By Albert B. Crenshaw
Sunday, April 16, 2006
Today is April 16 -- and there's still time, brother.
Because the traditional April 15 tax deadline fell on a Saturday this year, taxpayers in Virginia and most of the rest of the nation have until tomorrow to get their returns in. Residents of the District and Maryland, along with taxpayers in five other states -- Maine, Massachusetts, New Hampshire, New York and Vermont -- get until Tuesday because Monday is Patriot's Day, a holiday, in Massachusetts, the location of the filing center for these jurisdictions.
So, brothers (and sisters), if you haven't filed, you may still be able to get your return in on time.
It's worth doing, especially if you are expecting a refund. Every day you let pass -- and you can let quite a few pass if you get an extension, but more on that in a minute -- is another day you are lending your money to the government interest-free.
That's good for the government, but not good for you.
Doing a tax return in a day or two may sound daunting, but for most people it's not as hard as it sounds.
For individuals and families whose income is from wages, dividends and interest, and whose deductions are mainly state and local taxes and mortgage interest, collecting the records and filling out the forms is more drudgery than rocket science. The forms are designed to walk you through the process, so while there are lots of jokes about "subtracting the amount on line 32 from the amount on line 24," taxpayers who follow those directions usually end up with an accurate return.
A common taxpayer worry, of course, is that he or she may miss some obscure goodie (or fall into some hidden trap), but the forms are helpful on that score as well. It's a good idea to read each line on the form, especially the 1040, because the questions can remind you of benefits to which you may be entitled or bits of other income you should report.
(If your situation is simple and you know where you stand, the 1040A and the 1040EZ are easier, but the 1040 covers the waterfront and is a better guide. Plus, it's required if you want to itemize deductions or have certain kinds of income.)
But if you're hustling to finish at the last minute, there are some things to be conscious of.
First, be careful. Be sure to include your Social Security number and those of your spouse and dependents. This requirement includes babies born last year. The Internal Revenue Service used to give young kids a pass, but that was so widely abused that when the rules were tightened some years ago millions of dependents suddenly vanished.
And check your arithmetic. If you make a mistake, the IRS probably will catch and fix it, but it could delay your refund.
Second, make sure you check the correct filing status. The rules are different this year for heads of households. If you have filed as a head of household in the past, and you have adult children, you may have to file as a single taxpayer for 2005. Indeed, the Joint Tax Committee of Congress recently found that 250,000 taxpayers will lose their head-of-household status for 2005. This will generally result in higher taxes, the committee noted. For example, an individual with taxable income of $20,000 would have to pay $1,409 filing as single versus $953 as a head of household.
Third, be sure the figures you put on the return match those on third-party documents, such as the W-2 form you get from your employer or the 1099 you get from your bank for interest you earned. These figures, along with such things as mortgage interest you paid (Form 1098), are reported to the IRS, and its computers are supposed to match them up. The system isn't perfect, but a mismatch invites IRS questions.
Note that there are ordinary dividends and qualified dividends. Tax rates are lower for the latter, on the theory that the firm paying them to you has already paid tax on the income that produced them. If you got dividend income, you should have gotten a Form 1099 from the company or your brokerage or mutual fund, and it will show ordinary dividends and qualified dividends.
Fourth, if you don't have many deductions -- if you're single and don't own your home, for example -- you likely would be better off taking the standard deduction. If you have lots of deductions, then you want to itemize. If you're in between, it's worth trying both ways to see which is better. The IRS provides some rough estimates of the combinations of income and deductions that would make itemizing worthwhile, but they're more of a guide to start figuring than an answer to the question. It's all a pain, and one of the areas where computer software can be very helpful, but worth the effort.
Also, be sure to review the items in the "Adjusted Gross Income" section of the 1040. Included here are a number of deductions you can take without itemizing. These include breaks for various education breaks, including one for teachers, moving expenses, individual retirement account deductions and others.
After all this, if you can't quite get it done, file for an extension. Such extensions are granted automatically and, in a break from the past, are for six months. Until now, you got only four months and then had to apply again for two more. The form is 4868 "Automatic Extension of Time to File," and it's available on the IRS Web site, http://www.irs.gov/ . You can file electronically or by mail.
But note: An extension applies only to the filing of your return, not to your obligation to pay. This means you need to do enough of your return to be sure you don't owe anything beyond what has been withheld plus any estimated payments you have made. If you owe, you should pay the balance due when you apply for the extension. You can pay by check, credit card or direct debit from your bank account.
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Assets in 529 college savings pla ns topped $68 billion at the end of last year, according to data released recently by the College Savings Foundation. That total was up 7.9 percent from an estimated $63.4 billion at the end of September, and up 30.8 percent from the $52.3 billion reported at the end of 2004. Families fund these plans with after-tax money, but earnings are tax-free if used for higher education expenses.
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A federal court in California has granted the IRS a "John Doe summons" for the payment records of PayPal Inc., the company that allows individuals to send and receive money online. The summons is part of the agency's continuing effort to track down tax evaders who park assets offshore and then use various payment systems, including credit and debit cards and possibly PayPal, for access to their money. The IRS is not accusing PayPal of anything but wants the records to track funds to their source.
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