Today is "T" (for "Tax") day--last day for mailing your annual reporting to Uncle Sam's tax collectors. Your federal tax return must be postmarked no later than midnight tonight to be considered timely.
Today is also the deadline for several other actions connected with the income tax process. If you're unable to get your tax return in the mail today, you can get a four-month extension by filing IRS Form 4868 by midnight tonight.
But that extension -- to Aug. 15 -- is for filing the tax return, not for paying any tax due. On Form 4868 you must make an estimate of what your final tax liability will be. Then include with the request for extension a check for any balance of tax you expect to owe. Keep an extra copy of Form 4868 -- it must be attached to your tax return when you file it later.
Today is also your last chance to open an IRA for 1984 earnings. Last year, if you requested a filing extension, that automatically extended the deadline for an IRA deposit. But the Tax Reform Act of 1984 changed that rule; the last day for an IRA is the due date of your tax return without extensions -- April 15, in other words.
So if you're filing today or asking for an extension and intend to claim an adjustment for a contribution to your IRA, or if you filed earlier and took the adjustment with the intent of making the contribution later but haven't done so yet -- today is the last chance, so get with it.
Today is also the due date for the first installment of federal estimated tax. You should file Form 1040-ES and make quarterly payments if you have income not subject to withholding and you anticipate that withholding will not bring you within $500 or within 80 percent of your expected final tax liability. (There are other exceptions; see IRS Publication 505 for all the details.)
Finally, today is the last opportunity to correct any errors you may have made on your 1981 tax return. You have three years from the due date of an individual tax return to file an amended return. So if there was a mistake on your 1981 return -- either in your favor or in favor of the IRS -- you should file Form 1040X today to get it straightened out.
Q: I have heard that loans such as car loans should be paid off in full when the interest amount is relatively small compared to the principal paid. After two years or so, the small amount of interest doesn't provide a worthwhile tax deduction, so it pays to just pay off the whole loan. Is this true? If so, is there a formula for determining this point?
A: The only "formula" I know of is a rule of thumb that says you should put your money where it earns the greatest return. The size of the interest portion of each payment relative to the amount of principal being repaid really isn't a factor.
Example: You have $1,000 principal balance left on your auto loan, on which you are paying 15 percent. If you're in, say, the 34 percent tax bracket (combined state and federal), then the net cost of the loan is 9.9 percent after the tax deduction (assuming you itemize).
If you have the $1,000 available to pay off the principal balance, and it is sitting in a money market account earning perhaps 8.2 percent, and the tax bite on those earnings reduces the yield to an effective rate of 5.4 percent, then you come out ahead paying off the loan.
On the other hand, if you're in the 50 percent bracket, then the net cost of the loan is only 7.5 percent. If your $1,000 is invested in a tax-free bond paying the same 8.2 percent, then you're a little ahead leaving the $1,000 where it is and continuing with the monthly payments.
There are other factors, of course; for example, some people simply feel more comfortable with the loan paid off and no monthly payments facing them. But from a purely dollar value point of view, it's just a question of determining which action gives you the better return on your dollars.