Last-Minute Words-To-The-Wise On Taxes
The countdown is on to Tax Deadline Day. April 15 is only days away. But it's not too late to lower your tax bill! In this column, Early Showfinancial wiz Ray Martin has plenty of tips to help you cut your tax bill before the big day.
Last-Minute Words-To-The-Wise On Taxes
It's estimated that millions of folks will file their taxes during the final days before April 15 which is, of course, fast-approaching. So, here are a few tips to help last-minute tax filers save money and avoid potential problems.
Last Minute Money-Saving Tips
Get Your Recovery Rebate Credit: This credit is based on what you received from last year's economic stimulus payment. Here is how it works: Your 2008 tax information is used to figure this credit, but in order to send out the checks last summer, the credit was estimated, using your 2007 tax information. Because of this, some folks did not receive the full credit they were due. Here's the thing: If you did NOT receive the maximum credit of $600 ($1,200 if married filing jointly) plus $300 for each qualifying child, then you MAY be eligible for an additional credit equal to the difference between what you received last year and the maximum credit allowed. So, if you had another child in 2008 or had a reduction in your 2008 income, then make sure to calculate your Recovery Rebate Credit - you could be eligible for more money back.
Deduct Job Search Expenses: If you've been looking for a job in the same line of work you're currently in, many of your expenses, such as phone calls, the costs of preparing and copying your resume, and career counseling, may be deductible. You don't have to be out of work to have some of your costs qualify as a deductible expense, but only expenses that exceed 2 percent percent of your income count. See IRS publication 529 for details.
Claim Unemployment Benefit Income: If you have been unemployed during the last year, you'll need to report your unemployment compensation as income. Also, severance pay, bonuses and distributions from 401(k) or other pension plans may be taxable. Work done as an independent contractor also must be included in your income on Schedule C - Profit or Loss from Business.
Deduct IRA Contributions: You have up until the date you file your tax returns to make a deductible contribution to an IRA. The maximum deductible contribution you can make to an IRA is the smaller of $5,000 or the amount of your taxable compensation for 2008. This limit is $6,000 for folks age 50 or older in 2008. TIP: Run your tax return with and without the deduction for the IRA to see how much you can save. An average taxpayer will see a savings in federal and state income tax of $1,200 or more if they make a deductible IRA contribution.
Six Critical Items To Check Before You File Your Return
April 15th Is "Pay Day"
For many last-minute filers, April 15 is also "Pay Day," as they will need to pay the taxes they owe along with filing their returns. Many people still pay their taxes by mailing a check. The problem is that paper checks can be the target of fraudulent alterations. For this reason, the IRS suggests making the check payable to the "United States Treasury," not the "IRS." I also suggest using a pen with pigmented ink that cannot be washed or bleached, making it impossible to alter the check.
If you would like a more secure way to pay your taxes, consider electronic debit from your bank account, which can be elected when you file your return, or an extension using your personal computer and tax-prep software. When paying your taxes by direct account debit, you can specify an account and a payment date up to the April 15 deadline. All you need is the name of your bank, your account number, and the bank's routing number. But first, check with your financial institution to be sure it allows Electronic Funds Transfer (EFT) and to ensure you are using the correct routing number, to avoid any payment delays.
If for some (paranoid) reason, you think electronic bank account debit could make it easier for the IRS to spy on you, get a grip: The same information you would provide electronically is already available to the IRS from the information you file with your tax return!
If You Owe Taxes But Cannot Pay In Full
You should always file your return on time (by the due date plus extensions), even if you don't have enough money to pay your taxes in full. The penalty for filing late is stiff: five percent per month up to a maximum of 25 percent of the amount of tax due on the late-filed return. The penalty for paying late is also onerous: one-half-of-one-percent per month, up to a maximum of 25 percent of the amount due on the return. Suffice to say, filing and paying late can get expensive.
So what do you do if you can't pay the full amount of taxes due?
One alternative is to seek a personal loan from a bank or a credit union. But odds are that, if you cannot pay the taxes you owe, you also may not be eligible for a loan.
If you owe $25,000 or less, another option is to pay what you can and attach a Form 9465 Installment Agreement Request with your tax return. The IRS charges a user fee of up to $105 for setting up an installment agreement (the fee is $52 if payments are set up to be automatically deducted from your bank account, and even less for folks with incomes below certain levels). You have up to five years to pay under the installment agreement, and you'll have to pay all future taxes in full and on time.
To make this request, attach the Form 9465 to the front of your tax return and include a statement explaining why you cannot pay the full amount of taxes owed. The IRS will contact you with the terms of the installment payment plan.
You'll also pay penalties and interest on the taxes you owe until the agreement is paid off. However, the IRS could work out a payment plan at a reduced interest rate. Also, as a condition of the installment agreement, any future tax refunds will be automatically applied against the amount you owe until the balance is paid off.
You can also pay your taxes using the Credit Card Payment Option available through the Official Payments Corporation. You can charge your taxes on your Visa, MasterCard, Discover or American Express card, earning the rewards offered by your card for things like airline travel or cash back!
But using this option is no free lunch: The costs include hefty convenience fees and interest charges. Since the IRS does not pay the credit card company a merchant fee, the credit card company has to get their piece of the action by charging you a convenience fee, which is typically a percentage of the amount you owe. Also, if you don't pay your credit card balance in full, you could end up paying hundreds of dollars of interest at a rate that is higher than the IRS interest rate for installment payments.
The bottom line is that making a partial payment of what you owe and filing an Installment Agreement Request is better than not filing and subsequently incurring IRS penalties for late filing and late payments. And if you don't pay, the IRS will not go lightly on you - it typically will commence a collection action to levy your future wages for unpaid taxes, penalties and interest.
Automatic 6-Month Extension
If you'd rather deal with your taxes later, then you can file a Form 4868, Application for Automatic Extension for Time to File U.S. Individual Income Tax Returns. To avoid a failure-to-file penalty and interest, you must file an Application for Automatic Extension by April 15. While this gives you an automatic six-month extension, until October 15, 2009, to file your final tax return, it does not give you an extension to pay the taxes you owe.
If you file an extension, you need to also calculate a reasonable estimate of taxes owed and submit a payment with the Form 4868. You will need to pay at least 90 percent of what you think you owe to avoid any late payment penalty, and you will need to pay the full amount of the taxes you owe to avoid paying any additional interest.
It's a good idea to file an extension, especially if you need more time to do a through job preparing a tax return for a rather involved year with lots of new issues. And if your tax preparer is really bogged down, ask him to file an extension, so he get to your return later, when he can give it his full attention and do a more through job. Also, many financial institutions are still sending corrected forms 1099 with revised amounts for qualified dividends and foreign taxes. Taxpayers with investment income may want to file an extension and request a corrected copy of the form 1099. You can file your return later with the correct information.
And not to worry: Filing for an extension does not make your return any more likely to be the target of an IRS audit!