside the home, as do plumbers and outside salespersons. If you're affected by the Supreme Court decision, relief is on the way. Beginning in 1999, the Taxpayer Relief Act of 1997 will effectively nullify the Supreme Court ruling.

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BIG INCENTIVE TO CONTRIBUTE TO RETIREMENT ACCOUNTS

If you're eligible to make a tax-deductible contribution to an Individual Retirement Account or to a self-employed Keogh or Simplified Employee Pension plan (SEP), consider making the maximum deductible contribution. Besides earning a deduction for your deposit, other deductions on your return may increase as well. That's because IRA, Keogh and SEP contributions reduce your adjusted gross income, which in turn can increase various tax benefits whose size is linked to adjusted gross income -- such as deductions for medical and "miscellaneous" itemized expenses. Contributing to a retirement account also can be your salvation if your withholding and estimated tax payments last year came up short of what was required. Deductible contributions cut your tax liability and thereby reduce or eliminate your underpayment penalty. What's more, retirement contributions will bring tax savings in future years since your money is allowed to grow and compound tax-free as long as it remains in the account.

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OPTIONS FOR WRITING OFF BUSINESS USE OF CARS

For workers who used their car for business last year, the IRS standard mileage rate was raised to 31.5 cents a mile for 1997, up from 31 cents in 1996. When writing off business use of a car, workers often have the option of deducting actual expenses or claiming the IRS mileage allowance plus parking and tolls. Obviously, it's much simpler to use the standard mileage rate than totaling up a pile of receipts for gas and other assorted expenses. But if you hung onto your receipts, adding up your actual expenses may produce a bigger deduction. Nevertheless, when writing off a car for the first time, give careful consideration to which method you choose. To take advantage of the standard mileage rate, you'll need to choose it for the first year you use the car for business. If you do, you'll have the option in future years of using the standard mileage rate or the actual cost method. By contrast, if you use the actual-cost method in the first year, you'll never be able to use the standard mileage rate for that car.

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THINK TWICE BEFORE TAKING ADVANTAGE OF "TELEFILE" INVITATION

About 26 million taxpayers were sent special tax packages this year for filing their returns via touch-tone telephone using the IRS' "TeleFile" system. With TeleFile, all the necessary data from your return is punched in on your phone keypad during your call to the IRS computer. No paperwork needs to be mailed in. In an effort to prod more taxpayers to use the relatively new system, the IRS sent TeleFile packets to those who appeared eligible based on last year's returns. Eligible are single and married taxpayers who have relatively simple tax situations and no dependents. But don't feel obligated to use TeleFile just because you received received the TeleFile packet. Some taxpayers will miss out on valuable tax benefits by using the TeleFile form. For instance, with TeleFile you can't itemize deductions. On the other hand, if you like the idea of using TeleFile but didn't receive a TeleFile packet from the IRS in January, you're out of luck. TeleFile is by invitation only. You can't order the package.

Tribune News Service

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