We've made it! Welcome to the ultimate tax-filing month!
To help you make it these last few filing days to this year's April 17 deadline, here are April 2012's Daily Tax Tips. Thanks for making the jump from the January, February and/or March tax tip lists.
Although time to finish your taxes is short, don't panic. There are still ways to get your taxes done, and done right, so that you don't miss the Tax Day deadline.
As with the previous month's tax tips, April's tips will appear every day, Monday through Sunday, including holidays -- even the Emancipation Day one that pushed the 2012 filing due date further into this month -- through Tuesday, Apirl 17.
And while the focus will be on filling out the 2011 tax return, you'll still find some tax planning ideas to give you a start on reducing your 2012 tax bill.
You can find each day's new tip in the upper right corner of the ol' blog. But if you occasionally must tear yourself away from taxes -- say it ain't so! -- you can catch up on this and the other monthly tax tip compilation pages.
Many of the tips posted throughout filing season appear courtesy of Bankrate's annual tax guide. But some will be original Don't Mess With Taxes advice.
So now that you're through perusing January and February tax tidbits, let's flip that tax calendar page and take a look at the Daily Tax Tips for April 2012.
- Time to enroll in EFTPS -- Electronic transactions become more popular each year, both with the Internal Revenue Service and taxpayers. One way to electronically pay your tax bill and avoid any extra charges, such as credit card fees, is to use the Electronic Federal Tax Payment System, or EFTPS. EFTPS is the Treasury Department's free online payment system for businesses and individuals. Despite an early misstep in using EFTPS, I've used it for years to pay both annual and estimated tax bills. But to take advantage of EFTPS, you must enroll. And it takes about a week before you can use the system because you must wait for the IRS to send you a personal identification number, or PIN, via snail mail. Yep, even though the IRS in recent years has been encouraging (some say forcing) us to go electronic, it still uses the U.S. Postal Service to set up access to its own online payment system. But once you get past that ironic requirement and into EFTPS, it's a handy and free way to pay your tax bills. And if you want to try it out this filing season, set up your account soon. (April 1, 2012)
- Social Security number mistakes could be costly -- It seems simple enough. Make sure your Social Security number and those of your spouse and dependents are entered correctly on your return. But each filing season, lots of people this common tax-filing mistake. And for them, it could be very costly. A mismatched name and Social Security number on a tax return could, at best, could slow down a refund. At worst, it could unexpectedly increase a tax bill. The IRS checks Social Security numbers when you apply for tax credits such as the popular child and additional child tax credits or educational tax breaks. No or wrong numbers mean not tax breaks. Ultimately, a name and tax ID number discrepancy could prevent your wages from being posted correctly to your Social Security account record, which could mean you wouldn't get all the federal retirement benefits to which you're entitled. So remember to double check Social Security number entries before you send in your tax return. (April 2, 2012)
- Roth IRA rules -- Roth individual retirement accounts are popular for many reasons, the main one being that earnings on this type of nest egg are tax-free when withdrawn. As for those withdrawals, you get to decide when you take them. There are no required minimum distributions for Roth IRAs. But to ensure that you get all the Roth IRA advantages, you must meet follow the Roth rules. As with a traditional IRA, you must earn money to contribute to a Roth. You also can't make too much money; the IRS has earning limits on just who can contribute to a Roth. You can't put money into a Roth if in 2011 you made $179,000 or more and are married filing jointly; $122,000 if you file as single, head of household or married filing separately and did not live with your spouse during the year; or $10,000 if you lived with your spouse at any time during the tax year but file separate returns. If you made less than those amounts, you still might face a limit on how much you can contribute to a Roth. If you're eligible to open or contribute to a Roth IRA, you can put in up to $5,000 or $6,000 if you're age 50 or older. And remember that you can put money into the account through this year's April 17 filing deadline. (April 3, 2012)
- Traditional IRAs work just fine for some -- The big IRA decision is whether to choose a Roth IRA or a traditional IRA. The answer is it depends. Both retirement accounts offer some tax savings. The main difference is when you get those savings. For some, sooner is better and in those cases a traditional IRA still has a lot of appeal. Many taxpayers find that a traditional IRA lets them build tomorrow's retirement cushion while also reducing today's taxes. That's due to the above-the-line deductions deduction for a traditional IRA. Of course, you must meet the plan's requirements. You must earn money to open a traditional IRA. But if you earn too much, then your tax deduction could be reduced or disallowed totally. To figure that out, you must take into account your working spouse's retirement plan circumstances as well as the option to contribute to a workplace retirement plan at your job. For 2011 returns, a single or head-of-household filer with a company-provided pension plan can earn up to $66,000 and still get a partial IRA deduction. The earnings cap is $110,000 for joint filers where each partner has a company retirement plan. If you don't have a company plan but your spouse does, you lose your full traditional IRA deduction at $179,000. If you decide to contribute to a traditional IRA even if you can't deduct it, remember to file Form 8606. This paper trail will help you, and the IRS, keep track of money that you won't owe taxes on when you take distributions in retirement. (April 4, 2012)
- Make your nest egg pay off now with the retirement savers credit -- Retirement plans already offer many tax benefits. Taxes are deferred, and in some cases never collected, on money stashed now for your post-work years. But they also might enable you to reduce your current tax bill if you qualify for the retirement savers contribution credit. You'll find the credit on both Form 1040 and Form 1040A. Because it's a credit, it reduces your tax bill dollar-for-dollar, up to $1,000. Your actual credit amount depends on your income, filing status and just how much you put into retirement plans. Basically, the lower your income, the bigger your credit. Income limits are are adjusted annually for inflation. For 2011, the maximum $1,000 retirement savers credit is available to single filers making up to $17,000; to married joint filers with up to $34,000 in income; and head-of-household filers making up to $25,000. Reduced credits are allowed until filers' incomes reach more than $28,250 if single; $56,500 if married filing jointly; and more than $42,375 for head-of-household taxpayers. The credit can be claimed against contributions to traditional or Roth IRAs, as well as to employer-provided retirement plans, including self-employment plans. (April 5, 2012)
- Using IRA money to buy a house, pay for school -- Tax law allows you to tap your traditional individual retirement account early without paying the usual 10 percent penalty in certain hardship situations. But a couple of uses of the money, while technically considered hardship withdrawals, are usually far from adverse circumstances: buying your first home or paying for college. You can put up to $10,000 of IRA funds toward the purchase of your first residence. If you're married, and you and your spouse are first-time buyers, you each can pull from retirement accounts, providing $20,000 to put down on your first home. And best of all, you don't have to actually be purchasing your very first abode. You qualify as long as you (or your spouse) didn't own a principal residence at any time during the previous two years. When it comes to schooling, a happy accomplishment in most families, the IRS says no penalty will be assessed for withdrawing IRA money before you turn 59½ as long as the retirement funds go toward qualified schooling costs for yourself, your spouse or your children or grandkids. (April 6, 2012)
- Make sure your new name matches your Social Security number -- Have you changed your name? Make sure the Social Security Administration (SSA) knows or it could cause you tax-filing trouble. In in order for the Internal Revenue Service to properly process your tax return, your name and Social Security number must match. When they don't, your refund could be delayed or even disallowed. To make the change, filing a Form SS-5, Application for a Social Security Card, with the SSA. You can download the form, pick one up at your local SSA office or get one mailed to you by calling 800-772-1213. To finalize the change, you must provide the SSA with proof of your new name via a marriage document, divorce decree, Certificate of Naturalization or court order for a name change. (April 7, 2012)
- A dozen egg-cellent tax tips -- You probably took Easter Sunday off. That's OK. The ol' blog went on a tax eggstravaganza hunt for filing tips and found a dozen that, while not as yummy as chocolate rabbits, could sate your tax saving appetite. They include claiming day camp costs toward the child care credit; deducting mortgage re-fi loan points; writing off medical mileage, including trips to your pharmacy to pick up your prescriptions; including airline baggage fees in business travel deductions; claiming tax benefits for disabled taxpayers; and checking whether you're eligible to claim, via IRS Form 8801, a tax credit for prior year Alternative Minimum Tax (AMT) payments. Other tax issues to consider are the Earned Income Tax Credit (EITC), Roth IRA conversion taxes due on 2011 returns, checking asset basis calculations, writing off moving costs, deductible state sales or income taxes and home energy upgrades tax credits. (April 8, 2012)
- Keeping track of the kiddie tax -- Do you have kids that have investment accounts in their names? Then you need to pay attention to the kiddie tax. Despite the name that sounds like it might help young taxpayers, this tax provision was designed to keep parents from shifting income to their kids in lower tax brackets. It used to affect young investors in their mid- and late-teens. Now, however, it could affect some young people as old as age 23. Here's the deal. A portion of a child's investment income -- up to $950 in 2011 and 2012 tax years -- is tax-free. Then next amount, again $950 for last year and this year, is taxed at the youth's lower tax rate. But when the earnings exceed the combined amounts, or $1,900 for the 2011 and 2012 tax years, the unearned income must be taxed at the parents' usually higher tax rate. What this essentially means is that by the time a young investor can take advantage of his or her lower tax bracket (at age 19 unless the child is a full-time student, a situation which kicks the age to 24), he or she will likely be out of high school or even college and possibly working and earning enough so that the youth is no longer in the lowest tax bracket. Parents also must decide whether to file a form for their child, Form 8615, or to add the kid's investment earnings to their income via Form 8814. Yep, raising kids is not easy and neither is taking care of kiddie tax issues. (April 9, 2012)
- Reporting investment income -- Making money via investments sure beats working for a living. But just like wage or salary income, you still have to pay taxes on investment earnings. The good news is that in many instances, the tax rate is substantially lower than the taxes on ordinary income. The bad news is that you have a bit more tax paperwork to do. If you have interest income of more than $1,500 you must file Schedule B with your Form 1040 or 1040A. That $1,500 threshold also applies to dividends. And dividend payouts in excess of that amount go on Schedule B, too. Note that the dividends and interest amounts are calculated separately for reporting purposes. If you have $500 in interest and $1,100 in dividends, you don't need to file Schedule B even though your total of these investment earnings is more than $1,500. When you're able to report your earnings directly on your tax return because they were enough to trigger a Schedule B filing, be sure to note that there are two lines for these earnings. On both the 1040 and 1040A, interest goes on line 8. For ordinary dividends, use line 9a. Just below is 9b, for entering qualified dividends that are eligible for the lower capital gains tax rate, 15 percent for most filers. Investment earnings also require more calculations to come up with your correct bill. But in this case, the extra work is definitely worth it, since it usually means you have a smaller tax bill than if the investment income had been taxed at ordinary income rates. And remember that in both interest and dividend payment situations, you still have to report the money even if you didn't actually get it. If it was reinvested into your account or fund, you constructively received it, meaning it still counts as taxable earnings to you. (April 10, 2012)
- Taking advantage of foreign taxes -- If you have an internationally diversified portfolio you likely paid foreign taxes on some of your investments. You'll find any foreign taxes paid on your investments in box 6 of the 1099-DIV you got from your investment manager. It's never fun paying taxes to any country and especially not to one where you don't live. But you can recoup those foreign tax costs on your U.S. tax return. You have two ways to do that. You can claim the foreign taxes as an itemized deduction. This means you'll must file Form 1040 and the associated Schedule A. As a deduction, the foreign taxes will add to the amount you can subtract from your adjusted gross income so that you'll have a smaller taxable income upon which you figure your final Internal Revenue Service bill. Or you can claim the foreign tax amount as a tax credit, which will reduce your tax bill dollar for dollar. In this case, simply enter your foreign tax amount on line 47 of Form 1040. You also might have to complete Form 1116, but only if your foreign tax amount is more than $300. (April 11, 2012)
- Home energy tax credits -- Uncle Sam wants to help cover improvements to your house to make it more energy-efficient, but not as much as he did in prior tax years. For 2011, some relatively easy ways to cut your energy costs -- storm windows and doors, skylights, insulation, roofing (metal and asphalt), biomass stoves, and conventional furnaces, air conditioners and water heaters -- could be worth a maximum tax credit of $500. That's just a third of the credit that was available previously. And the available credit amounts vary with the different improvement options. Still, the tax break is a credit, meaning your tax bill is reduced dollar for dollar. If, however, you have already claimed the maximum credit for upgrades in prior tax years, you're not eligible for more. But you do get a second home energy improvement chance if you install more dramatic energy upgrades and the tax savings are larger. This includes solar powered systems, fuel cell plans, wind energy programs and geothermal heat pumps. The credit in these cases is up to 30 percent of the cost of the alternative-energy equipment. (April 12, 2012)
- Ways to e-pay your tax bill -- If you end up owing Uncle Sam this year, you can pay your tax bill electronically. One of the most popular payment options is with a credit or debit card. The Internal Revenue Service has approved three vendors to process plastic payments. The only problem here is that each will charge you for the convenience of using your Visa, MasterCard, Discover or American Express card to pay your taxes. If you don't mind paying the U.S. Treasury directly from your bank account, that's OK too and there's usually no charge for these transactions. You can pay via electronic funds withdrawal, or EFW, or Electronic Federal Tax Payment System, known as EFTPS. EFW essentially is the reverse of the direct deposit that the IRS encourages for receipt of refunds. You can pay this way via Free File, commercial software or a paid preparer. You'll need your financial institution's routing transit number and account number. Check with your bank to confirm these numbers, especially the routing data since it's not always the same as on your paper checks. Since EFTPS requires some set-up time, if you haven't already established an account it's out of the tax e-pay picture for the impending filing deadline. But after you're through with your 2011 return and tax payment, check it out. You can use it rest of the year to electronically make your estimated tax payments. (April 13, 201)
- Self-employment tax issues -- If last year was the first one in which you worked for yourself, either as your full-time job or by doing some freelance work on the side to supplement your wages, you are likely to encounter a big tax surprise when you file: self-employment tax. Self-employment tax, or SE tax, is in addition to the usual federal income tax. It goes toward Social Security and Medicare, similar to those tax amounts that employees see withheld from their working-for-the-man paychecks. SE tax kicks in when your net profit is $400 or more. To determine that, sole proprietors or independent contractors will calculate their earnings on Schedule C or C-EZ. Once you get your self-employment earnings amount, you calculate your SE tax. This used to be 15.3 percent of net earnings, but the payroll tax holiday, in effect for 2011 and 2012, cuts the tax rate to 13.3 percent -- 10.4 percent goes toward Social Security tax and 2.9 percent to Medicare. As a self-employed taxpayer you pay both the employer and employee portion of the SE tax. Again, this process follows that of standard employees and employers where the worker pays half of the payroll tax via withholding and the boss matches that amount. And again because of the payroll tax holiday, employees now pay just 4.2 percent while employers still must put in 6.2 percent of a worker's earnings. Since you're both the worker and the boss, you must make both tax payments. But you do get to deduct the employer portion of the SE tax on your tax return. You'll find it in the adjustments to income, also known as above-the-line deductions, that are listed in the last section on page 1 of Form 1040. (April 14, 2012)
- State taxes due, too; most on April 17 -- Taxpayers in 43 states and the District of Columbia District of Columbia have multiple taxes to worry about this time of year. Not only are their federal returns due in mid-April, but they also must file with their state tax department. And in 38 of those jurisdictions, state (or D.C.) Tax Day is the same as the Internal Revenue Service deadline. For 2011 filings, that's Tuesday, April 17. Taxpayers in Maine and Massachusetts also have to keep an eye on Patriots Day. This commemoration of the beginning of America's tax-sparked revolution against Great Britain is a state holiday in those two New England locations. When that third Monday in April holiday coincides with Maine's and Massachusetts' tax deadline day, residents get until the next business day to get their state filings done. But Pine Tree and Bay State residents still must get their federal returns to the IRS on the regular April due date. That's not a problem for 2012. This year Monday, April 16, is both Patriots Day and Emancipation Day, the D.C. holiday that has pushed federal filings until Tuesday, April 17. And what states collect income taxes but don't follow the IRS filing calendar? Hawaii, with tax returns/payments due by April 20; Delaware and Iowa, with tax returns/payments due by April 30; Virginia, with tax returns/payments due by May 1; and Louisiana, with taxes tax returns/payments due by May 15. (April 15, 2012)
- Payment options when your tax bill is too big -- Freaking out because you just finished your tax return and discovered you owe the Internal Revenue Service a lot? And by a lot, I mean more than you can pay right now? Don't panic. You have several tax payment choices. If you don't have the money in your checking account, but you have a credit card limit that's large enough to cover your bill, you can pay with plastic. Just try to pay that charge card bill off as quickly as possible so that you don't incur a lot of interest charges. Or you can set up an installment plan with the IRS. Uncle Sam's interest rate is a lot lower than the credit card companies (right now it's just 3 percent), but you will pay an application fee and also incur some late payment charges until your tax bill is paid in full. If you're expecting money in a few months that you can use to pay your tax bill, you might even be able to get a NAMEshort-term (up to 120 days) payment plan that doesn't have as many associated costs as longer payment arrangements. And if you're unemployed or the business you own has taken a hit in the economic slowdown, the IRS is waiving some penalties in these cases. Check out all your payment options, because you do need to work out some way to come up with the money as quickly as possible. And definitely go ahead and file your return, even if you can't pay your full bill. The IRS' non-filing penalties are steeper that its non-payment charges. (April 16, 2012)
- It's Tax Day. File something! -- Most taxpayers are able to finish their returns by the annual filing deadline (for 2012, that's April 17). But each year around 7 percent of us are uber procrastinators. We (and yes, I am one) opt to postpone our filing deadline for up to six months by filing Form 4868. This short (nine lines) and easy (really!) tax form will get you until Oct. 15 to finish your tax forms. Of course, you can send in your return any time before then that you finish it. But one thing you must send in by the April deadline is any tax bill you owe. Remember, the Internal Revenue Service grants the automatic extension to file your tax paperwork, not to pay any due taxes. (April 17, 2012)
Missed a tip or two?
February 2012's Daily Tax Tips
Again, thanks for continuing on the ol' blog's filing season tax tip journey.
Once we wrap up April's tips, the Weekly Tax Tips for the filing "off season" will begin.