Put house in order for tax man

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Tax time is breathing down your neck and getting right up in your face, with a scant two weeks to nail down your 1040 for 2010. And if it wasn’t for an obscure Washington holiday, you wouldn’t even have THAT much time.

But you do, because of Emancipation Day, an official Washington, D.C.-holiday that falls on April 16, but that’s a Saturday so federal workers observe it on Friday the 15th, which is Tax Day, but not this year, because it’s moved to the next business day, Monday, April 18. Got it?

At any rate, it’s like a snow day for your taxes, so take advantage of the extra few days and file on time.

Time’s on your side

Now before you get all flummoxed and panicked, stop and try my Tax-Time Two-Step:

Step One: Did you get a tax refund last year, did you keep your withholding at the same level, and did your finances remain pretty much the same between 2009 and 2010?

If the answer is “yes,” you can calm down. There is no penalty for filing late if you’re getting a refund. Well, technically, there is, but the penalty is a percentage of the taxes owed. Since you’re sure you owe $0 taxes (you’re sure, right?), there’s no real penalty. So calm down and if you file a week or two late, no big deal.

Step Two: Do you have even the slightest prayer of finding all your paperwork, documenting all your deductions, rounding up all your receipts and setting aside several hours to fill out forms between now and midnight two weeks from today?

If the answer is “no,” then it’s tax-extension time for you! The good news is you can file for an extension electronically, using tax software or the IRS Free File service at www.IRS.gov, or mail in Form 4868, which you can print online.

Now the bad news: An extension to file isn’t an extension to pay. So why, you ask, should you file now if you’re just going to guess at your payment?

Well, in the case of under-paying your taxes, the penalty is one-half of a percentage point on what you owe, plus 4 percent interest. But the failure to file penalty is 5 percent, on top of the interest due.

“If you owe and can’t pay, still file,” says Detroit IRS spokesman Luis Garcia. “The penalties for not filing and not paying are 10 times what they are for filing and not paying. We understand times are tough, and we will work with you.”

Free software’s out there

OK, you’ve decided that you can’t skip filing and you don’t want to put it off, so get busy. Missing tax statements, such as mortgage interest, can often be downloaded or found on your financial institution’s website.

If you’re using tax software, stop before you buy and see if you qualify for IRS Free File. If your adjusted gross income (your taxable income after deductions, credits and exemptions) is less than $58,000, you can use the service for free. No matter what your income, you can use the Free File forms, which you can file electronically or print and mail. But that doesn’t include a Michigan state tax return.

“Why in the world would you pay for software when it’s the same exact software you can get for free from the IRS?” Garcia asks. “It’ll process your taxes the same, you get the same deductions and the same refund. The only difference is that it’s free.”

If you do buy tax software, make sure you go through the update process. Congress passed lots of tax laws at the last minute before Christmas, and you want to get all the latest adjustments to keep things accurate.

Once you’ve got your tax-prep method of choice (software, online or splintered, gnawed pencil) use last year’s return as a guide. With software, double-check any numbers you enter, and watch those tricky letter designation with Box 12 on your W-2.

You’ve got four steps that come next: figuring your income, figuring out if you can lower your taxable income, figuring out if you can claim any tax credits, and then figuring out which countries don’t have tax extradition treaties with the United States.

You want to pay attention to the income adjustments on page one of your 1040, since the less income you have, the less tax you pay. If you think you’re anywhere near qualifying, take the time to do your homework, because these adjustments are worth it. Check at www.IRS.gov, with your software provider or the always-reliable “J.K. Lasser’s Your Income Tax 2011.”

Credits trump deductions

Next, claim as many of those juicy tax credits on page two as you can. “A lot of things that were set to expire were renewed in December,” says Ronald Mauter, office manager of the H&R Block office on Schaeffer Highway in Detroit. That includes the educator’s tax credit and others that have been renewed for two years.

Tax credits give you a dollar-for-dollar tax cut, whereas the deductions that go on Line 40 only give you a percentage back on what you claim. The $1,000 child tax credit, for example, knocks an even grand off your tax bill. But if you’re in the 28 percent tax bracket, a $1,000 charitable deduction reduces your tax by just $280.

By now, you’re nearing the bad news on the bottom line. Check your return against last year’s, check your math, then check it again, because that’s where most mistakes happen. Also check your Social Security numbers, another big spot for mistakes.

Now do the math. If you’re getting money back, go to the nifty withholding calculator at www.IRS.gov and adjust your paycheck so you keep more of your own money during the year.

If you owe, don’t let the tears stain the ink on your check. If you owe and can’t pay, send it what you can and wait for your friendly tax workers to send you a letter asking for the rest. If you can’t pay it then, contact the IRS for their E-Z payment terms.

Check first with the IRS if you are considering taking any kind of loan to pay your taxes (especially against a 401(k) or similar tax-deferred retirement account). In many cases you’ll find Uncle Sam offers better rates to pay your tax bill over time than putting your tax shortage on MasterCard or Visa — even after the reward points.

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