Don't Mess With Taxes

Today's Tax Tip

Tax season 2012 is here. To make fulfilling your tax duty as painless as possible, you'll find a Daily Tax Tip over there in the ol' blog's right column. Each day, including weekends and federal holidays, you'll find ways to cut your 2011 tax bill, ease your filing tasks and/or make key 2012 tax year planning moves. And if you miss a day, don't worry. You can visit the complete list of 2012 tips.

Last week at my other tax blog: Romney's tax lessons on marginal and effective rates and aggressive filing; Refund delays

The battle to win the Republican presidential nomination has heated up, with taxes being a hot topic last week.

So it's no surprise that the campaign related tax posts dominated last week at my other tax blog.

Mitt Romney finally released his tax returns, confirming what we already knew (except for that surprising first name of Willard). But what Romney's 14 percent tax rate did provide was a way to differentiate beween marginal and effective tax rates.

The other thing we learned about Romney is that he's essentially a play-it-safe taxpayer. If he'd been more aggressive, he might have paid Uncle Sam less.

Finally, the 2012 tax filing season encountered a glitch in the IRS' new anti-fraud program. It was designed to keep people from getting improper refunds. What it's done is slowed some legitimate refunds by about a week.

You can check out my new posts each Tuesday and Thursday (with an occasional Friday item thrown in for good measure) at Bankrate Taxes Blog. And if you happen to miss them there, you can find a wrap-up here each Saturday.

You also might find these items of interest:

• Comparing presidential -- and presidential wannabe -- 1040s
• State of taxes in Obama's State of the Union address
• Romney's earnings prompt renewed attention
  to carried interest taxation

Getting old tax filing information

During tax filing season you're focusing on last year's tax return.

Sometimes, though, you need a copy of an older tax return.

This is often the case when you're applying for a loan, especially a mortgage. In the wake of the housing/banking debacle, lenders are taking closer looks at potential customers' finances and that includes copies of old IRS filings.

The best source is your own records.

You don't need to keep all the documentation indefinitely, but you should hang onto copies of your past returns forever. Digital is fine. Just scan in those decades of 1040s and associated schedules.

But if you didn't keep records of your old returns or you lost them in a move or a disaster, you can get copies from Uncle Sam.

Today's Daily Tax Tip looks at the choices available to you in obtaining your old tax information.

Full copies:  If you need an exact copy of a previously filed and processed return and all attachments, including your W-2, send the IRS Form 4506, Request for Copy of Tax Return.

Copies of returns are generally available for seven years from when you filed them.

This option, however, will cost you.

When you send in Form 4506, include a check or money order payable to U.S. Treasury for $57 for each tax return you are requesting.

Yep, if you need full return copies for 2005 and 2006, you must pay $114.

And be patient. It could take up to 60 days for the IRS to process your request.

Transcripts only: If you don't need that much detail, transcripts might work. There are two versions of this filing data.

A tax return transcript shows most line items contained on the return as it was originally filed, including any accompanying forms and schedules.

In most cases, a tax return transcript will meet the mortgage verification requirements of lending institutions.

Complete Form 4506-T to order a tax return transcript.

There's also a shorter version, Form 4506T-EZ. The EZ is only for individual filers of Form 1040. Businesses, partnerships and individuals who need transcript information from other forms must still use the Form 4506-T.

If you need a statement of your tax account showing changes that you or the IRS made after the original return was filed, you must request a tax account transcript.

This account transcript shows basic data including marital status, type of return filed, adjusted gross income, taxable income, payments and adjustments made on your account.

Tax return and tax account transcripts are generally available for the current and past three years.

Even better, there is no charge for transcripts and you should receive them in 10 business days after you make the request.

You also can avoid the paperwork by calling the IRS toll-free at 800-908-9946 and following the automated prompts to order a tax return transcript.

Or you can order your old tax info online at Order a Transcript.

You also might find these items of interest:

• Tackling tax record keeping
• Midyear tax tip: Get organized!
• Tax record keeping song and dance

How your future retirement tax bracket affects today's Roth IRA decisions

A couple of years ago -- Yikes! Has it been that long!? -- I asked in a post Are you ready for a Roth conversion? It looked at the elimination of the income limit on converting a traditional IRA to a Roth account. Back then, my fellow personal finance blogger and Twitter pal JoeTaxpayer. was among those who offered some answers to that question so I invited him to elaborate. He graciously agreed to write a guest post then and now he's updated it with 2011-2012 tax data.  

Today, I'd like to offer a look at what it would take to be in a higher tax bracket at retirement.

Since no one can say what the tax rates will be in two years let alone 10 or 20, let's look at the numbers for a couple retiring in 2012.

Note there is a withdrawal rate of 4 percent that is commonly used as a safe number to avoid spending down your funds too quickly. Further, I assume no itemized deductions, just the standard deduction, to keep this analysis as simple as possible.

In 2012 dollars (and tax brackets) a couple would have a standard deduction of $11,900 plus exemptions totaling $7,600. The first $19,500/year is tax-free. A 4 percent withdrawal means one needs $487,500 in pretax savings to generate that $19,500.

The next $17,400 is currently taxed at 10 percent. Another $435,000 to generate that; $922,500 to just fill the 10 percent bracket.

The next $53,300 is taxed at 15 percent. You need an additional $1,332,500 to be able to withdraw this much.

Let's summarize this, and take a moment to think about these numbers. $90,200 is the total income you can have in 2012 and have that last taxable dollar taxed at 15 percent. If you are taking all of that from pretax accounts, you need $2,255,000 to maintain that withdrawal rate.

I find that a chart is the better way to present so many numbers to clarify this discussion and bring the point home.

	Amount you can withdraw at each rate	Gross Dollars needed to generate this withdrawal	Cumulative dollars needed to 'top off' this tax bracket
Married Filing Joint
Zero Bracket	$19,500	$487,500	$487,500
10%	$17,400	$435,000	$922.500
15%	$53,300	$1,332,500	$2,255,000
25%	$72,000	$1,800,000	$4,055,000
Single
Zero Bracket	$9,750	$243,750	$243,750
10%	$8,700	$217,500	$461,250
15%	$26,650	$666,250	$1,127,500
25%	$50,300	$1,257,500	$2,385,000

All of the numbers presented in the text are now shown above. I've added the 25 percent marginal rate as well as the numbers for a single filer. I use the term "zero bracket" to describe the effect of the standard deduction along with the exemption amount, it should not be treated as an official tax term.

Well-informed readers will note that I've ignored the fact that Some Social Security benefits may be taxable. As this occurs at $25,000 for single and $32,000 joint, it lends itself to a completely different dialog, beyond the scope of this article. Suffice it to say that as one gets closer to retiring, this issue does need to be addressed.

This discussion is focused on just how much income (and therefore wealth) it takes to even retire at the top of the 15 percent tax bracket. It would be a shame to convert money and perhaps pay a marginal rate of 25 percent only to find yourself retiring at a lower rate, as most of us will.

On the other hand, if when you do your taxes for 2009, you realize you are currently in the 15 percent marginal bracket, it can certainly make sense to convert enough each year to "fill the bracket," so your last dollar taxed is at 15 percent, but any higher amounts would have been at 25 percent.

Likewise, the same strategy can be used in any year your income drops for whatever reason, a period of unemployment, a spouse taking time off to raise a child, etc.

Remember, the Roth conversion is not an "all or none" decision. For most converts, it's an annual partial conversion that will maximize their wealth and minimize their tax burden.

Photo by Andrea_44 via Flickr

JoeTaxpayer is the founder of the eponymous www.JoeTaxpayer.com, Financial commentary for the average Joe, where he has been blogging on various financial topics for over three years. You also can follow him on Twitter at @JoeTaxpayerBlog.

A couple of years ago -- Yikes! Has it been that long!? -- I asked in a post Are you ready for a Roth conversion? It looked at the elimination of the income limit on converting a traditional IRA to a Roth account. Back then, my fellow personal finance blogger and Twitter pal JoeTaxpayer. was among those who offered some answers to that question so I invited him to elaborate. He graciously agreed to write a guest post then and now he's updated it with 2011-2012 tax data.  

Today, I'd like to offer a look at what it would take to be in a higher tax bracket at retirement.

Since no one can say what the tax rates will be in two years let alone 10 or 20, let's look at the numbers for a couple retiring in 2012.

Note there is a withdrawal rate of 4 percent that is commonly used as a safe number to avoid spending down your funds too quickly. Further, I assume no itemized deductions, just the standard deduction, to keep this analysis as simple as possible.

In 2012 dollars (and tax brackets) a couple would have a standard deduction of $11,900 plus exemptions totaling $7,600. The first $19,500/year is tax-free. A 4 percent withdrawal means one needs $487,500 in pretax savings to generate that $19,500.

The next $17,400 is currently taxed at 10 percent. Another $435,000 to generate that; $922,500 to just fill the 10 percent bracket.

The next $53,300 is taxed at 15 percent. You need an additional $1,332,500 to be able to withdraw this much.

Let's summarize this, and take a moment to think about these numbers. $90,200 is the total income you can have in 2012 and have that last taxable dollar taxed at 15 percent. If you are taking all of that from pretax accounts, you need $2,255,000 to maintain that withdrawal rate.

I find that a chart is the better way to present so many numbers to clarify this discussion and bring the point home.

	Amount you can withdraw at each rate	Gross Dollars needed to generate this withdrawal	Cumulative dollars needed to 'top off' this tax bracket
Married Filing Joint
Zero Bracket	$19,500	$487,500	$487,500
10%	$17,400	$435,000	$922.500
15%	$53,300	$1,332,500	$2,255,000
25%	$72,000	$1,800,000	$4,055,000
Single
Zero Bracket	$9,750	$243,750	$243,750
10%	$8,700	$217,500	$461,250
15%	$26,650	$666,250	$1,127,500
25%	$50,300	$1,257,500	$2,385,000

All of the numbers presented in the text are now shown above. I've added the 25 percent marginal rate as well as the numbers for a single filer. I use the term "zero bracket" to describe the effect of the standard deduction along with the exemption amount, it should not be treated as an official tax term.

Well-informed readers will note that I've ignored the fact that Some Social Security benefits may be taxable. As this occurs at $25,000 for single and $32,000 joint, it lends itself to a completely different dialog, beyond the scope of this article. Suffice it to say that as one gets closer to retiring, this issue does need to be addressed.

This discussion is focused on just how much income (and therefore wealth) it takes to even retire at the top of the 15 percent tax bracket. It would be a shame to convert money and perhaps pay a marginal rate of 25 percent only to find yourself retiring at a lower rate, as most of us will.

On the other hand, if when you do your taxes for 2009, you realize you are currently in the 15 percent marginal bracket, it can certainly make sense to convert enough each year to "fill the bracket," so your last dollar taxed is at 15 percent, but any higher amounts would have been at 25 percent.

Likewise, the same strategy can be used in any year your income drops for whatever reason, a period of unemployment, a spouse taking time off to raise a child, etc.

Remember, the Roth conversion is not an "all or none" decision. For most converts, it's an annual partial conversion that will maximize their wealth and minimize their tax burden.

Photo by Andrea_44 via Flickr

JoeTaxpayer is the founder of the eponymous www.JoeTaxpayer.com, Financial commentary for the average Joe, where he has been blogging on various financial topics for over three years. You also can follow him on Twitter at @JoeTaxpayerBlog.

New York offers debit card refund option

Tax refunds via debit cards didn't work for Uncle Sam last year, but maybe the Empire State will have better luck.

The New York Department of Taxation and Finance announced this week that the state's taxpayers can now choose to receive their personal income tax refunds on a prepaid MasterCard debit card.

 
Click image to view a video on the NY tax refund debit card option.

The option was created to provide folks without a bank account a way to have their refunds directly deposited. 

New Yorkers can choose the debt card refund method when they file their tax returns.

Once the return is processed and refund is OK'ed, the money will be deposited into a bank account and your card -- or two cards if you filed a joint return with your spouse, one for each of you -- will be mailed to you.

When you get it, just activate it and use it as you would any other debit card.

Bank alert: Now here's where some folks might have an issue.

The financial institution with which New York tax officials have partnered is Bank of America.

Still want the card?

Fine.

A lot of folks are adamantly anti-BoA, but others don't have a problem with the bank. I just wanted you to know.

Other rules, possible fees: Once you activate your New York tax department refund debit card you can use it for purchases as you wish wherever such cards are accepted.

Your first bank transaction is free. You noticed that "first," right? You might face a $1 charge for each subsequent withdrawal.

But there are no fees for purchases.

And you don't have to use it regularly to keep the card active.

As for quick cash, if you use in-network ATMs -- those are Bank of America and Allpoint machines -- you won't face any charges for those transactions.

The New York tax office has published a complete fee schedule.

Of if you prefer, you can bring the debit card to a bank and cash out the entire refund amount.

Federal follow-up: I'm sure the U.S. Treasury Department and Internal Revenue Service will be closely watching the New York program. And that earns this post today's Follow-up Friday honors.

The New York program looks to be more streamlined than the ill-fated federal pilot program that failed miserably last year.

If the refund debit card works well in the Empire State, perhaps Uncle Sam will be able to follow New York's plan and one day reissue a debit card for IRS refunds.

You also might find these items of interest:

• New federal tax refund debit cards
  for taxpayers without bank accounts (2010)
• Direct deposit to replace U.S. checks
• When real life meets tax refund loans

Tax refunds delayed by fraud fine-tuning

Few folks are as eager as those awaiting a tax refund.

Well, there's bad news for some of you early filers.

New anti-fraud measures implemented this tax filing season have caused the Internal Revenue Service to be a bit slow in sending out refunds.

After getting calls from taxpayers and tax professionals wanting to know why folks were still waiting for refunds -- e-filers generally can expect their directly deposited refunds in about 10 days -- the IRS announced that the tax cash could be delayed a week because of a new anti-fraud safeguards.

Here's the official email word from the IRS via its QuickAlert notification system:

"As with the start of any tax season, there are system validations that occur requiring some fine-tuning of our systems. As part of this, some taxpayers will receive refunds approximately one week later than initial projections they may have received, but these are still in line with historical refund delivery times.

The one-week delay for some refunds relates to fine-tuning IRS systems to adjust for new safeguards put in place this tax season to provide stronger protection against refund fraud. The IRS is providing additional screening for fraud this year before issuing refunds, but the vast majority of taxpayers can still continue to expect to receive their refunds in a timely fashion."

ID theft issues: While the delay is understandably irritating, the reason is legitimate.

Tax refunds lost to identity thieves is a growing problem. In 2010 alone, reported the Government Accountability Office (GAO) last year, the IRS identified more than 245,000 incidents of identity theft.

While that amount is tiny when you consider that around 140 million of us file tax returns, it represents a nearly five-fold increase in taxpayer identity theft between 2008 and 2010.

It's just too bad the IRS couldn't test its fraud detection system before filing season began.

Not so fast: There are reports, however, that the "vast majority" of taxpayers the IRS says are getting their refunds quickly might be overstated.

Beverly Russell, a financial planner for Jackson Hewitt in Spartanburg, S.C., told CBS affiliate WSPA-7 that his office received a memo from the IRS saying they were "researching an issue with their fraud screening and detection process, which could impact between 60 to 70 percent of refunds for this funding cycle. This would include returns accepted by the IRS before 11 a.m. on January 18th."

"They're using the term 60 to 70 percent will get delayed," Russell told the TV station. "So that means 30 to 40 percent will get through, so I don't know which 30 or 40 percent is going to be happy or not."

Refund timing: As I noted in my earlier post about when to expect your tax refund, those delivery dates are estimates.

The IRS reiterated that in its notification about this delay:

"The IRS reminds taxpayers that refund time frames provided by "Where's My Refund" and tax providers are projected time frames and are subject to revision. Many different factors can affect the timing of the refund after the IRS receives the return for processing.  The IRS apologizes for any inconvenience caused by the revised refund dates."

So if you filed early and are getting a bit anxious about your refund, this probably is the reason you haven't received it yet.

You can find out its exact status by using the agency's Where's My Refund tracking tool.

And not to be too much of a tax nag, but it's also another reason why you should adjust your withholding.

A tweak of your W-4 will mean you won't have to depend on the IRS to send you back your cash that you could have had control of all year.

You also might find these items of interest:

• Tax refunds as forced savings accounts
• $153 million in tax refunds returned as undeliverable
• Tax refunds: Spending tips, payroll withholding effects

Federal workers and retirees owe more than $3 billion in taxes

Lost in the political sniping this week about which candidate pays how much in taxes was a report on which federal workers aren't paying what they owe.

The latest tax delinquency data shows that at the end of fiscal 2010, about 98,000 federal, postal and Congressional employees owed $1.03 billion in unpaid taxes.

Add in federal retirees and military personnel, and the Internal Revenue Service says the total comes to nearly 280,000 people owing $3.4 billion.

The numbers are from the IRS' Federal Employee/Retiree Delinquency Initiative (FERDI). Since 1993, FERDI figures have been send to Congress as part of an effort promote tax compliance among current and retired federal employees.

It's not working so well.

The 2010 analysis shows a 3 percent increase in delinquent federal worker/retiree tax debt from the previous fiscal year.

The tax scofflaw percentage is a bit bigger on Capitol Hill. And no, I'm not talking about Representatives and Senators.

There were around 18,000 Congressional staffers in 2010 and 684 employees, or almost 4 percent, owed taxes that year. That was an increase of 46 workers from the unpaid federal worker tax bills in 2009.

Specifically, 4 percent of House staffers owed $8.5 million and 3 percent of Senate employees owed $2.1 million, according to the 2010 IRS data.

The Washington Post has created an interactive table where you can sort alphabetically by name or numerically by dollar amount to see just which federal worker and retiree groups owed exactly how much in 2010.

Congressional tax targets: Rep. Jason Chaffetz (R-Utah), a member of the House Oversight and Government Reform Committee, noted that while the number of tax delinquent federal employees has remained fairly constant since 2004, the amount they owe has increased 72 percent from 2004 to 2010.

Table courtesy Rep. Chaffetz. Data from  IRS FERDI. Click image for larger view.
Excludes federal employees who have entered into tax repayment agreements.

Chaffetz has sponsored bills that would allow federal employees who owe the IRS to be fired. Current law only allows for the termination of IRS employees who haven't paid their federal income taxes. Companion legislation has been introduced by Sen. Tom Coburn (R-Okla.), who most recently also went after tax breaks for the wealthy.

You can be sure these two lawmakers will cite FERDI's latest nonfiling numbers when they reintroduce their bills this year.

You also might find these items of interest:

• Federal workers owe IRS $3 billion 
• Uncle Sam's tax deadbeat trouble
• Who owes the IRS millions? Uncle Sam

State of taxes in Obama's State of the Union address.

Tuesday was the day that news really wasn't new.

First, Mitt Romney released his tax returns, which didn't tell us very much we didn't already know.

Then came Obama's 2012 State of the Union address, which also contained a lot of tax ideas that we've heard before.

And we've still got a week until Groundhog Day!

In case you missed it, you can watch the White House video of the speech.

Or you can read the transcript. Or you can peruse a collection of Twitter comments posted while Obama spoke.

But since you've stopped by the ol' blog, here are the tax highlights.

Buffett Rule booster: Let's start with individual taxes.

Obama wants Congress to sign off on the Buffett Rule. The White House floated this idea of taxing the wealthy more last fall, shortly after Warren Buffett announced that he didn't believe he paid enough to Uncle Sam.

The reason for the low tax rate, according to the Berkshire Hathaway head and the prez, is the preferential tax treatment given to investment income. That 15 percent long-term capital gains tax rate is enjoyed by not only Buffett and many of his financial peers.

But if Obama gets his wish, households with annual incomes of more than $1 million would pay a minimum tax rate of 30 percent. That would be double the rate paid by Willard Mitt over the last two years.

In addition, the prez wants to end many tax breaks for rich taxpayers. Again, this is something the Administration has proposed before.

"[M]y Republican friend Tom Coburn is right: Washington should stop subsidizing millionaires," said Obama, referring to the Oklahoma Senator's report on tax subsidies of the rich and famous.

Obama proposes ending tax breaks for mortgage interest, health care cost, retirement contributions or child care for those making more than $1 million a year. Charitable contributions, however, would still be allowed to wealthy donors.

Business tax enticements, penalties: On the corporate tax side, Obama decried a tax system that provides "tax breaks for moving jobs and profits overseas" while "companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it. So let's change it."

Obama's suggested corporate tax changes include both carrots and sticks. He wants to:

• Require U.S. companies pay a minimum tax on overseas profits. The U.S. Treasury would get any difference between the foreign tax and a new, unspecified minimum tax.
  
• Prohibit companies from claiming a business eduction for any costs associated with closing American operations that are then sent abroad.
• Offer a new tax credit for companies coming back to the United States. It would cover the costs of closing overseas operations that are relocated in the U.S.
• Lower tax rates for manufacturers, with added tax breaks for high-tech manufacturing.

What now? The Buffett Rule is a nonstarter in this current political climate. But it will lead to continued discussion of our current tax system and how it might be adjusted to erase perceptions of unfairness.

As for actual individual tax changes, don't count on them until sometime in 2013 at the earliest regardless of (or depending on) who gives that year's State of the Union address.

Some corporate tax refinements might have a better chance of making it through the legislative process this year. But even then, look for any changes here to be minor.

Or, to paraphrase the president as he was wrapping up his remarks, that brings us back to where we began. Just like so many times before.

You also might find these items of interest:

• Who wants to tax a millionaire?
• Rethinking mortgage tax breaks
• Is it time for tax reform?