Archive for the ‘2007 Filing Season Tip’ Category


Tuesday, April 17th, 2007 by Joe Kristan

Today is the deadline for filing your 2006 1040. Unless you are extending, of course. For the most part, the game is over for 2006, and there’s little to do but add up the score.
Any more, 2006 is dwelling on the past. It’s time to move on. What lessons can we draw from this filing season while the pain is still vivid?
The hardest tax problems are those when people don’t keep up on their taxes. It can happen when you reduce your withholding too much. It can also happen when you don’t keep up with your estimated tax payment obligations. If you own an interest in a partnership or an S corporation, it can become a problem in a hurry, especially if you spend the nice distributions they give you without putting them away for your taxes.
The first quarter federal estimated tax payment is due today. If your tax preparer gave you a voucher, file it with your check as instructed. It won’t get any easier next April if you don’t.
Most people who come to their tax preparares in April looking for a miracle have already squandered most of their tax-saving opportunities. These are likely to be found at work. Take advantage of the easy stuff:
– Maximize your 401(k) contribution. If you aren’t at least putting in enough to get the entire employer match, you are making an unforgivable financial blunder. More is better.
– Review your health plan opportunities. If your employer offers an Health Savings Account option, think not twice, but several times before rejecting it. Many employers offer generous breaks to switch to high deductible health insurance, and most of the time you’ll be financially better off with an HSA. If there is no HSA at your job, make sure you take full advantage of the cafeteria plan.
– Start funding your 2007 IRA. The main benefit of these is tax-free buildup of earnings; if you fund it now instead of next April, your money is tax-sheltered an extra year.
– If you are saving for college, but a little money away in a Section 529 plan like College Savings Iowa every month.
One of the perplexing things about being a tax preparer is seeing somebody with a $500,000 W-2 unable to raise $30,000 to pay taxes in April. You should always have some amount of cash easily available. Some people advocate enough to pay six months of living expenses, but I think you can do with less – especially if you have some other investments, or if you have a house. If you are a homeowner, open a home-equity line of credit, and then don’t use it except for emergencies – like a $30,000 tax bill.
This is the last installment of our series of 2007 filing season tax tips. Happy filing!



Monday, April 16th, 2007 by Joe Kristan

Maybe you spent hundreds of dollars to have a preparer do your complicated 1040. Or maybe you spent the 30.3 hours the 1040 instructions say is the average estimated time it takes to do your own return. Either way, you’ve made a substantial investment in time and/or money.
Now isn’t the time to cheap out. Unless you are filing electronically, you ought to spring for the extra $4.25 to file your return “certified mail, return receipt requested.” It’s well worth the time and trouble of going to the post office to get that postmarked receipt. The tax law is full of sad stories of taxpayers who lost thousands of dollars because they didn’t have a postmark to document that they filed on time. Don’t let it happen to you!
Another documented timely filing.
If there’s no post office open or handy, you can also use a mailing receipt from one of the designated private delivery services authorized by IRS for timely return shipment. As they don’t use P.O. boxes, you’ll want to refer to Russ Fox’s handy list of service center street addresses.
And don’t procrastinate, because Jiffy Express isn’t a designated private delivery service.
This is the penultimate entry in the series of 2007 filing season tax tips. Collect them all!



Sunday, April 15th, 2007 by Joe Kristan

It happens every year. Sometimes there are even good reasons. The return is ready, the taxpayer owes a bunch, and the cash isn’t there. You don’t have any investments you can turn into cash immediately. What to do?
DON’T BLOW IT OFF. The worst thing you can do is to just put your head in the sand. If you don’t file anything, you start to accrue a monthly penalty of 5% of any amount you owe the IRS. 60% APR almost makes LoanMax look reasonable (though the total penalty maxes out at 25%). Interest also accrues on the unpaid taxes and penalties. Once you start digging this kind of hole, it can take years to climb out.
FILING BUT NOT PAYING. Getting an automatic extension with Form 4868 gives you until October to file a timely return. Even if you can’t pay your tax, an extension can turn the 5% monthly failure-to-file penalty into a 1/2% montly failure-to-pay penalty. That is, it can if you ultimately file your completed 1040 and pay your taxes by the extended due date.
Also, the tax regulations don’t impose the failure to pay penalty if you have 90% of your tax paid in by the original due date. In that case, you just have to pay the interest on the remaining balance due at the IRS rate for underpayments – currently 8%. If you are coming up just short, you should pay in what you can with an extension and pay the rest as soon as possible.
BORROW (but not from a car-title or payday-loan shop. The IRS is a better creditor). If you have a home equity line, tap it. The IRS accepts credit card payments. If you have a good credit rating, your friendly banker might be able to do something. If you have a gullible sympathetic relative, take advantage.
NOWHERE TO BORROW? Then it’s time to fill out Form 9465, Installment Agreement Request. You can do this online. If you own more than $25,000, you may need to file additional infomration on Form 433f. Of course, if you owe that much, you need professional tax help anyway.
Once you get the installment agreement in place, live up to it. The IRS gets ugly in a hurry if you fall behind on an installment plan.
And whatever you do, don’t bounce a check. It only makes your penalties worse. And work with a professional so you don’t get caught short next year.
This is another of our series of filing season tax tips. There’s a new one every day through April 17 at



Saturday, April 14th, 2007 by Joe Kristan

If you are going to file by the April 17 deadline, you should have your taxes about done by now. Before you drop that form in the mail, take a few minutes to go through the IRS last-minute checklist:

* Did you use the peel?off label and enter any corrections? If you used the label, did you enter your social security number in the space provided?
* If you do not have a label, or there are too many corrections, did you clearly print your name, social security number, and address, including zip code directly on your return?
* Did you enter the names and social security numbers for yourself, your spouse, your dependents, and qualifying children for earned income credit or child tax credit, exactly as they appear on the social security cards? If there have been any name changes be sure to go to or call at 1?800?772?1213.
* Did you check only one filing status?
* Did you check the appropriate exemption boxes and enter the names and social security numbers exactly as they appear on the Social Security Card, for all of the dependents claimed? Is the total number of exemptions entered?
* Did you enter income, deductions, and credits on the correct lines and are the totals correct?
* If you show a negative amount on your return, did you put brackets around it?
* If you are taking the standard deduction and checked any box indicating either you or your spouse were age 65 or older or blind, did you find the correct standard deduction using the worksheet in the Form 1040 Instructions or the Form 1040A Instructions?
* Did you figure the tax correctly? If you used the tax tables, did you use the correct column for your filing status?
* Did you sign and date the return? If it is a joint return, did your spouse also sign and date the return?
* Do you have a Form W-2 (PDF) from all of your employers and did you attach Copy B of each to your return? File only one return, even if you have more than one job. Combine the wages and withholding from all Form W?2’s, on one return.
* Did you attach any Form 1099-R (PDF) that shows tax withheld?
* Did you attach all other necessary schedules and forms in sequence number order given in the upper right?hand corner?
* If you owe tax, did you enclose a check or money order with the return and write your social security number, tax form, and tax year on the payment? Refer to Topic 158 for more information, and
* Did you make a copy of the signed return and all schedules for your records?

A few minutes now can save you weeks of frustrating correspondence with the IRS. It’s time well spent.
This is one of a series of daily tax tips appearing here at through April 17, this year’s tax deadline. Collect them all!



Friday, April 13th, 2007 by Joe Kristan

OK, the tax deadline is upon us. Counting today, we have five days to make our peace with the IRS.
Well, no, We have six months and five days, actually. All you need to do is file Form 4868 to get until October 15 to file your taxes. Just make sure you have at least 90% of your taxes paid in. It’s smarter, of course, to be all paid in, but you avoid the 1/2 percent underpayment penalty if you are 90% paid in.
If you are a quarterly estimated tax filer, you should pay in enough to cover your first quarter 2007 estimated tax payment. You can credit it to 2007 when you finally file your 1040, and in the meantime it serves as a cushion in case your 2006 tax bill turns out to be more than you anticipate.
Some people don’t like to extend. The typical arguments:
“I’m more likely to be audited.” Nonsense. I have seen no evidence that extended returns attract IRS attention. It is clear, though, that returns with errors do attract IRS attention. If taking an extension means you file a more accurate return, you actually reduce your chances of an audit. That’s especially true if you would other wise have to file an amended return to fix an error.
“I want the statute of limitations to run.” This is actually has some merit, if you have a controversial position on your return. It also rarely applies in real life. While I’m sure it happens, I’ve never seen a client have to pay extra taxes because they kept the three-year statute open an extra few months by extending a return. Again, if by extending you make your return more accurate, you probably reduce the chances of the IRS looking at you.
Extensions also give you time to consider other options for your 2006 return, like a SEP. So take your time – extend it, don’t amend it.
This is one of a series of daily tax tips appearing here at through April 17, this year’s tax deadline. Collect them all!



Thursday, April 12th, 2007 by Joe Kristan

It’s standard tax advice to leave your money in your IRA as long as possible. The longer your money stays in your IRA, the longer it builds up without being taxed. If you take it out too early (generally before age 58 1/2), you often also face a 10% excise tax on top of the regular income tax.
Yet circumstances don’t always cooperate. If you took money out of your IRA in 2006, you may be able to avoid or reduce taxes and penalties on the withdrawal.
Sometimes part or all of your IRA withdrawals can be nontaxable. Other early withdrawals are taxable, but aren’t subject to the 10% penalty. Keep these exceptions in mind so you don’t pay extra tax or penalties on your return:
– Roth IRA contributions can be withdrawn tax-free to the extent of your non-deductible Roth IRA contribuitons before age 59 1/2. Of course, all Roth distributions after that age are tax-free.
– Traditional IRA distributions are tax-free to the extent they are attributable to your non-deductible contributions. Determine this amount using Form 8606.
– Qualifying distributions rolled over into another IRA within 60 days are nontaxable.
– Traditional IRA distributions are taxable, but may be penalty-free, in these situations:

*You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
*The distributions are not more than the cost of your medical insurance.
*You are disabled.
*You are the beneficiary of a deceased IRA owner.
*You are receiving distributions in the form of an annuity.
*The distributions are not more than your qualified higher education expenses.
*You use the distributions to buy, build, or rebuild a first home.
*The distribution is due to an IRS levy of the qualified plan.
*The distribution is a qualified reservist distribution.

You can find more information on whether you qualify to avoid these penalties here.
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Wednesday, April 11th, 2007 by Joe Kristan

Many taxpayers pay income taxes in more than one state. With the increased popularity of “pass-through” ownership of businesses through S corporations and limited liability companies, many taxpayers find themselves filing returns in two or more states. Others have taxes paid in other states by the businesses that they own through a “composite” return filed by their S corporation or partnership.
All states with an income tax have a system to keep their residents from paying full state taxes on the same income in more than one state. The credit for taxes paid in other states is computed on your resident state return; Iowans use Form 130. The credit is the lesser of the tax paid to the other state or the tax computed on the income in the home state.
If you are an Iowan who owns an S corporation, there is another alternative. You can compute an S corporation apportionment credit on Form 134. This credit can provide significant savings, especially for taxpayers whose S corporations retain a large part of their annual income.
And remember, in Iowa you can claim a credit for taxes paid in other states if you have foreign tax withheld. Many taxpayers have this through international mutual funds.

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Tuesday, April 10th, 2007 by Joe Kristan

Some taxpayers can still knock $5,000 or more off their 2006 taxable income without giving up the use of their money until retirement. These are taxpayers who had a qualifying “High Deductible” health insurance plan during 2006, but who have not yet made a contribution to a Health Savings Account.
Health Savings Accounts work a bit like old-fashioned individual retirement accounts, or IRAs. You can deduct contributions to the accounts, but the earnings accumulate tax-free until withdrawal. But unlike IRAs, you can always withdraw earnings from an HSA tax-free to pay medical expenses not otherwise reimbursed by insurance. That means your earnings aren’t locked away until retirement like IRA earnings are. If you don’t use them for health expenses, you can withdraw the funds for retirement like IRA funds.
To contribute to an HSA for 2006, you need to have had a qualifying high-deductible health insurance plan in place during the year. This means an deductible of at least $1,050 for individual coverage or $2,100 for family coverage. The maximum deduction for single-coverage taxpayers is the lesser of $2,700 or the annual deductible; for family coverage taxpayers, the deduction caps out at the lesser of the deductible or $5,450.
The deadline for 2006 HSA contributions is April 17. A number of Iowa financial institutions sponsor HSAs, including Iowa Savings Bank of Carroll. To claim the HSA deduction, complete Form 8889.
Link: IRS discussion of HSAs
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Monday, April 9th, 2007 by Joe Kristan

If you started a new business on your own, or if you had a profitable moonlighting business on the side, you may be facing an unpleasant tax bill. You might be able to ease the tax pain by – figuratively speaking – taking money out of one of your pockets and putting it into another.
At this point, the easiest way to do that is to set up a Simplified Employee Pension plan, or “SEP.” A SEP is a plan where an employer puts money into an employee’s IRA. You can put up to 25% of your funds into an employee SEP and get a deduction, while the employee picks up no income. Of course this is most attractive when you are the only employee.
A SEP is easy to set up. All you need to do is complete a Form 5305-SEP and put it in your records, and fund your SEP-IRA by the due date of your return. If you extend your return, you have until the extended due date to set up and fund the plan.
The downside of a SEP is that if you have any employees, they have to get the same percentage of salary contribution that you have. As long as there are no employees, though, it can work very well.
If you want to set up the plan for the 2006 tax year, though, you need to get on the stick. You don’t want to wait until the last minute to find a bank or mutual fund company to handle it. If you are down to the wire and you aren’t sure what to do, it may be wise to extend your return so you can consider a SEP at your leisure, in consultation with your tax advisor.
The bottom line? It’s still your money; it’s just put away for retirement. You move it from one pocket to another, and you reduce your taxes by doing so.
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Sunday, April 8th, 2007 by Joe Kristan

It’s a chilly Easter in most of the country, but sunny here in Des Moines. As it’s a holiday, we’ll stick with an easy tip today.
The IRS says that millions of eligible taxpayers are failing to claim the telephone excise tax refund. Anybody who has paid a long-distance phone bill in the past three years can claim this as a “gimme” tax credit, whether you itemize or not.
If you have lots of time and you have spent a lot of time on the phone, you can figure your actual refund for the last three years, but most of us will just claim the standard amount, based on the number of personal exemptions on your 1040:
* One exemption, the standard refund amount is $30;
* Two exemptions, the standard refund amount is $40;
* Three exemptions, the standard refund amount is $50;
* Four exemptions or more, the standard refund amount is $60.
There are a few people who don’t qualify for the credit: those who only use prepaid calling cards or prepaid cell phones. Everybody else with a long distance bill qualifies. You can check the details here if you aren’t sure.
To claim the refund, just put your number — $30, $40, $50 or $60 — on your 1040. It goes on Line 71, if you file the long form.
Click to enlarge.
Have a great Easter. And go Zach Johnson, Drake boy and Iowa native! (UPDATE: and 2007 Masters Champion!)
Come to the Tax Update Blog for a tax tip a day through April 17. Collect them all!