Tax Edge

George Washington once said, "No taxes can be devised which are not more or less inconvenient and unpleasant." But, with the clock ticking down to the April 15 federal income tax filing deadline, procrastinating over this inconvenient and unpleasant task is no longer an option. It's 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 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 e-filing. If you haven't already done so, consider e-filing this tax season. Last-minute tax law changes enacted at the end of 2008 and early in 2009 make this tax season more complicated than ever. Using tax prep software helps eliminate much of the confusion you might otherwise experience.

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 87 million individual tax returns (almost 60 percent) were filed electronically last year.

The increase in e-filing has been driven by taxpayers using their home computers and e-filing their income tax returns in record numbers, though increases are continuing to occur in both self-prepared e-filings and e-filings by tax professionals. In addition, more taxpayers are also choosing to have their tax refunds directly deposited into a bank account. IRS directly deposited approximately 75 percent of all individual tax refunds processed during 2007 and 2008.

Filing electronically may also be the most cost-effective option for many taxpayers. Seventy percent of American taxpayers are eligible to file their return 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."

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 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 e-filing may help to reduce some errors and speed refunds, but it doesn'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. The errors targeted by the IRS include:

• 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

Enjoy 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, there is one commonly available 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 2008 tax year, you can contribute up to $5,000 ($6,000 if you were at least age 50 during 2008) 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 2008 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 2008 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, you may be able to save big on your 2008 tax bill! People who qualify for the First-Time Homebuyer credit and who buy a new home (a primary residence) in 2009 before December 1 will be able to knock as much as $8,000 off their 2008 taxes, if they choose.

The credit for new homebuyers first came to life last year. Then, new and improved for 2009, it provides a credit of 10 percent of the purchase price of a home, up to $8,000, for home purchases finalized by November 30. The law allows anyone purchasing a home before the deadline in 2009 the option of treating the purchase as if it had taken place on December 31, 2008, thus permitting them to use the credit to reduce either their 2008 or 2009 tax liability.

Thus, if you are eligible for the credit and 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.

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

Although the due date itself is not negotiable, you can still get an automatic extension of six months to file an individual income tax return. Keep in mind, though, that 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, 2008, 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!

Posted April 6, 2009.