NINE LAST-MINUTE TIPS

These moves can help cut your ’89 taxes and avoid penalties

It is time for a final, hard look at your 1989 tax liability before filing your return by April 16. What follow are nine tips, starting with six money-saving ideas—yes, cutting your taxes is still possible even at this late date.

• Shelter some earnings in an Individual Retirement Account. You still have time — until April 16 — to open an IRA for 1989 with as much as $2,000 ($2,250 if you file jointly with a non-working spouse and fund an IRA for him or her too). You can deduct all of that if you and your spouse are not covered by a retirement plan at work. If one of you is covered, you can still take a full IRA deduction if your joint adjusted gross income does not exceed $40,000, or a partial deduction if it’s more than $40,000 but less than $50,000. For singles, the AGI limits are $25,000 for a full deduction and $35,000 for a partial one.
• Tap your IRA to pay your tax. The essential purpose of an IRA is to fund your retirement. But in a cash emergency, like an unexpectedly large tax bill, a little-known provision permits you to withdraw all or part of your 1989 contribution and its earnings by April 16 without penalty, assuming you have not yet filed your return. If you withdraw the contribution, you lose the deduction and must pay taxes on the earnings. But presumably you can avoid borrowing money to pay your IRS bill.
• Consider setting up a simplified employee pension plan. A SEP is a super-IRA available to the self-employed and to small-business owners and employees. As with an IRA, you have until April 16 to open a SEP and make a contribution. But you may put considerably more into a SEP than into an IRA: up to 13.04% of your self-employment income or $30,000, whichever is less. In fact, many self-employed taxpayers prefer SEPs to a better-known option, Keogh retirement plans, because SEPs are easy to open and require less paperwork.
• Contribute to your Keogh account. If you opened a Keogh by last Dec. 31, you have until April 16 to make a deductible contribution to it. If it’s a defined-contribution plan, such as a so-called money-purchase Keogh, you may put in the lesser of 20% of your self-employed earned income or $30,000; with a profit-sharing plan, the lesser of 13.04% or $30,000. Contributions to a defined-benefit Keogh can be much higher — even 100% of your earnings — depending on the income you expect from your plan when you retire.
• Beware of reporting your child’s income on your return. Starting this year, if a child under 14 has unearned income of less than $5,000, you may report it on your 1040 instead of on a separate return for him or her. That would save paperwork but might cost you if you pay state income taxes. Reason: combining a child’s income with yours on your federal return would hike your AGI, possibly pushing you into a higher state tax bracket. Further, if you file separately, your child’s standard deduction and exemption may wipe out the kid’s state tax liability.
• Ignore line 54 on your Form 1040, or line 23 on your Form 1040A. Those are the lines where taxpayers 65 and older were originally supposed to report their supplemental Medicare premiums, which they were to pay as part of their taxes. By the time Congress repealed the surtax, the 1989 forms had already been printed. If you paid the surcharge by mistake, the IRS will send you a refund.

Here are three laws and IRS regulations, some of them new, that might cost you tax penalties if you overlook them:

• Get Social Security numbers for your dependents. Your 1040 must now report the Social Security numbers of any children age two and older and any other dependents, such as elderly parents, whom you claim as exemptions. One reason: the IRS wants to prevent divorced parents from double-dipping, each claiming $2,000 exemptions for the same child. You can get the numbers in about three weeks by filling out Form SS-5, “Application for a Social Security Number,” at your local Social Security office. Or call 800-234-5772 and have the form mailed to you. If you don’t have the Social Security numbers by your tax-filing deadline, claim the exemptions and write “applied for” in the appropriate box on your return.
• Report your child-care worker’s Social Security number. Because the IRS is cracking down on off-the-books babysitters, you may no longer claim a child-care credit of as much as $ 1,440 unless you give the Social Security number, name and address of the care provider on line 1 of Form 2441 if you file Form 1040. With Form 1040A, it goes on line 1 of Schedule 1. If the provider is an organization, such as a child-care center, you must give its Employer ID rather than Social Security number. No number is required for tax-exempt organizations.
• Get an extension if you won’t have your tax act together by April 16. By submitting Form 4868, “Application for Extension to File,” you can get an automatic reprieve until Aug. 15. Warning: you still must pay your taxes by April 16. Send a check for your estimate of what you owe with Form 4868. If you underpay, you’ll be socked with interest — currently 11% — on the shortfall, plus a penalty of one-half of 1 % a month if the underpayment is more than 10%.

—Teresa Tritch

THE BEST TAX SOFTWARE

One of these programs could save you several times its cost

Computer tax programs are better than ever — and cost as little as $49. If you normally do your own return, you should certainly consider buying one. In fact, several of the programs reviewed here are so easy to operate that even if you’re a computer semi-illiterate who usually hires a tax accountant, you might instead buy a tax program, spend the two or three hours needed to complete and print out a draft of your return and give it to an accountant. You might then, for example, ask the accountant to point out any tax-saving possibilities you overlooked or areas where you might have been too quick to claim write-offs.

Since you will have organized your records with the help of the software, you could easily cut an hour from the time your accountant spends on your return. At $50 to $200 an hour, which is what tax pros charge, your program will have paid for itself.

All tax programs display copies of the 1989 tax forms on your screen and lead you through them line by line, asking questions to obtain the necessary figures. For example, if you answer “yes” to a question on charitable contributions, the software will direct you to an explanation of the rules on them and guide you back to Schedule A, lines 14 to 17, where you report charitable deductions. The software will automatically do the math, recalculating every number on your return each time you make or change an entry.

Before buying a tax program, check the package to be sure that the software will work with your computer and printer. All five programs reviewed here will run on IBM and IBM- compatible computers. Apple Macintosh owners should consider a program that works only on their computers —  MacInTax (Softview. $99). which is comprehensive, simple to use and has outstanding graphics. Our favorites for IBMs:

• Andrew Tobias’ TaxCut (Meca Ventures. $79.95), which last year sold 45.000 copies, now incorporates one of I989’s most complete programs, the little-known Ask Dan. TaxCut leads you effortlessly through 42 forms and schedules and 10 worksheets. Suitable for people who don’t know a C- prompt from a sea biscuit. TaxCut takes nothing for granted. Its Shoebox feature intelligently assumes that many of us simply hand an accountant a boxful of W-2s and receipts. Shoebox’s questions (Did you get this from a bank? Did you gel this from your employer?) then guide you to the right line on the right form where you insert the data.
• TurboTax (ChipSoft. $75). last year’s overwhelming bestseller with 200.000 copies, is outstanding for its clarity and attention to technical detail. It offers 33 tax forms and schedules and 23 worksheets.
• Personal Tax Preparer (Parsons Technology, $49) is hard to beat for the price. Fast, friendly and fairly extensive — 45 forms, schedules and worksheets — this program is not widely available in stores (1989 sales: 25.000). But you can get it by calling 800-779-6000 or by sending a check for $49 plus $5 for handling to 375 Collins Rd. N.E., Cedar Rapids. Iowa 52402. Specify a 5″4-inch or 3J4-inch disk. Personal Tax Preparer offers no expert advice. Its menus, however, give you the rudiments of tax law in short, palatable bites. The program’s math calculator, financial calculator, note pad and running total of your tax bill are among the best.
• J.K. Lasser’s Your 1990 Income Tax (Simon & Schuster, $79.95) has problems. The instructions for completing 59 forms, schedules and worksheets arc unduly difficult for computer novices, and they usually refer you for advice to the perdurable red and yellow tax preparation book, J.K. Lasser’s Your 1990 Income Tax. The book comes with the software.
• Tax Shop 1040 (TenKey Publishing. $69), a full-feature tax program, would rank much higher if it were easier to install and use. But once you have successfully loaded Tax Shop and mastered the commands, it will let you calculate your taxes on 36 forms and schedules and eight worksheets as well as the other programs mentioned here.

—Augustin Hedberg