Complete Tax

By Robert Steere, Toolkit Staff Writer

"Taxes—Of life's two certainties, the only one for which you can get an automatic extension."—Author Unknown.

But—though it's true that you can get an automatic extension—the clock ticks down toward the April 15 federal income tax filing deadline. And, like death, your taxes can't be put off forever. Now is the best time to overcome your anxieties and frustrations, gather your records, sit down at your desk or at the kitchen table with a cup of coffee, your computer, and your tax forms and instructions, and get busy!

And to help you in this dutiful effort, here are some useful tips and reminders to consider as you step boldly forward through this year's tax filing season toward a triumphant April 15 filing.

Consider using online tax prep services. Last-minute tax law changes enacted at the end of 2008 and during 2009 make this tax season more complicated than ever. Using online tax return preparation services can help eliminate much of the confusion you might otherwise experience. More and more taxpayers are using these services to walk them through the process of preparing and then e-filing their returns. It may be a more pleasant route to take than plodding through on your own with paper forms, lengthy instructions, pencils and erasers!

Consider e-filing. If you haven't already done so, consider e-filing this tax season. Most taxpayers are already following this useful advice. The IRS recently announced that taxpayers are continuing to e-file in greater numbers than ever before. According to the IRS, more than 95 million individual tax returns (more than two thirds of the 141 million total) were filed electronically last year. Most of the increase in e-filing has been driven by record numbers of taxpayers using their home computers to prepare and e-file their income tax returns.

Use Free File, if eligible. Filing electronically may also be the most cost-effective option for many taxpayers. Seventy percent of American taxpayers are eligible to file their returns electronically for no cost by using the IRS's Free File program because their adjusted earned income is $56,000 or less. Free File is available at the IRS website by clicking first on "Free File."

Choose direct deposit for your refund. In addition to e-filing, more taxpayers are also choosing to have their tax refunds directly deposited into a bank account by electronic transfer. IRS directly deposited approximately 75 percent of all individual tax refunds processed during 2008 and 2009. It's simple, and it results in a speedier refund.

Double-check your work. Common, yet avoidable, tax return preparation errors draw unwanted attention from the IRS and cause unwanted delays in the processing of your tax return and your tax refund. Such mistakes often result in a taxpayer failing to pay the correct amount of tax due. But with a little extra attention to detail, many of these (dare I say) careless mistakes that cause needless hassle can be eliminated.

To avoid needless mistakes, carefully follow the instructions of the online service or read all the instructions to the tax forms and schedules as you prepare the return, and then double-check the entire return before filing. The use of online services and e-filing may help to reduce some errors and speed refunds, but they won'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, including the following:

• 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
• improperly computing qualified dividends and capital gains
• failing to properly calculate taxable Social Security benefits
• mailing a return to the wrong address

This year, a new mistake may move to the top of the list--failing to claim the "making work pay" tax credit. Most taxpayers have heard of this tax credit, but they believe they already received the benefit of it through reduced income tax withholding throughout 2009. However, you must actually claim it on your 2009 income tax return. To do that, you must attach new Schedule M to your form 1040. Don't forget! Otherwise, the benefit is lost!

And don't forget that if you bought a new car during 2009, you may be able to deduct the state and local sales tax you paid on the purchase as an additional standard deduction. Again, you must claim it on your tax return to get the benefit, and it requires attaching new Schedule L to your Form 1040.

Increase last-minute tax savings by saving. Generally, once the calendar year ends, so does your ability to change the tax consequences for that tax year. However, if you have the cash to do it, there is one easy way to reduce your tax bill right up to the April 15 filing deadline--to invest in a traditional individual retirement account (IRA).

If you haven't yet made contributions to an IRA for the 2009 tax year, you can contribute up to $5,000 ($6,000 if you were at least age 50 during 2009) 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).

Provided certain requirements are met, the immediate benefit of making an IRA contribution by April 15 this year is that it can reduce your taxable income for 2009 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 2009 tax bill.

Whether IRA contributions are deductible depends on the taxpayer's income level and whether the taxpayer is covered by another pension plan at work. A person must have earned income (i.e., wages, salaries, commissions and other sources of earned income) equal to or greater than the amount of any contributions made. If a taxpayer or his or her spouse is covered under another retirement plan, if their combined income is over certain limits, they may not be able to deduct the full amount of contributions allowed. If neither is covered under a retirement plan, then 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.

Enjoy last-minute tax savings by homebuying. If you are an eligible first-time homebuyer or long-time resident homebuyer, you may still be able to save big on your 2009 tax bill! People who qualify for the first-time homebuyer credit will be able to knock as much as $8,000 off their 2009 taxes if they buy a new home (a principal residence) in 2010 before May 1. Those who qualify for the homebuyer credit as a "long-time resident" in the home they currently own will be able to knock as much as $6,500 off their 2009 taxes if they buy a new home before May 1.

The credit for new homebuyers first came to life in 2008. Then, new and improved for 2009, the law provided a credit of 10 percent of the purchase price of a home, up to $8,000, for home purchases finalized by November 30. Then, the credit was extended into 2010. Under the new law, an eligible homebuyer must enter into a binding contract to buy the home on or before April 30, 2010 and close on the home by June 30, 2010. The law also expanded coverage to allow long-time resident homebuyers a credit, too, capped at the lower amount of $6,500. The law allows eligible homebuyers who buy a home in 2010 before the deadline to treat the purchase as if it took place in 2009, thus permitting them to claim the credit on their 2009 income tax return. Furthermore, it is a refundable credit, so if it exceeds your 2009 tax liability, you can get a refund.

Thus, if you qualify for the homebuyer credit and are in the market to purchase a new home, this is a great chance to do some tax planning to determine the best way to merge your homebuying plans with your tax reduction plans. You can find out more about it on the IRS website.

Don't be late. Remember that for calendar-year taxpayers, the deadline for your income tax returns and schedules is April 15.

As our unknown author noted above, 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 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 15, 2010, 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.

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.

Finally, 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!

For more help with the many tax changes that may affect you for the 2010 tax filing season and beyond, take a look at the Tax Guide 2010.

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Posted April 6, 2010.