Archive for the ‘2008 Filing Season Tip’ Category

Extreme year-end tax planning: tie (or untie) the knot

Wednesday, December 24th, 2008 by Joe Kristan

As nice it is to save taxes, some folks consider other things more important. If you can believe that. But if your tax life is everything for you, extreme year-end planning strategies may come to mind
For example, your marital status on the last day of the year is your tax status for the whole year. Many one-income couples will save taxes filing a joint return. And this is such a romantic time of year. Why wait until June for a big wedding when you can tie the knot now for a tax break?
Alternatively, marriage can still be costly for two-earner couples. A quick trip to Vegas might enable you to file singly for 2008. As a practical matter, though, I think divorce takes more paperwork than marriage (I wouldn’t know personally), so it may be a bit late to do this for 2008. They don’t say “marry in haste, repent at leisure” for nothing.
Now either of these strategies require a certain amount of, well, cooperation, and I’m sure they aren’t for everyone. I have no good advice on how to broach the subject (“Honey, I know how we can pay for that new vacuum cleaner you need!”). But if taxes are that important to you, maybe your future (present?) spouse deserves the warning.



Tuesday, April 15th, 2008 by Joe Kristan

Today’s the day. There isn’t a lot to add to what I’ve already said about this filing season, but a few reminders can’t hurt:
– Today’s the deadline
– If you don’t e-file, certified mail is a great way to document timely filing.
– E-file is good.
– Extensions are your friend.
– If you claim a SEP deduction or an IRA contribution for 2007 and are filing today, make sure you have it funded by the end of the day.
If you have found the process of paying taxes painful, I understand. Sometimes the pain is unavoidable. Remember the painful parts, and start now to ease them. It’s mostly the little things:
– If you always end up short on April 15, you may be underwithheld.
– If you have a lot of income not subject to withholding, keep up on your estimated tax payments.
– If you have a 401(k) plan at work, use it.
– If you are self-employed, it’s easier to fund your SEP or Keogh plan a little at a time, rather than at tax time when you need to come up with a tax payment too.
– If you qualify for a health savings account, fund it.
– Keep your records in order so tax time next year isn’t a debacle.
– Review your tax situation in the fall so you are ready for what happens next April.
Finally, be a good citizen. Tax simplification starts with maiking Congresscritters do their own returns live on the internet. Write your lawmakers!
This is the last installment of our 2008 filing season tips. Thanks for reading!



Monday, April 14th, 2008 by Joe Kristan

Everyone knows that tomorrow is the deadline for filing your 1040. Most taxpayers are probably aware that you can extend this deadline six months with Form 4868. You can extend other returns due today for six more months too. Form 7004 extends both Form 1041, the estate and trust return, and Form 1065, the partenrship return.
Extending your tax return extends some other important deadlines for six months, including:
– Funding a 2007 qualified pension or profit-sharing plan contribution, including a Keogh plan.
– Establishing and funding a SEP, or Simplified Employee Pension.
– Recharacterizing a Roth IRA contribution as a regular IRA contribution.
– Withdrawing excess IRA contributions for 2007.
– Filing Form 3115 under an automatic procedure for changing accounting methods.
– Many elections, such as the partnership “Section 754” election to step up the basis of assets after a sale of partnership interest, are timely when made on an extended return.
Folks with section 1031 like-kind exchanges entered into after October 18 of last year can get extra time to close the acquisition of replacement property, but the extended deadline is 180 days after the old property was given up – not 180 days from April 15.
Some deadlines aren’t extended at all with a return extension. A few examples where April 15 is the do-or-die deadline:
– Paying your federal tax due for 2007 (though no penalties, only interest, will accrue if you are 90% paid in when you extend your 1040).
– Funding an Individual Retirement Account for 2007
– Funding a Health Savings Account for 2007
– Paying your first quarter federal estimated tax for 2008
– Making a Section 475 “mark-to-market” election for securities trading.
So: extensions get you more than just time to get your return right. They can also help with cash management. But be careful about what can’t get extended, and act accordingly.
This is the penultimate installment in our daily series of 2008 filing season tips, and perhaps the ultimate opportunity to use the word penultimate here.



Sunday, April 13th, 2008 by Joe Kristan

If you are scrambling to wrap up your 1040, and you don’t know how you can get it right by April 15, maybe you shouldn’t even try.
The tax law is hard. From bitter experience, every practitioner knows how easily mistakes can happen as you rush to get stuff filed by April 15. That’s why extending your return is often the wise choice.
Filing an extension is easy. All you need to do is file your Form 4868 to get another six months to finish and file your 1040. You can also e-file an extension. If you have at least 90% of your final liability paid, you will have no penalties when you pay the rest; you will have to pay 6% interest on any amount due.
If you are a quarterly estimated payment filer, it’s wise to gross up your extension payment to cover your first quarter payment. That gives you some cushion on your 2007 taxes, and you can apply your overpayment to your 2008 taxes when you file the final 2007 return.
Last year we mentioned two common arguments we hear against extensions. Our feelings towards these arguments are unchanged:

“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.

Keep in mind: an e-filed return may never be seen by an actual human, while every amended return has to get at least some review from an IRS agent with the ability to refer it for examination. That shouldn’t keep you from amending a return if you need to correct an error or collect money the IRS owes you. It does mean that if the choice is to extend and get it right or amend later to fix an error, better to extend than amend. And if you are paying to have your return done, amending is more expensive than extending.
Tomorrow: What you can extend, and what you can’t.
Link: IRS Tax Topic 304, Extension of Time to File Your Tax Return.
This is another in our series of daily 2008 filing season tips. Only two left!



Saturday, April 12th, 2008 by Joe Kristan

An entrepreneur’s tax return isn’t necessarily cheap.  One relatively prominent entrepreneurial couple filed a 2005 tax return with three schedule Cs and K-1s from a bunch of partnerships.  Their return fee was a cool $16,535.

Maybe you spent hundreds of dollars to have a preparer do your business return. 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, your tax return represents 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 $4.80 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!

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 fourth-to-last installment of our series of 2008 filing season tips.
(Cross-posted from



Friday, April 11th, 2008 by Joe Kristan

It happens. Sometimes, for some taxpayers, April 15 comes and there isn’t enough cash on hand to cover what the IRS wants. 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.
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 or significant other, take advantage.
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 6%. 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 FROM THE IRS. Many taxpayers can set up an installment agreement with the IRS online. You can also apply for an installment agreement by filling out Form 9465 and filing it with your timely-filed tax return, along with a check for whatever you can afford to pay now.
If you get an installment plan in place, live up to it. Once you fall behind, things can get ugly quickly.
Remember, too: The Iowa return and payment isn’t due until April 30, so you have time to come up with cash for them.
And whatever you do, don’t bounce a check. They really don’t like that.
Link: IRS release on “Payment Options Available for Those Who Can



Thursday, April 10th, 2008 by Joe Kristan

The Roth IRA is a nice option for personal retirement planning. Contributions to a Roth IRA are not deductible, but earnings form them are permanently tax free at retirement. This contrasts with the traditional IRAs we discussed yesterday, which are tax-deductible (within strict limits) at contribution, but fully-taxable on withdrawal.
The choice between a Roth IRA and a traditional one involves a bet. If you forego the deduction, you are wagering that the benefits of having income permanently tax-free outweighs the value of a deduction today. That’s most likely to be true if you expect to pay higher tax rates at retirement. This makes the Roth IRA especially attractive for younger workers, who are busy climbing up the tax brackets while they climb the career ladder. But given that the markets predict higher rates in just a few years, a Roth IRA might be a good bet for higher-income workers, too.
intrade 2011 tax rate prediction market at 7:45 am 4/10/08
The contribution limits for Roth IRAs are generally the same as traditional IRAs for 2007: $4,000 per taxpayer or $8,000 per couple, but limited to the amount of compensation income. The ability to fund a Roth IRA phases out for high-income taxpayers under the following schedule:
You have until April 15 to fund your 2007 Roth IRA. It won’t reduce your taxes now, but it could do great things for you down the road.
Link: IRS publication on Roth IRAs
We’re posting a new 2008 filing season tip daily through April 15. Catch them all!



Wednesday, April 9th, 2008 by Joe Kristan

The Individual Retirement Account became a red-headed stepchild of the tax law when Congress limited deductions for such accounts mostly to people with no money to save in them. Like all high-income phaseouts, the limitation of IRA deductions is bad policy and adds foolish complexity to the tax law.
But even within its limits, the traditional IRA can be a good deal for taxpayers. First, many taxpayers can deduct their IRA contributions. Your deduction is limited only if you are covered by another employer pension plan. Even if you are covered, your spouse may be eligible for a deduction. And even if you can’t deduct an IRA contribution, money saved in an IRA can earn tax-deferred income from otherwise taxable investments.
You have until April 15 to make your 2007 IRA contribution of up to $4,000, or $5,000 if you were age 50 by the end of 2007, if you have at least that much 2007 compensation income.
You can deduct the contribution if:
– You and your spouse (if you have one) are not covered by any employer retirement plan during the year. Most of us can tell whether we are so covered by looking to see if the “retirement plan” box on our W-2 is checked.
– If you are covered by a retirement plan, you can use this chart to determine whether your 2007 contribution is deductible:
-If you aren’t covered by a retirement plan, but your spouse is, use this chart:
IRA contributions can also qualify you for the savers credit, if your income is low enough. And the math is compelling: If you start young, you can build a terrific IRA nest egg through annual contributions.
Tomorrow: The Roth IRA
Link: IRS publication 590 on IRAs
This is another installment of our daily series of 2008 filing season tips running through April 15.



Tuesday, April 8th, 2008 by Joe Kristan

The 2008 filing season ends a week from today. That means you have eight days, counting today, to fund an individual retirement account for 2007. if you haven’t already done so.
There are several kinds of retirement IRAs: The traditional deductible IRA, the traditional non-deductible IRA, and the Roth IRA. While they differ in important details, they share common contribution limits and deadlines and the ability to shelter earnings that would otherwise be tax exempt.
You have through April 15 to fund a 2007 IRA. IRA contributions are limited to the lesser of your compensation income or $4,000 ($5,000 if you were at least 50 years old by December 31, 2007). If only one spouse has compensation income, the other spouse can use that income to meet these limits. If husband has $50,000 in 2007 wages and wife has $0, for example, both spouses can make a full IRA contribution.
But what kind of IRA? More on that tomorrow.
Link: Publication 590 (2007), Individual Retirement Arrangements (IRAs)
This is another installment of our daily series of 2008 filing season tips – a tip a day thorugh April 15.



Monday, April 7th, 2008 by Joe Kristan

The Tax Update believes Refund Anticipation Loans should be legal, just like other stupid forms of finance, like car-title loans and payday loans. Adults should be allowed to commit finance with other consenting adults, as long as the terms are all disclosed. They should then be allowed to face the consequences of their own foolish choices. Same goes for people who bought too much house and their foolish lenders.
But just because it’s legal, say, to go to the bar, line up 10 shots of Jagermeister, and see if you can drink them all before “You Shook Me All Night Long” finishes on the jukebox, it’s still not a great idea. Refund Anticipation Loans are in the same league.
Why are they so stupid? Let’s start by looking at the IRS refund cycle chart, which tells you how quickly your refund will come for different filing dates:
What this means is that if you e-file and have direct deposit, you will have an 8 to 15-day wait to get your refund. A Refund Anticipaton Loan charges you a lot of money to get your money at most 15 days earlier — at interest rates that run from 40% to over 700%.
There are always people willing to sell you a chance to do something stupid. When they try to sell you a Refund Anticipation Loan, take a pass.
The Tax Update is counting down filing season with a daily 2008 filing season tip through April 15.