As April 15th approaches, consider these strategies and tips to simplify your tax filing and help you avoid surprises.
IRA contributions
Individuals have until April 15 to make contributions to their traditional Individual Retirement Accounts and still receive a deduction for the previous tax year. The maximum combined contribution to either a traditional or Roth IRA is $3,000 for 2004.
If you are over the age of 50, you can take advantage of the catch-up contribution and increase your maximum amount to $3,500. Income limitations and employer-sponsored retirement plans may limit or nullify your deduction.
Extensions
Many people misunderstand the concept of an extension. It does not provide you with more time to pay your tax.
To avoid interest and late payment penalties, 100 percent of your 2004 tax liability must be paid by April 15. Similar rules apply to most state income taxes. And, if you pay quarterly estimated payments, your first estimate for the following year is also due.
Nanny taxes
Although household employee taxes, including FICA and Medicare, no longer have to be deposited on a monthly basis, they must be paid each year as part of your overall annual tax liability. If not planned for properly, they can considerably increase your tax burden.
Further, all household employers must report wages paid and taxes withheld for domestic employees on Schedule H of the Form 1040.
Alternative Minimum Tax
As part of your year-end tax planning, you may have accelerated your final state or local income tax estimate to accelerate the federal deduction into 2004. What a surprise when you realize that this did not decrease your tax liability, but, in fact, may have actually increased it.
Why? The Alternative Minimum Tax (AMT).
The best way to understand the AMT is to view it as an entirely separate tax system, with its own rates, scaled-back deductions and changes, that reduces certain tax benefits for higher income taxpayers. In 1970, 19,000 taxpayers paid the AMT. Today, that number is approaching 4 million and it significantly increases every year.
Taxpayers with a high number of personal exemptions, large state, local and real estate tax deductions and/or large capital gains are the most likely candidates to be unexpectedly hit with the AMT. The AMT taxing system adds back all state, local and real estate taxes, and it does not have as advantageous a long-term capital gain rates as the regular tax system.
Electronic filing
More than 60 million tax returns were electronically filed for the 2003 tax year, and that number is expected to significantly increase for 2004. Many taxpayers think of electronic filing merely as a way to obtain a faster refund, when, in reality, it has many other benefits.
Electronic filing software checks your return for errors and missing information and also bypasses any issues that could be caused by regular mail. Your return goes directly into IRS computers, avoiding the potential human error of it being keypunched incorrectly.
And yes, you do get your refund faster, usually in two weeks or less if you choose direct deposit.
Also, be aware of service providers that charge outrageous fees in order for you to receive your refund immediately, when, in reality, the service is actually a loan from the preparer with an extremely high interest rate.
Get organized
Take some time to go through all tax-related information you have received, including W-2s, 1099s, K-1s and other items of income and deduction support, and identify what may be missing so you are not scrambling at the last minute to obtain necessary documents. With the tremendous growth of online information access, acquiring the proper documents has never been easier.
Peter Bellini, CPA, is a senior manager in the Skoda, Minotti & Co. tax department. Skoda, Minotti & Co. is a broad-based accounting and tax, strategic planning, litigation support, insurance and investment services firm. Reach Bellini at (440) 449-6800 or [email protected].
