As the days leading up to April 15 grow longer, your fuse may be getting dangerously short if you are among the 25 percent of Americans who wait till the last two weeks to file your tax returns.
Good old procrastination is probably responsible for many last-minute returns, but there are other reasons, too. Some people believe that the chances of an audit go down if your 1040 rolls in with the tidal wave of returns submitted on April 15, overwhelming the IRS. Others are still trying to get a hold of numbers and documents, not even sure what documents they need and what policies apply to them when it comes to reducing their tax burdens. So for those folks still spending their weekends indoors, despite the growing rumor that spring has arrived, here are some last-minute tips to save time and face when it comes to taxes.
1. You don’t have a choice about paying taxes. But you may have a choice about the amount of taxes you pay, depending on your filing status (e.g. head of household, married filing separately, etc.). IRS filing statuses are not mutually exclusive and you may be eligible for more than one. If so, see which one results in less tax.
2. There’s one exception to the general rule about filing status: if you are married but for any reason do not wish to be liable for your spouse’s taxes, then do not file “married jointly” – instead, file under “married separately.” You may pay more taxes as a separate filer than as a joint filer, but you will avoid any tax liabilities, interest, and penalties that might result from your spouse’s return.
3. Even if your child qualifies as your dependent, he or she may still need or want to file a separate return. Be alert to the following situations where a separate return is warranted: your child had self-employment or tip income and so must pay social security taxes; your child earned more than $10,000 in the recent tax year; your child had insufficient income to be taxable but is owed a refund from paycheck withholdings; or is eligible for a tax credit, such as the American Opportunity educational credit.
4. If you are requesting that your refund be deposited directly to your bank account, be sure to check — and check again — that you have entered the correct account and routing number. If you make a mistake and the refund gets deposited to someone else’s account, you’ll have a hard time getting the money back. The IRS won’t help you fix this.
5. You cannot take an education credit for your child on your tax return if you are not claiming him or her as a dependent. Sometimes, however, it makes sense to forgo the personal exemption on your return (i.e., not claim the child as a dependent), and let your child file a return, claim an exemption, and take the education credit. This is generally the case if your child has enough income to owe taxes.
6. Quit gloating about that “big” refund you think you are going to get. It’s not smart to leave your own money on deposit with the IRS and get nothing in return. When interest rates start to move up again, it will be just plain dumb. Resolve that once you get that return filed, your next stop is your workplace payroll office to get your withholding reduced.
7. Schedule B filers: Did you buy bonds in the recent tax year and pay accrued interest at the time of purchase? You can use this accrued interest paid to offset the interest income received, but be sure to report this offset as a negative amount on your Schedule B, rather than netting it from interest. In other words, use two lines on the Schedule B to report the activity on this bond. The IRS, like your grade school math teacher, needs you to “show your work.” Otherwise they don’t know where your numbers are coming from. And when the IRS is confused, it is NEVER a good thing.
8. If you have been using a nondeductible IRA because you are over the income limits for a deductible IRA, consider a Roth IRA instead, where income limits are much higher. You’ll get the extra benefit of potentially no taxes on the Roth earnings upon withdrawal – a perk not available to the nondeductible IRA.
9. Points on “points:” If you bought a primary home in 2012, any points charged as prepaid interest on your mortgage loan (if less than $1 million) are deductible. If you refinanced your mortgage, these points are deductible over the life of the loan. If you sold a home this year that had been refinanced, you can deduct all remaining refinance points.
10. Preparing your return just for the purpose of compliance is “so last year.” Use the time shuffling though all those numbers to start thinking about what you can do in future tax years to reduce your taxes and save. Talk to a financial planner about tax strategies that make sense for your individual situation.