Down to the Wire

Today is Uncle Sam’s favorite day of the year: the tax filing deadline. If you are a procrastinator, keep reading on. If you have mailed off your returns, read on to feel better about what good person you are!

Let’s start with a fact: the IRS hates tardiness. The penalty for late filing is 5% per month up to a maximum of 25% of the amount of tax due on the late-filed return. That’s why you have to get busy! One way to do so is to file an extension (Form 4868), which allows an additional six months to complete your return. Even with an extension, you must pay what you estimate you might owe. The IRS not only detests late filers, but late payers do not do much better---the penalty for late payers is one-half of 1% per month up to a maximum of 25% of the amount of tax due on the return.

If you do not have the money to pay right now, one option is to request an installment agreement with the IRS. If you owe less than $25,000, you can pay what you can now and then attach Form 9465 (Installment Agreement Request) on the front of your tax return. You should also include a statement explaining why you can’t pay the full amount due. The IRS charges a user fee for establishing an installment agreement, which can be as high as $105 ($52 if payments are automatically deducted from your bank account). You have up to five years to pay and you will also have to pay interest and penalties due until the agreement is paid off, unless the IRS agrees to lower the interest rate as part of the installment plan. Additionally, you are required to pay all future taxes in full and on time. Once you file, do not assume that you are done---the IRS will contact you with the terms of the installment plan.

If you are short on cash, another option is to charge your taxes on your credit card, which will cost you an extra 2.49% processing fee. While I hate to suggest this, in the current low interest environment, it is possible that the interest from your credit card company is lower than that of the IRS.

If you are filing your returns and do not need an extension or an installment plan, be sure to review the following before sealing the envelope or pushing send:

-Correct Social Security #s for all individuals listed on your return
-Sign and date returns – make sure that spouses sign too!
-Attach all W-2 and other forms required – spot check that W-2 forms line up with what you have reported on the return
-Take IRA deductions if you have funded them or fund them if you took them

TIPS FOR NEXT YEAR:

· Adjust your withholding. Your circumstances and the tax law change constantly and so does your tax liability. To make sure that you are not lending Uncle Sam money interest-free, you may need to adjust your withholding with your employer. Conversely, if you had an unpleasant surprise and actually had to pay Uncle, you may need to withhold more money. Adjusting your withholding now is a good way to even out your cash flow throughout the year.

· Make retirement contributions early. Did you receive a tax refund? Instead of spending it, why not plow it into your Roth or Traditional IRA? Get that money working before you spend it!

· If you are self-employed or own your own business, talk to your CPA now in order to determine the best retirement plan vehicle for you.

· Review your benefits at work. Can you put a little more into your retirement plan? Can you pay for certain benefits with tax-free dollars? Try to reduce your out of pocket costs by utilizing your company’s benefits plan more wisely.

· Submit medical and dependent care account expenses quarterly. Many tax filers mistakenly believe that they can deduct expenses up to tax filing time. Unfortunately, you must claim these expenses in the calendar year, or else you will lose the money you set aside to pay for them. The key here is to claim as you go.

· Consider converting “bad debt”, like credit cards or car loans into “good debt”, like a mortgage, or home equity loan. This used to be a slam dunk recommendation, but with the credit crisis, it’s harder to qualify, but check if this might make sense for you.

· If you expect a windfall this year, set aside the tax money in a safe, low risk instrument. Do not invest the money in a hot tip or even what you consider a safe mutual fund.

· Start a file for next year’s tax information right now.