Your April To-Do List
by Eva Rosenberg
Tuesday, April 8, 2008
provided by MarketWatch.com


Payment strategies, last-minute tax shelter, and more

Are you a procrastinator? If you live in Chicago, New York or Houston, chances are you'll be among the millions who file a tax return in the few days before April 15, according to TurboTax's annual ranking of the top 10 procrastinating cities in the U.S. Los Angeles didn't quite make it, coming in at No. 12.

Since you're making a concerted effort not to be one of the last to file, let's see what you can do to make your tax experience a bit easier this month.

Give Up and Move On

You're having a hard time getting all the information you need. Partnerships and pass-through entities which have your money are late sending K-1s to you. Forms 1099 you received were wrong or you're still missing some. Same with some straggling W-2s.

Chill out, and file an extension. Use Form 4868 to get an automatic six-month extension to file your tax return.

Use Form 7004 to get an automatic six-month extension to file your partnership (Form 1065), gift tax (Form 706) and trust (Form 1041) returns, as well as an assortment of other returns.

Some states accept the IRS extension, but many don't. You can find your state's forms by clicking on your state on the U.S. tax map.

Go ahead and do it now. And voila! You've taken the pressure off.

Check with your online tax-preparation company. You may be able to file the extensions electronically for the IRS and the states. By filing the extension electronically, you have a receipt proving the IRS and your state received it.

If you have tax professionals preparing your taxes, it's quite likely they'll prepare extensions for all their long-term clients even without your call. Just in case, call, email or fax them a note requesting that they prepare the extension on your behalf.

Pay Up

Remember, this doesn't mean you have an extension of time to pay. You still have to pay your balance due. If you're not sure exactly how much that's going to be, estimate and enter a round number on the Form 4868 or Form 7004.

When you don't have enough money to pay the taxes due on April 15, you have some options. In all cases, enter the amount of your expected tax liability correctly. The amount enclosed may vary.

One option: Pay with a credit card, if you have one that has a very low interest rate. Also, look for cards that give you bonus or mileage points, which are tax-free benefits. You can pay online using a variety of IRS approved credit card processors. Fees range from 2.49% to 2.95%.

Or, use cash-advance checks or money transfers from your credit card. Read the fine print about cash-advance fees which can range from 2% to 4% or more of the advance. Some are limited to a specific ceiling, such as $50 to $75. Others have no limit and may amount to hundreds of dollars.

Another option, and you're going to be surprised at this suggestion, is to send only a token payment to the IRS, paying the balance due when you file, as late as October 15. Why? IRS charges you only 6% per year for the underpayment -- for six months, that's 3%. Add that to the late payment penalty of 0.5% per month -- another 3% for six months -- and this only costs you 6%.

Make It a Deposit

If you don't know what you owe, you can elect to make your Form 4868 payment a deposit instead of an estimated payment. To do that, write your taxpayer identification number on the check, along with the form number and year. Then write "deposit only - not estimate."

Why would you do this? This strategy lets you cover the potential tax balance due when you know it may take more than six months to resolve some of the financial issues relating to your tax return. Or, you are so busy that you often don't get around to filing your tax return for a year or two.

The one drawback is that "deposits" don't earn interest. The benefit is that you can file a tax return five years late and still get your refund, if you're entitled to it. Refunds of estimate payments can only be claimed if you file a tax return within three years of the original due date of the return or within two years after you make the payment. The same thing applies to withholding and any payment of tax, even garnishments.

Incidentally, you can make this election (choice) with each payment you send to the IRS.

Estimated Tax Payments

April 15 is a busy day: It's also the due date for your first estimated tax payment for 2008. Now is the time to dig up money for this. It's almost more important to come up with the estimated payment than the extension payment.

Why? Ultimately, when you finally file your tax return, what if you still don't have enough money to pay it? You'll need to request an installment agreement from IRS at that time. IRS isn't very agreeable when you are not in compliance for the current year.

It's easier to catch up 2007 and prior years when you can demonstrate that this year, at least, you've got your act together.

Couples in Transition

If you're in the process of getting married, divorced, or your spouse died and there are estate issues or trust issues, you may want to consider filing separate extension forms and estimated payment vouchers. That way, each payment is associated with just one Social Security number.

Use this same strategy if you're facing an innocent or injured spouse situation. Keep the payments separate so your spouse's outstanding taxes don't cause your payments to be appropriated.

Another Claim on Already-Stretched Funds

April 15 is the deadline to fund all your IRAs -- regular IRAs, Roths, Coverdell, etc. You may also be able to fund an IRA for your spouse, even if she or he didn't earn any income. Your income must be high enough to cover his or her contribution.

Beware the contribution limits when your job provides retirement coverage. Your deductible contribution starts to phase out when your income hits $156,000 for married couples filing jointly.

You can find more information on contribution limits in IRS Publication 590. Click on "What's New for 2007."

One More 2007 Tax Shelter

If you're self-employed, even if you don't have money to fund a 2007 retirement plan right now, you still have one last chance to fund one later. In fact, it will generate a substantial tax savings if you take this step. Open a SEP-IRA and fund it with up to 25% of your self-employment income or your S corporation wages. There are some odd twists to the calculation, so have a tax professional help you with it. You can open the account and fund it until October 15, or the date you file your 2007 tax return up to the extension deadline.

Re-Evaluate Your Portfolio

You're counting on no state taxes this year and, then oops, here's a shock: None of your tax-free municipal bonds are tax-free. What happened? You moved to a new state and forgot to replace your old state's bonds with investments in your current state. Get your financial adviser to help you make the transition. If you're planning a move to another state this year, remember to take care of this before the move.

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