Frugal Fridays: Last Minute Tax Advice
Fri Apr 06, 2007 at 12:13:37 PM PDT
Welcome to "Frugal Fridays" where we share money saving tips, discuss living frugally and generally talk about personal finance issues. I'm back from a three week hiatus, just in time to finish my taxes, so I figured that would be a great topic for this week. According to the IRS web site, about third of US taxpayers wait until the last two weeks to file, so there are a lot of us out there. Don't feel alone, but do feel immense and crushing pressure that the entire federal government is breathing down your neck. (OK, ignore that last part, that's my inner demons coming out.)
Getting Started
If you haven't yet started the process at all. You had best get busy this weekend. Even the simplest form is going to take a few hours to file, when you include the frantic search through all your piles of stuff for that W-2 you mislaid. (I can't be the only person who does that!)
The first thing you need to do is assemble all the paperwork you need. In addition to your W-2 from your employer, you may also have 1099's from anyone who gave you money over the year (e.g., banks, brokerage houses, and state income tax refunds), statements showing mortgage or student loan interest payments you made, letters or receipts showing charitable donations you made, receipts showing tax deductible payments you made for car or boat registrations, etc. It's a good bet that most things that came in envelopes that said "Do not discard: Important Tax Document" on the outside are going to be useful when filing your return.
If you are not having a professional do your return for you (and who would want to give up the fun of doing their own taxes???), I strongly suggest you use software to fill out your return and then electronically file your return. You will avoid most of the more common tax form mistakes just by using software to complete your return. If your AGI (adjusted gross income) is under $52,000, you can electronically complete your form and file for free. If you are over this limit, you can either use the on-line versions or the home versions of tax preparation software. Personally, I would recommend the home versions, so that your return data is stored on your own computer, rather than some company's server, but that's just because I'm paranoid about data security sometimes. I have used Turbo Tax for years and like it a lot, but it is the most expensive one out there now. I know people who are happy with Tax Cut as well.
Getting Help
One benefit of using the software is there is some help functionality built in. If you have a question that's more complicated than the software can answer, you may want to use a tax guide. I've used both J.K. Lasser's Your Income Tax and Ernst & Young Tax Guide over the years. I have a slight preference for the Lasser guide, since it seems to have more examples to help you understand the rules. If you are really hard core, go for the U. S. Master Tax Guide published by CCH, but be warned that this book is designed for tax professionals, not amateurs.
The IRS web site has a lot of good information for taxpayers, and some of it is actually easy to access. You may also have access to free tax advice information. Taxpayers whose AGI is under $39,000 can get advice from the Volunteer Income Tax Assistance Program. Call 1-800-829-1040 to locate the nearest site. Senior citizen taxpayers can call 1-800-829-1040 for access to the free IRS Tax Counseling for the Elderly Program or can call AARP’s Tax-Aide counseling program at 1-888-227-7669. Check your local library or community center or senior center to see if there is a local service being offered as well.
Earned Income Tax Credit
It may be worth filing taxes even if you earned so little that you didn't pay any income tax. If you worked but your income was very low, you may qualify for the Earned Income Tax Credit which will give you cash to offset what you had to pay in social security tax. Check out this site to see if you qualify.
New and Often Overlooked Deductions
Another good reason for using tax preparation software is that it will suggest deductions that you are eligible for that you may not have heard of or remembered. Here are a few to keep in mind:
- This year, there is a one-time telephone tax credit all taxpayers can take that is worth $30-$60. If you have saved all your phone bills for the last few years (March 2003 - July 2006) and if you made a lot of long distance calls in that time, you may qualify for an even larger credit, but be sure to have the documentation to support this if you itemize this deduction. This refund can be taken even if you file the 1040EZ form.
- It is not too late to contribute to an IRA. If you were employed, you can contribute up to $4000 ($5000 if you are over 50) and take a full tax deduction for this amount if your AGI is under $50,000 ($75,000 married filing jointly). If your AGI is over those limits, the tax deduction may be reduced or eliminated. Unless you really need that tax deduction this year though, I would strongly encourage you to contribute to a Roth IRA instead. Your contribution is not tax deductible now, but, unlike a regular IRA, your gains are all tax free when you take them out after retirement age. This is a really sweet deal. All sorts of details on IRAs can be found in the IRS publication 590. If you make the contribution by April 17, 2007 you can apply it for tax year 2006.
- Here is a nifty little discussion of some of the most overlooked deductions people miss filing for. It comes complete with a slide show to walk you through each one.
Filing for an Extension
If you really can't finish your tax forms by the deadline, don't panic. You can get a free six-month extension from the federal government. However, an extension to file is not an extension to pay, so you will have to figure out how much you owe and send that payment in with your extension form. If you underestimate your payment, you will owe interest and possibly penalties that will accrue until you file your final return. Don't forget to file separately for an extension from your state as well! They don't look kindly on being forgotten.
Planning for Next Year
Once you have completed your return, there is no rest for the weary. Now is actually the time to start planning for next year. First off, if you are getting a large refund this year, this is not a good thing, in the grand scheme of things. It means you paid Uncle Sam too much withholding through the year and he got to use your money interest free all year. Adjust your W-3 with your employer to reduce your withholding amount to make sure this doesn't happen in 2007. If you really like getting this windfall each year and depend on it to balance your checkbook, you can trick yourself by setting up a savings account where you divert a portion of your paycheck automatically each pay period and absolutely refuse to let yourself touch it until April 15 each year. It will have the same effect as the system you are using now, but you will get interest on that savings.
Once you have modified your W-3, you probably don't need to do much thinking about taxes until November of this year (unless you are buying or selling large assets like houses or stocks). Some time in November or early December (mark it on your calendar) take a look at your overall situation for the year. If you find you want to make any payments or charitable donations or what have you, it's nice to be able to do it well before the end of the year.
Next February (again, mark it on your calendar), you should have received all your W-2s and 1099s. If anything is missing, this is the time to notice it and start tracking down your missing documentation. If you wait until April, you may not be able to track everything down in time to file before April 15, 2008. Also, if you are getting a refund, this is also the time to file your taxes, so that you get that refund as early as possible.
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