By Paul N. Gada, Toolkit Staff Writer
With the April 17 federal income tax deadline fast approaching, filing season anxiety should be at a frenzied pitch. Whatever you do, though, don't panic!
Like the famous train in the children's story, imagine yourself as the little taxpayer that could. Stop procrastinating, resign yourself to losing a few hours of your time, gather your records, sit down in front of your tax preparation materials, and don't get up until you are done (OK, you can get more coffee or go to the bathroom, but that's it!).
To help speed you on your merry way, here are five more useful tips for a brighter 2006 tax filing season.
Consider e-filing. If you haven't already done so, consider e-filing this tax season. Last-minute tax law changes enacted at the end of 2006 make this tax season more complicated than ever. Using tax prep software helps eliminate much of the confusion you might otherwise experience.
It seems that many taxpayers have already followed this useful advice. The IRS recently announced that taxpayers are continuing to e-file in greater numbers than ever before. According to the IRS, as of March 23, 2007, the IRS had received almost six percent more e-filed returns compared to the same period in 2006.
The increase in e-filing, according to IRS Commissioner Mark W. Everson, has been driven by taxpayers using their home computers and e-filing their income tax returns in record numbers. So far this tax filing season, 72 percent of all returns have been e-filed, compared to 68 percent for the same period in 2006. As of March 23, 29 percent of e-filed returns were filed by taxpayers using their home computers, up from 28 percent of e-filed returns for the same period in 2006. Self-prepared e-filings have increased by more than 8 percent over 2006 at this time, while returns e-filed by tax professionals have increased by almost 5 percent.
More taxpayers are also choosing to have their tax refunds directly deposited into a bank account. So far in 2007, the IRS has directly deposited more than 45 million refunds, or 71 percent of all refunds issued this tax filing season, up from 69 percent of the total for the same period in 2006.
Filing electronically may also be the most cost-effective option for many taxpayers. Seventy percent of American taxpayers are eligible to file their return electronically for no cost by using the IRS's Free File program because their adjusted earned income is $52,000 or less. Free File is available at the IRS web site by clicking on "2007 Free File."
Make a list and check it at least twice. Common errors made by individuals when preparing their tax returns are a surefire way to draw unwanted attention from the IRS. These mistakes may result in the taxpayers' failure to pay their correct tax liabilities and in delays in processing returns and refunds. Put another way, many of these mistakes are just plain "open-palm-applied-to-forehead" errors that cause needless hassles.
To avoid making easily avoidable mistakes, taxpayers should always carefully read all instructions to the tax forms and schedules and review the entire return before filing. The use of e-filing may help to reduce some errors and speed refunds, but it doesn't help much if you input the wrong data.
The IRS regularly highlights the most common mistakes made by individuals while preparing their federal tax returns. The errors targeted by the IRS (and, therefore, the ones you should pay close attention to) are:
- choosing the wrong filing status
- failing to include or using incorrect Social Security numbers
- using incorrect forms and schedules
- failing to sign and date returns
- claiming ineligible dependents
- failing to file for the earned income tax credit (EITC)
- improperly claiming the EITC
- failing to pay and report domestic payroll taxes
- failing to report taxable income
- treating employees as independent contractors
- filing no return when a refund is due
- failing to check liability for the alternative minimum tax
- failing to request the federal telephone excise tax refund
- improperly computing qualified dividends and capital gains
- failing to properly calculate taxable Social Security benefits
- mailing a return to the wrong address
Enjoy last minute tax savings. Generally, once the calendar year ends, so does the ability to change the outcome for the tax year. However, there is one commonly available way to lower your tax bill all the way up to the April 17 filing deadline: invest in a traditional individual retirement account (IRA).
For 2006, the most that you can contribute to an IRA is $4,000 ($5,000 if you were at least age 50 during 2006). When both a husband and wife file jointly, the limit applies separately to each, so that as much as $8,000 can be contributed ($10,000 if both are 50 or over).
Provided certain requirements are met, the immediate benefit of making an IRA contribution is that it reduces your taxable income for the amount contributed (up to the annual limit). For example, a single taxpayer with $57,000 in taxable income contributing $4,000 to an IRA would save $1,000 in taxes. Using the same $57,000 income amount, a married couple filing jointly and contributing $8,000 would save $1,200 from their final 2006 tax bill.
Whether IRA contributions are deductible depends on the individual's (or, if married, the couple's) income level and whether or not the individual is covered by another pension plan at work. There is an earned income requirement and any contributions must be from compensation (i.e., wages, salaries, commissions and other sources of earned income). If neither the individual nor spouse is covered under another retirement plan, they may take full advantage of the tax deduction for the amount contributed, regardless of their income level, as long as sufficient compensation is earned to cover the contribution.
Don't be late. Remember that for calendar-year taxpayers, the deadline for your income tax returns and schedules is April 17. Please note that this year you get two extra days to file because April 15 falls on a Sunday in 2007 and the following day, April 16, is Emancipation Day, a newly instituted legal holiday in the District of Columbia.
Although the due date itself is not negotiable, you can still get an automatic extension of six months to file an individual income tax return. Keep in mind, though, that 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 IRS 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, 2007, for most calendar year taxpayers). There are several ways to file this form, such as filing by phone (at 1-888-796-1074), through your personal computer, by mailing a paper Form 4868, or by contacting your tax advisor.
Those filing Form 4868 must include an estimate of taxes due for the year. You are not required to make an estimated tax payment in order to file Form 4868. However, any taxes owed after the regular due date of your tax return are subject to interest and possible penalty charges.
Take a moment to reflect. If you are filling out your tax forms and wondering where all your money went, hold on to that thought. Once tax season is over, you can spend some time working on a financial planning strategy that can best maximize your earnings and tax deductions.
Good luck and happy filing season!
- Related items:
- Save Money, Cut Taxes with an IRA Before Tax Day
- Over $2 Billion in Unclaimed Refunds From 2003 Faces Looming Deadline
- IRS Cautions Taxpayers About Tax Scams
- Taxpayers Making Costly Mistakes When Claiming Federal Telephone Excise Tax Refund
- Income Tax Filing Deadline Changed by IRS
- IRS Touts Program for Free Filing of Tax Returns
- IRS Begins Tax Season With Important Issues Unresolved
- IRS Officials Highlight Tax Return Changes For Individuals
Added to the news on April 10, 2007.
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