Tax Time: Take Your Time And Have Fewer Problems
This year most of us – who know that we will get at least some money back – will rush to complete their taxes in order to buy the house they have been wanting or the perfect car that they have been dreaming about for months. A word of caution to you! Take your time. It is important that you make sure that you don’t be too hasty because than you are bound to make more than just a few mistakes.
As an example I will take you back to two years ago when I was filing my taxes. I was wanting to get them done quickly and I also didn’t have much expertise in the area. Needless to say I was late, had to file two to three times, and told them I owed them when I didn’t. It wasn’t a pretty time for me and left me with so much more work than I wanted. That is why I have provided you with a check list to fill out. This will give you time to make sure that you have everything you need.
1. Update your records
When you changed brokerages last year, or in the last couple of years, were there any securities where the basis didn’t transfer over? Go dig out the original purchase information. Don’t forget to look for reinvested dividends. They will increase your basis in the present investment.
2. Have you qualified for mortgage insurance
Look carefully at your mortgage documents for the cost of qualified private mortgage insurance (PMI). David Mellem, an enrolled agent with Ashwaubenon Tax Professionals in Green Bay, Wis., explains that qualified premiums are premiums paid on a loan used to acquire a principal residence in 2007. This new deduction is in addition to the interest you’ve always been able to deduct. Unfortunately, the deduction phases out when your income is over $100,000 ($50,000 for singles).
The Form 1098 that you get from your lender will report the mortgage insurance premiums received in the appropriate box. In cases where you have prepaid future years’ premiums, those premiums are not presently deductible. They will be deducted in the appropriate year. If your lender doesn’t provide you with the information, this is the time to do some digging. You will find the costs in two places: The HUD-1 escrow settlement statement will have the amount you paid at the time you bought your home, or look at your monthly mortgage statement or the summary of transactions in your loan’s escrow, or reserve, account. Each of your monthly payments includes PMI.
3. Mortgage-debt forgiveness
Look over your loan documents for another new benefit. You’ve heard a lot of talk about the Mortgage Forgiveness Debt Relief Act of 2007. It’s touted as offering a fix for folks who have lost their homes and are facing cancellation-of-debt income. You got one of those 1099-C’s and rejoiced, thinking you won’t have taxable income.
Unfortunately, you may not be off the hook. Look more closely at the law. This is what is says: “Exclusion of up to $2 million of acquisition indebtedness on a principal residence. Effective for discharges incurred on or after Jan. 1, 2007 and before Jan. 1, 2010.” Ideally, your discharge date qualifies. But the problem is your loan may not qualify as acquisition debt. For instance, if you refinanced your loan and added all the fees and points to the new loan, or you refinanced and you took cash out to, say, pay off your credit cards or vehicle loans.
Refinance of original acquisition debt does not change the debt to the extent it is replacement of existing debt or for improvement to the property. This clarification will be a big help for those taxpayers who didn’t think they would qualify for this debt relief.
5. Gather identification numbers for any dependent care
You’ll need the name, address and employer identification number of the child or dependent-care provider in order to get the Child and Dependent Care Credit on Form 2441. If you are missing any of those components, IRS will reject the credit. Your state will probably reject it, too.
Incidentally, did anyone notice when the cost of kindergarten stopped being eligible for this credit? Enrolled agent Doug Thorburn, in Northridge, Calif., puzzled this out and discovered that kindergarten costs stopped being deductible effective 2005.
6. How you will pay
You ran some estimates last month to see where you stand. You realized that you were going to owe money. Have you figured out how you’re going to pay the taxes? This is a good time to start working on funding your April 15 bill. You can draw the money from savings or investments. Don’t draw money from retirement accounts. The taxes on the draws aren’t worth it.
Of course, you can always use your credit cards to pay. Be very careful, advices Liz Pulliam Weston, author of “Your Credit Score: How to Fix, Improve and Protect the 3-Digit Number that Shapes Your Financial Future.”
The big problem is the cost. Most e-pay providers charge a 2.5% to 2.9% fee. If you don’t pay your bill in full when the statement arrives, you’ll have to add finance charges to that. Credit cards are only worth considering when you don’t have the cash to pay your bill, your interest rate is low or zero, and you think you’ll be able to pay it off within a few months.
But if it will take longer to pay than your low rate will hold up, check into payment arrangements with the IRS. IRS’s installment agreements may be cheaper than paying the typical credit card interest rate (which hovers around 14% to 15%).
7. Gather your records
Tougher even than paying the taxes is the task of getting organized and gathering your records. Don’t overlook your deductible cash receipts. Start digging through your pockets, your briefcase, your purse, your luggage. Don’t forget to look into that slot in your car’s visor for all the parking receipts and tolls and fares. What about that kitchen drawer, or desk drawer, or dresser drawer where you’ve unloaded your pockets at the end of the day? Pull them all together and summarize them. Or turn them over to someone to write up the summaries for you.
Not only will you end up with a decent tax deduction, you might find receipts to submit to your employer for reimbursement. After all, getting paid 100% of an expense is worth much more than the 25% to 45% you’ll get back in tax savings.