April Fools Days means that there are two weeks and counting until your 2014 income tax returns are due. So, here are a few tips and reminders to make everyone’s tax life easier the next two weeks …and beyond.
Bottom line...stop procrastinating and get your taxes done.
That’s all I can think of right now. It’s back to returns.
There is a little more than 3 weeks left before your 2014 tax return is due. What if you can’t get your return done in time to file by then? You can file an extension. It can be done electronically or by filing a paper Form 4868 by April 15th. And it does have to be postmarked or electronically filed by April 15th. After that time, the extension won’t help you.
As the tax filing deadlines approach, I get calls from clients wanting me to file an extension for them. It’s easy to do electronically; set up a file and send. I don’t need signatures. What I do need is to know about what the client is going to owe so that they can pre-pay that.
The IRS gives individuals an automatic 6 months to file a return. The extension due date for 2014 tax returns is October 15, 2015 Of course; you can always file the return before that. BUT! An extension is not a delay in paying. It just means you want more time to get all your info together to file a complete return. If you know you will be getting refunds, you really don’t have to file an extension. The extension gives you protection against the failure to file penalty if you make a good faith effort to pay what you think you will owe. Underestimate your final tax and balance due too much and the IRS says they could add the failure to file penalty back. But if you send them too much now, you will get that back as a refund when you do file.
I just said that if you are getting a refund, you don’t need to file an extension but you should if you want to protect the right to elect a special tax treatment. Many elections must be filed with a timely filed tax return and that could include extended returns. For example, a net operating loss is generally carried back to prior years. But you can elect to just carry the loss forward. But the statement must be filed with the return by April 15th unless you file an extension on time. Then you keep the option available until the return is filed.
What to do? If your return is done and you just can’t pay the balance due, file the return. You can work out a payment arrangement. If you need more time to get all your paperwork together, estimate your taxes. If you’re sure you’re getting a refund, you don’t need an extension unless you want to protect a special election. File an extension if you owe (or as a protection if the estimate is close) and send them what you think you will owe. You can always file the extension but not pay anything but you have to be prepared for a notice wanting interest and penalties for not pre-paying your tax.
There a lot of good reasons to get your back returns filed if you haven’t already. First reason is that it is the law. If you owe on a back return, you might save yourself some of the failure to file penalty by filing a return. Then there is the statute of limitations for the IRS to review a return. When you file a return, you start the clock ticking until the IRS can’t look at that year’s return. They can open a return for review for three years after it is filed or two years after the tax is paid, whichever is later (unless there is fraud involved but that is another post). If you don’t file a return, the IRS can review it forever. If they can review, they can audit. The IRS also requirement that all past returns be filed before they will work with you on an installment agreement or offer in compromise is a good reason to get tax compliant.
The best reason to get your back tax returns filed is that you might be due refunds. The catch is that you only have three years to get a past return filed and still get the refund. Wait longer than that, you lose your money.
So, returns for 2011 must be filed by April 15, 2015. The due date for 2011 returns was April 16, 2012. Adding three years makes this year’s due date of April 15, 2015 your target date. You can still file after that but not get your refund back.
The IRS has estimated that one million taxpayers haven’t filed their 2011 tax return and are due an estimated one billion dollars in refunds. That works out to a nationwide average of $698. In Kansas, there are about 11,600 taxpayers who could split up $10,421 in potential refund. ($667 average)
There are a lot of reasons to get your back taxes filed but the best motivation many be to get any refund to which you are entitled. Especially, if time is running out on your 2011 tax return. Don’t give the government your money because you didn’t file a return.
Back to returns.
Let’s set the Wayback Machine to 2008 (sorry, watching Mr. Peabody and Sherman) and revisit the Housing and Economic Recovery Act of 2008: the legislation that gave us the first version of the 1st Time Homebuyer’s Credit. This version did not become the fraud magnet that the later versions did since it required the repayment of the credit over 15 years. And that is the problem.
The first 1st Time Homebuyer’s Credit allowed taxpayers who bought their first home between April and December of 2008 to get a refundable tax credit of 10% of their home’s purchase price up to a maximum of $7,500 on their 2008 tax return. It really wasn’t much of a credit as a short term loan because taxpayers who took advantage of the program had to begin repayment of their “credit” on their 2010 tax returns. The repayment was stretched over 15 years.
There were two other versions of the 1st Time Homebuyer’s Credit. The major difference from the first was that they did not require repayment of the credit if the taxpayer used the home as their principle residence for 3 years.
So, taxpayers who took advantage of the first version of the credit are now making their 5th payment on their 2014 tax return. Someone who received the maximum credit of $7,500 is paying back $500 each year. $500 may not seem like a big amount but they can really get hit if they sell the house. When they sell the house, the taxpayer will have to repay the remaining balance on that year’s tax return. A taxpayer who received $7,500 in 2008 sells their house in 2015. They have repaid $2,500 (2010-2014) and that means they will have to repay the remaining $5,000 on their 2015 tax return. That doesn’t mean adding that $5,000 to their income like a cancellation of debt. They have to pay the whole $5,000 back as a tax.
Many of the taxpayers who took advantage of the 2008 credit were young people buying their first home. Homes which they would like to trade in for a larger model but the repayment will make more expensive.
Recipients of the first version of the 1st Time Homebuyer’s Credit knew they were going to have to repay the credit. But the fact that others who got the credit under later versions don’t have to pay it back is frustrating. And the frustration is compounded by the fact it makes a new home harder to afford.
It’s too much to expect Congress to forgive the debt of those repaying their credit but I have an idea. It will make things more complicated but this is the tax code. How about allowing taxpayers to rollover their repayment into a new home? Give them a fixed amount of time between sale of the first and purchase of their second home. If they go longer, they repay in full. Of course there will have to be all kinds of restrictions on related parties and how long before they can rollover to a new house. Or, maybe make it easier on everyone and just forgive the debt.
You know that you’re getting a Federal refund. What should you do with that money? Honestly, many taxpayers have that money spent before they get their return prepared. But if you’re planning to put all or part of that refund into savings, you might consider buying a US Savings Bond.
Most taxpayers know that they have the option to have their tax refunds directly deposited into a personal account. But most people don’t know that the refund can be deposited into more than one account. Form 8888 allows the taxpayer to split their refund in up to three accounts. These can be a checking, savings, IRA, or brokerage account. On top of that, you can also buy a savings bond or two.
Form 8888 allows you to purchase Series I bonds for yourself or as a gift. Use Part II to buy paper bonds. Just fill in the amount you want the bond to be. If you’re buying the bond as a gift, you need to fill in the recipient’s and the co-owner/beneficiaries’ name along with the amount of the bond (line 5a or 6a). If the bond is for you, just fill in the bond amount on line 4. The paper bonds will be mailed to the bond owner.
You can also use part I of Form 8888 to add money to your TreasuryDirect account and allocate the money to buy a gift bond or buy a bond for yourself.
Using Form 8888 to buy savings bonds is an easy way to save part of your refund for the future.
Unless you are a non-resident alien and use a Form 1040NR, you might have the choice of using one of the three 1040 forms, 1040EZ, 1040A and 1040. Which form you can use depends on your circumstances; income, deduction and credits. Having an idea which of the 1040s you need might not be necessary if you use a paid preparer, it can be something you want to think about if you do it yourself and have to get the forms or you are paying for box or online tax software. After all, you need to know what you have to buy the right box.
Who can use the 1040EZ? Only about 16% of taxpayers can use the 1040EZ. First, your filing status must be single or married filing jointly and you can't claim any dependents. You also can't be 65 or older. (If you or your spouse were born on or after January 1, 1950, you can't use the 1040EZ.) And you can't have filed Chapter 11 bankruptcy since October16, 2005.
Next, your taxable income must be less than $100,000. And that income is limited to wages, salaries, tips, taxable scholarship or fellowship grants, unemployment compensation, Alaska Permanent Fund dividends, and taxable interest which can’t be over $1,500. A note about tips, if you have to report your tips on Form 4137 or you have allocated tips reported in box 8 on your W-2, you can't use the EZ form.
Deductions on a 1040EZ are limited to the standard deduction. Besides not being able to use morgage interest, charitable contributions and state and local taxes to itemize deductions, that means no IRA, student loan, teacher expense, alimony paid or other "adjustment" that reduces income. And only one credit is allowed, the Earned Income Credit for returns without children.
If you had health insurance coverage for the whole year, you can use the 1040EZ to report that but not to calculate the Premium Tax Credit or Individual Shared Responsibility Penalty or exemption.
Form 1040A is open to more taxpayers. It can be used by all filing status and taxpayers with dependents. Income is expanded to include dividends and capital gain distributions. Also distributions from IRAs and pensions as well as Social Security benefits can be reported on the 1040A. Besides the standard deduction for their filing status, taxpayers can take deductions for education expenses, IRA contributions, student loan interest and tuition and fees.
Form 1040A also expands the number of tax credits that can be taken used on the return. Besides Earned Income Credit, the 1040A allows the Child Care Credit, Education Credits, Retirement Savings Credit and the Child Tax Credit. The 1040A can also be used to calculate the penalty for the Individual Shared Responsibility Penalty or report an exemption to the penalty. The 1040A can also be used for the Premium Tax Credit.
Everyone else needs Form 1040. This form allows the reporting of all types of income and all allowable deductions and credits. That includes, but not limited to business and rental income and capital gains. Using Schedule A to Itemize Deductions also requires the Form 1040.
Anyone can use Form 1040 to file their tax return. But if you qualify to use the 1040EZ and 1040A your tax headache might be milder or you won’t have to pay for the full featured tax software.
Thanks to Taxgirl (Kelly Phillips Erb) for the warnings to look for in choosing a tax preparer. I usually write a post along these lines each season but I couldn’t say it better.
The IRS also has a page on choosing a tax pro. There will be a database of some tax pros but it’s not up yet (1/11/15).