Taxing Matters

Probably the most important documentation we have is the tax return itself. Make sure you save both the electronic and paper versions of your tax return. If you are using desktop software, make a backup of your data file. If you used online software make sure you have both a PDF file and a print out on paper of your tax return. You should also keep confirmations for your e-filed tax returns, or your certified mail receipts if you mailed in your taxes.

After April 15th I file or throw away or shred the various documents that have been accumulating on my desk. My basic rule of thumb: I keep any papers relevant to something on the tax return. And how long to keep these tax records? Generally I keep everything at least four years. Some documentation (such as relating to real estate purchases or investments) I keep in a separate permanent file.

Filing a tax return after the April 15th deadline typically isn't any different than the normal procedures. Be sure you have all your tax-related documents for income and deductions, prepare your tax returns, and send them into the IRS. Tax software such as TurboTax, H&R Block's At Home and TaxACT are will still be available in desktop and online software through October 15th. The IRS e-file and Free File services also remain operative through October 15th.

The only a couple of extra things to remember about filing after April 15th.

First, remember to include any extension payment along with your other withholdings and payments on your tax return.

Second, if you have a refund, the IRS typically won't assess any late fees -- as long as you file before October 15th. But if you have a balance due, then the IRS will assess a late payment fee along with interest.

You can file your extension for free using one of the Free File tax software providers.  Other software providers sometimes charge a fee. But the nice thing about filing an extension online is that you receive an electronic confirmation that the IRS received your extension request.

April 15th, besides being the deadline to file tax returns, is also the deadline to fund an individual retirement account. You may be wondering if a traditional or Roth IRA is better for you. You might also be wondering exactly how much you're eligible to contribute, or how much you can deduct for a traditional IRA.

Some quick answers:

A traditional IRA is better if you can take a deduction for your savings contribution, and you expect your income in retirement to be taxed at lower rates than you are taxed now. Basically with a deductible IRA you get to defer the tax now until later, when hopefully you'll be in a better tax bracket.

A Roth IRA is better if you expect your tax rates to be the same or higher in retirement. With a Roth you don't get any deduction now, so you are basically prepaying tax now in return for future tax-free income.

You can contribute a total of $5,000 to either a traditional IRA or a Roth IRA (or some combination of the two). The maximum increases to $6,000 for people age 50 or older. IRAs require "earned income" to be eligible to make a contribution, meaning you will need at least $5,000 (or $6,000) of wages or net self-employment income to qualify.

This is a lot of material to digest just before the deadline. So here's some short cuts: if you definitely want to contribute to an IRA but still not sure about the type of IRA, fund the IRA by April 15th and file the extension. Why? With an extension you will have until October 15th to withdraw an excess contributions over your allowed maximum without penalty or to switch (or "recharacterize") the between Roth or traditional IRAs if it turns out one is better suited to you than the other.

As the tax deadline nears, many of us feel rushed to finish up tax returns and get them submitted to the IRS. You can buy yourself time simply by filing an extension. An extension gives you an extra six months to file your tax return with the IRS: a deadline of October 15, 2010. An extension does not, however, give you extra time to pay.

So here's the tip. Start working on your tax return using tax preparation software. If you see that you have a refund, simply stop and file the extension. If you see that you have a balance due, file the extension and send in a payment. At the very least, this removes any worries about late penalties, and you'll have the extra time you need to wrap up your return.

What if you cannot afford to pay the IRS? File the extension anyway. This will reduce your penalties.

Need to file your extension fast? There's six ways I found to send in your extension in under ten minutes.

2009 has been a disastrous year for many. People who lost their homes to foreclosure, had their credit card debt canceled, or cashed out retirement plans early to stay afloat financially may be in for a tax shock. These events can trigger higher taxes. Here's how to minimize the tax consequences.

Real estate foreclosures and short sales are considered the "sale" of property. So you'll need to calculate any capital gain or loss. These transactions often result in the bank wiping out mortgage debt if the property sells for below the outstanding balance. Forgiven mortgage debt is considered taxable income by default, but some types of forgiven debt can be excluded from taxes. The "trick" here is you may have to report a foreclosure or short sale in two separate places on the tax return: once as a capital gain for the sale of a home, and again as canceled debt.

Unlike the tax relief made available on foreclosures and short sales, other types of canceled debts are still taxable. This includes credit card debt forgiven as part of a debt settlement program. The only tax break available here is the insolvency exclusion, which provides tax-free treatment for debt in excess of the value of a person's total assets, and the bankruptcy exclusion, which provides tax-free treatments for all debts forgiven as part of a bankruptcy petition.

People who cashed out retirement savings such as 401(k) and IRA plans may have two separate taxes show up on their tax returns. Not only are distributions from a retirement plan subject to regular income taxes, but they are also subject to an additional 10% tax for savings withdrawn before age 59.5 years old. This early distribution penalty can be minimized or eliminated by taking a look to see if any of the exceptions apply. Distributions taken to pay for health insurance premiums while you are unemployed, or to pay for significant health care expenses, or to go back to school can help avoid the additional 10% tax.

Before sending in your 2009 tax return, here's a few things to double check just to make sure you're not overlooking any tax issues.

The Making Work Pay tax credit. New for 2009 (and will also apply to 2010 returns), the Making Work Pay credit refunds the first $400 of Social Security and Medicare taxes ($800 for joint filers). The things to watch out for: the credit is gradually eliminated for people earning $75,000 or more; and the credit is reduced if you received the one-time $250 economic recovery rebate from Social Security.

Unemployment insurance benefits. For 2009 only, the first $2,400 of unemployment benefits are tax-free. This is hard to see on the actual tax form, as there's only one line to indicate unemployment benefits.

Energy-efficient home repairs and improvements. If you installed insulation, replaced windows, upgraded your HVAC or made other energy-efficient improvements, you may be eligible for a tax credit of up to $1,500. This credit disappeared in 2008, but reappeared in 2009.

Enhanced Standard Deduction for some filers. People who are accustomed to taking the standard deduction will want to take a look at the new Schedule L. You can now claim additional standard deductions for real estate taxes and car sales tax, without needing to fill out the longer Schedule A for itemized deductions.

People who have a high-deductible health insurance plan may be eligible to pair that insurance policy with a health savings account. These plans may not be right for everyone, but personally I find health savings accounts particularly appealing from a tax perspective. Individuals get a deduction for savings contributed to an HSA, which can be set up through a bank, credit union or other financial institution. The contribution is tax-deductible going into the HSA, and the funds withdrawn are tax-free as long as they are used for legitimate medical expenses. Plus, individuals have until April 15th to fund their HSA for the previous year (the same deadline for funding IRAs). And unlike flexible spending accounts, the individual always owns his or her HSA funds. They aren't lost at the end of the year if unused.

People have until April 15th to fund an individual retirement account for last year. Generally speaking, funding an IRA is a great way to get an extra deduction for your 2009 taxes even though the savings are being contributed in 2010. It's important to remember that IRAs come in three basic varieties: tax-deductible traditional IRAs, non-deductible traditional IRAs, and tax-free Roth IRAs. Which is best for you depends on your level of income and whether you are covered by a retirement plan through your employer.