It's Tax Time

So it’s the time of year to talk seriously about tax deadlines.  Your IRA contribution for 2011 can be made as late as April 17^th of this year.  If you’re finding out bad news about your tax bill, this is a quick fix that you can still make.  If you contribute to a Coverdell education savings account you have until April 17^th to do that. 

Your income taxes are due this year on April 17^th.  Even though April 16^th falls on a Monday, Washington D.C. celebrates Emancipation Day on that date, so they moved the tax deadline one more day.  Presumably there’s a sense of irony associated with mixing emancipation and income taxes that enabled this decision. 

While you can file for an extension if you’re not ready to file a tax return, you must PAY all taxes owed for 2011 by April 17^th.  This is a hard and fast rule.  You file for an extension using IRS form 4868.  That can be e-filed as well.  You can pay by check, or charge it through an IRS approved credit card processer.  There are fees for using a credit or debit card, so you’re better off with a check if you can do that.  Any option is cheaper than the penalties and interest for not paying.  If you can’t afford to pay the whole thing at once the IRS does allow you to apply for an installment plan using Form 9465.  Again, this is expensive, but cheaper than the alternative of not paying anything up front.  It’s also important to remember that failing to file creates a whole other set of penalties and interest.  My advice is that you file and pay what you can.

If you get an extension you have until October 15^th to get the final tax return done.  If you have a Keogh plan in place and you file an extension you can wait until October 15^th to make that contribution.  Your Keogh plan must have been up and running by January 1^st of 2012 for this to work.  If you don’t meet that criterion, you can set up a SEP-IRA. 

Let me emphasize one more time how important it is to timely file and pay.  If you make mistakes it’s much easier to get them fixed if you can point out to the IRS that you tried to do the right thing.

 Back to doing tax returns….

Miscellaneous Questions

I’ll be spending some time today working through expense sections of QuickBooks files that have titles like “ask my accountant” or “uncategorized expenses”.  Many of the items in those accounts won’t meet the criteria to be an expense for the taxpayer’s business, but they will be eligible for one of the more confusing personal deductions, known in the trade as “2% miscellaneous”. 

The 2% doesn’t refer to something small, as in “putting your 2-cents in”.  Instead, it’s a reference to the amount of expenses you need to have to start taking the deductions.  If the miscellaneous expenses are less than 2% of your adjusted gross income, then no deduction for you. Miscellaneous, on the other hand, means just what you think.  There is a diverse list of items  included as eligible for this deduction.  The IRS breaks the list into 3 categories:  unreimbursed employee expenses, tax preparation fees, and all other.   

Unreimbursed employee expenses are often misunderstood.  Key points to remember include that if you are not required to spend the money by your employer, you can’t get a deduction.  An example of this would be buying a computer used only for work that you can’t get done at the office -- but your employer didn’t ask you to do that.  If this applies to you, look for a new job rather than a new tax deduction.  Actually in this example you could do both because the search for a new job in the same field is deductible.

You can take a deduction if your employer partially reimburses your expenses.   Let’s say you get a travel allowance of $500, but your expenses were actually double that for a business trip.  You might be tempted to skip the hassle of getting the employer reimbursement and deduct the whole amount – it’ll help you hit the 2% threshold.  That would be a mistake.  To get the deduction, you need to ask for whatever reimbursement you can get and then report all the info on form 2106, Unreimbursed Employee expenses.

Some miscellaneous expenses aren’t subject to the 2% floor, so if you itemize, you can take them from the first dollar.  My favorite in this group is gambling losses that offset gambling winnings.  There’s tax policy in action, gamblers get the deduction first, but workers who spend their own money to meet employer goals have “eat” up to 2% of their AGI in expenses.  This makes me think it’s time to turn off my computer and head to Meadows. 

More Easily Missed Tax Breaks

The good news is that I found so many examples of often overlooked deductions that this turned into a 3 part post.  The bad news is those at the bottom of the list are less compelling.  Still, they may come in handy for a game of Trivial Pursuit.  Or you could answer a question on Quora.

If you are one of the lucky folks who did a refi in the past few years and you paid points, you are eligible for more than just a lower mortgage payment.  You can take the points divided by the term of the loan.  So if it’s a 15 year loan, that’s 1/15^th of the points each year.  Not much, but not nothing either.  Also if you pay off the loan, you get to take the remainder.

Most employers continue to pay your salary if you go on jury duty, but many of them also take the “pay” you get from going.  If you fall into that particular pool, you can take the jury compensation you didn’t get as a deduction.  This is another “above the line” chance to reduce adjusted gross income. One reason this gets overlooked is there’s no line on your 1040 marked jury duty pay.  You take it at the end of the section for deductions before you calculate adjusted gross income.

My next tip isn’t actually a deduction, but in the year where enhanced brokerage reporting starts to kick in it’s worth noting.  You pay taxes on reinvested dividend income, but many people forget to add this to their basis cost when stock is sold.  Adding that little bit extra either reduces taxes owed for gains or increases the loss you can put towards gains on your tax return.

Finally, don’t overlook that Uncle Sam is giving you a little extra time this year.  Individual and partnership returns aren’t due until April 17^th.  Corporations don’t get a break  -- they’re still due on the ides of March.  Remember if you file an extension it gives you more time to finish the return, but you still have to pay taxes you owe by the initial deadline. 

Often Overlooked Tax Deductions

The good news is that this tax season is getting off to a busy start.  The bad news is I got off schedule and missed posting last week.  Back on track now and starting to focus on the fun part of tax – deductions.  First off, most apply only if you itemize, so the initially look at  whether you’re better off with the standard deduction .

High on the overlooked list of deductions is the option to deduct sales tax paid for the year rather than income tax.  The rough rule of thumb is that if you live in a state with income tax, you’re probably better off taking the income tax.  Still it’s worth checking particularly if you’ve purchased big items or done some home remodeling.  The IRS has a calculator that lets you set what you would get from sales tax for the year, so you can be sure that you’re making the right choice before you hit the send button on e-file.  On a related note, if you paid state income tax in the spring, for last year’s return, it’s deductible this year.  Make sure you don’t lose track of that.

Charitable deductions are common enough, but it’s often forgotten that out of pocket expenses associated with charitable work and driving for a charitable purpose are deductible.  If your total giving for the charity exceeds $250 you’ll need an acknowledgement from them.  Also remember non-cash donations require a special form.

Here’s one I picked up from kilplinger.com that’s easy to miss.  If parents pay back a non-dependent child’s student loan, the IRS treats the money as if it was given to the child, who then paid the debt.  Because the child is the debtor, it’s his deduction still, even though mom and dad paid the money.  If the loan is made to mom and dad, the deduction is theirs alone.

If you pay for child care you should check the child care tax credit.  People with an employer sponsored depend care account should consider if the savings from that is more than what they’d get from the credit.  I won’t go into the full details, but if you have more than $5,000 in child care expenses you consider the credit over the spending account. 

More next time…