By Lauren Young, TurboTax Deductionista
Thanks to Lauren (via the TurboTax PR office) for letting me repost this article from the TurboTax Blog. Funny thing is, as of the posting of this article, I haven’t gotten around to filing our own taxes yet!
Iâ€™m not going to be able to file my taxes in time. What should I do?
If you canâ€™t make that April 15 deadline, you are in good company. The Internal Revenue Service says it received requests for 11 million extensions in 2008, which amounts to about 8% of all tax returns. (I was one of them!) Taxpayers who ask for an extension get an extra six months to fileâ€”your new deadline in 2010 will be Oct. 15.
You can get some extra time without any hassle. Simply e-file for a Personal Tax Extension of your federal tax return using TurboTax Easy Extension. You can also file for an extension on the IRS website.
But there a few important things to remember when you request an extension. First, a federal extension does not automatically extend the deadline for your state income tax return. To find the extension guidelines for your state, click on this list of state tax websites compiled by TurboTax.
Also, an extension to file your federal taxes does not give you an extension to pay your actual tax bill. You still have to figure out your taxes and make an estimated payment.
Estimating how much money youâ€™re going to owe can take time, so please do not wait until April 15 to get started. Last yearâ€™s tax return could be a good starting point if you havenâ€™t experienced any major life changes. If that is the case, you can probably pay the same amount in taxes for 2009 that you paid in 2008. But if you lost your job, purchased a new home with the first-time homebuyerâ€™s credit, or had a baby, youâ€™ll need more information to determine your tax bill.
Why is it so important to come up with this ballpark estimate? You will pay a penalty if you underpay your taxes by more than 10 percent. Thankfully, TurboTax takes the guesswork out of calculating your estimated payment.
If you are expecting a refund, file your taxes as soon as possible if to get that payment. You risk losing your refund if you fail to claim it within three years of the return due date.
Here is a rundown of why people file lateâ€¦or not at all.
What do I do if I canâ€™t afford to pay my taxes?
I posed this question to the IRS, and the No. 1 thing to doâ€”even if you canâ€™t pay all the taxes you oweâ€”is to file your return. â€œIf there is one message to get to consumers, I cannot emphasize enough how important it is to file your return,â€ says an IRS spokesman.
My advice: File your return as soon as possible, preferably before midnight on April 15. Why? Failure to file your taxes is a federal offense that could have significant legal ramifications. And if that isnâ€™t reason enough, another incentive to file your taxes on time is a financial one. Thatâ€™s because the IRS can impose a penalty of 5% of the tax you owe for each month you do not file your return. The maximum penalty is 25% of your tax bill.
Try to pay as much of the bill as you can. But if you donâ€™t have the cash, you may be able to work out a payment agreement with the IRS. In the past few years, the IRS says it set up installment agreements for 2 to 3 million returns. It should take less than 10 minutes to figure out if you are eligible for an installment agreement on the IRS website.
You can also call the IRS at 1-800-829-1040 to discuss your payment options.
Filers who pay the IRS via an automatic installment plan typically owe less than $25,000. Also, if you are interested in a payment plan, you should be in good standing with the IRS, and you should expect to pay off your bill within five years.
Installment agreements can be costly, so think before you leap. The IRS charges a one-time fee of $105 for setting up the installment plan, or $52 if you have the payments debited directly from your bank account. The interest rate fluctuates, based on the amount you owe. For a sense of how these payment plans work with sample scenarios, look at this IRS page.
If I havenâ€™t closed on my new home yet, can I still claim the first-time homebuyer credit?
Yes. You still have time to get that credit, but you need to act fast. The Worker, Homeownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, has been extended. According to the IRS, â€œan eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010.â€ No wonder you are seeing more â€œFor Saleâ€ signs around town.
So who is eligible? You qualify as a first-time buyer if you have not owned a primary residence during the three years up to the date of purchase. You must also meet certain income restrictions: The credit begins to phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for joint filers. If you qualify, you may be eligible for a maximum tax credit of $8,000.
If you donâ€™t fit the criteria for the first-time homebuyer credit, you could be eligible for a long-time resident credit of up to $6,500. Buyers must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence. In addition, you must buy your new home before May 1, 2010. Or, if you sign a binding contract on or before April 30, 2010, you must purchase or close on the new home on or before June 30, 2010, according to the IRS website.
There is a significant amount of documentation required if you want to receive either of these credits, which is why the IRS doesnâ€™t let you e-file.
The homebuyer credit is a hot topic for 2009. The IRS offers extensive information about the ins and outs of the homebuying credit on its website.
If I was unemployed for part of 2009, is any of my income tax free?
Unemployment benefits are taxable, but you donâ€™t have to pay taxes on the first $2,400 you receive. If you and your spouse are out of work, you can both exclude that first $2,400 in benefits. You should have received a Form 1099-G reporting what youâ€™ve been paid.
If you end up with a big tax bill from your unemployment benefits, consider changing your withholding status for 2010. Fill out Form W-4V to have 10 percent of your benefits withheld for federal income taxes.
There are a bunch of education tax breaks available. Whatâ€™s the difference and which one should I take?
I hear this question a lot. In fact, I recently got it from a listener on National Public Radioâ€™s All Things Considered. While a tax deduction of up to $4,000 can be claimed for qualified tuition and fees, tax credits usually result in bigger tax savings.
For many people, the American Opportunity Credit will provide the most bang on a tax return because it offers the largest tax break ($2500 for qualified tuition and expenses). It is an expansion of the Hope credit, and it is tied to the economic stimulus package. The income cap for the American Opportunity Credit is higher than other credits, too. The credit can be claimed for tuition and certain fees you pay for higher education in 2009 and 2010. Books and required course materials count as a qualifying expense. Plus, the credit can be claimed for four post-secondary education years instead of two.
If you have brushed up on your career skills, use the Lifetime Learning Credit. It provides a credit of up to $2,000 to cover qualified education expenses, such as job training. And it is applicable for you, your spouse or your offspring. The credit is based on your incomeâ€”joint filers canâ€™t claim it if their income exceeds $120,000.
Finally, to figure out which educational tax break makes the most sense for you, use TurboTax to compare the impact on your tax return.
Is there anything I can still do to lower my tax bill?
One of the best options to lower your tax bill is to maximize your 2009 retirement savings. For 2009, you can stash up to $5,000 in an IRA ($6,000 for those over age 50). But there are income hurdles to be aware of. You can also buy a new house (above) or contribute to Haiti and Chile relief (below).
I made donations to support relief in Haiti and Chile this year. Can I deduct it on my 2009 taxes?
Yes, assuming you made those donations before March 1 to help Haiti and Feb. 26 for Chile. But pay very careful attention to the news. Pending legislation, which already passed the House of Representatives, is now awaiting approval in the Senate. (It is considered to be a slam dunk, but Congress has been a little tied up with healthcare reform.) There is a good chance Congress will extend the deadline for charitable contributions to Haiti and Chile through April 15. And if that happens, you should be able to use the deduction for 2009 returns.
If I need to amend my tax return, does that need to be done by April 15?
If you sent in your tax return already and realized you forgot to claim something, you can amend your return. (It happens to the best of us: Last year we forgot to include our 529 savings plan contributions on our 2008 tax return.)
Use Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040 (PDF), Form 1040A (PDF),Form 1040EZ (PDF), Form 1040NR (PDF), or Form 1040NR-EZ (PDF). If you used TurboTax to file your return you can follow these instructions to amend your return. To avoid any penalties and interest, you need to file Form 1040X and pay the tax by April 15 of the following year.
If you are filing for an additional refund, the IRS advises you to wait until you have received your original refund.