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By Marcia Richards Suelzer, Toolkit Staff Writer
The clock is ticking down toward April 17--the 2012 federal income tax filing deadline. There is no time like the present to overcome your anxieties and frustrations, gather your records, sit down with a cup of coffee, your computer, and your tax forms and instructions, and get busy! To help you along the way, here are some tips to save you time, heartache and (hopefully) money.
Save on Taxes with Last-Minute Retirement Savings
Generally, once the calendar year ends, so does your ability to change the tax consequences for that tax year. However, there is one notable exception. If you have the cash to do it, you can reduce your tax bill right up to the April 17 filing deadline by investing in a traditional individual retirement account (IRA).
If you haven't yet made contributions to an IRA for the 2011 tax year, you can contribute up to $5,000 ($6,000 if you were at least age 50 during 2011) to an IRA. When a husband and wife file jointly, the limit applies separately to each, so that as much as $10,000 can be contributed ($12,000 if both are 50 or over).
The immediate benefit of making an IRA contribution by April 17 this year is that it can reduce your taxable income for 2011 by the amount contributed (up to the annual limit). For example, a single taxpayer with $76,000 in taxable income (25-percent tax bracket) contributing $5,000 to an IRA would save $1,250 in taxes. Using the same $76,000 income amount, a married couple filing jointly (25-percent tax bracket) and contributing $10,000 would save $2,500 from their final 2010 tax bill.
Tip. Whether IRA contributions are deductible depends on your income level and whether you are covered by another pension plan at work. You cannot contribute more than the amount of your earned income (e.g., wages, salaries or earning from your business). If you or your spouse are covered by another retirement plan and your combined income is over certain limits, you may not be able to deduct the full amount of your contributions.
Don't Call Attention to Your Return with Silly Errors
Double-check your work. Common, yet avoidable, tax-return preparation errors not only draw unwanted attention from the IRS, they will cause unwanted delays in processing your tax return and getting your tax refund. But a little extra attention to detail can eliminate many of these careless mistakes that cause needless hassles.
Work Smart. The use of tax prep software and e-filing may help to reduce some errors and speed refunds, but they won't help much if you input the wrong data. Take time to check all your inputs.
The IRS regularly highlights the most common mistakes made by individuals while preparing their federal tax returns, including the following:
Electronic Preparation and Filing Reduce Errors and Speeds Up Refunds
Tax law is complicated, littered with phase-outs, thresholds and minimum requirements. Using tax software to prepare your return eliminates much of the aggravation you will otherwise experience. More and more, taxpayers use software to walk them through the process of preparing and then e-filing their returns. Not only is it easier (dare we say, "less taxing") to use tax prep software, but most products have built-in error checking and many will suggest tax saving options that you would probably overlook while plodding through the return on your own.
Consider e-filing this tax season. Most taxpayers are already following this useful advice. According to the IRS, more than 112 million income tax returns, or 77 percent of all individual returns, were filed electronically in 2011. E-file has proven itself as a safe and secure method of filing a tax return--software vendors and paid tax return preparers use the latest encryption technology. And, if you e-file you will receive an electronic acknowledgment within 48 hours to let you know your return has been received by the IRS and if it was either accepted or rejected.
If you aren't using an online tax prep program that has built-in electronic filing, consider using IRS Free File. Everyone can use Free File, either the brand-name software offered by IRS' commercial partners or the online fillable forms. Individuals or families with 2011 adjusted gross incomes of $57,000 or less can use Free File software. The Free File Fillable Forms program, the electronic version of IRS paper forms, has no income restrictions.
Use direct deposit for your tax refund. The number of taxpayers using direct deposit increases each year--more than 79 million used direct deposit in 2011. Why? Because the safest and fastest way to get your tax refund is to have it deposited directly into your bank account. Thousands of paper checks are returned to the IRS by the U.S. Post Office every year as undeliverable mail. Direct deposit eliminates the possibility of your refund check being lost, stolen or returned to the IRS as undeliverable. And, if you combine e-file and direct deposit, it's likely the IRS will issue your refund within two weeks. The IRS estimates that it will be six to eight weeks before it sends out a refund for a return filed using paper.
Think Ahead. You can deposit your refund into multiple accounts. With the split-refund option, you can divide your refunds among as many as three checking or savings accounts and up to three different U.S. financial institutions. Use IRS Form 8888, Allocation of Refund (Including Savings Bond Purchases), to divide your refund. A word of caution: Some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Additionally, Form 8888 should NOT be used to designate part of your refund to pay your tax preparer.
Regardless of Your Filing Method, File on Time
Remember that for calendar-year taxpayers, the deadline for your income tax returns and schedules is April 17. You can get an automatic extension of six months to file an individual income tax return. Keep in mind, though, that the due date for the tax payment is not negotiable, and the automatic filing extension is not an extension of time to pay the tax due on the return.
To get an automatic six-month filing extension, file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by the due date of your income tax return (April 17, 2012, for most calendar year taxpayers). There are several ways to file this form, such as e-filing through your personal computer or a tax professional, by mailing a paper Form 4868, by paying some or all of your estimated income tax due (by phone or Internet) using a credit card, or by contacting your tax advisor.
Don't delay filing because you can not pay the full amount of tax owned. If you pay at least 90 percent of your projected tax liability, you will not be hit with a failure-to-pay penalty when you file your full return by October. If you can't pay the 90 percent and you were out of work for at least 30 consecutive days between January 1, 2011, and April 17, 2012, or you had a reduction in business income of 25 percent or more during that time period, you may be able to obtain relief from the failure-to-pay penalty. See the instructions for Form 1127A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, for more information. You may also qualify for a streamlined installment agreement. Visit the On-line Payment Agreement (OPA) page on IRS.gov to see if you qualify.