The due date for corporation and individual income tax returns is fast approaching. The Corporation income tax return due date is March 15th and individual and partnership income tax return due date is April 17th. In this article, I will focus on the individual income tax return and show you the strategies to help you lower your taxes, save money and avoid penalties when you prepare for your individual income tax return.
First, one of the best strategies to lower your tax liability is to contribute to your retirement plan, such as an IRA, Keogh or SEP. Contribution into qualifying retirement plans, such as IRA, can lower your Adjusted Gross Income (AGI) which is better than the deductions reported on your schedule A which could be subject to AGI level. For example, your medical bills could be deductible only if the amount is above 7.5% of your AGI. The due date for 2011 IRA contribution is April 17, 2012 and if you have Keogh or SEP, the due date could be October 15, 2012 if you file for extension. Contributions to these retirement plans not only reduce your current income (AGI) which could help you get more deductions on your schedule A, but also the gains are tax deferred. The result in 20 years could amount to tens of thousands of dollars more in your account than a regular investment account. It will be very tough to find better deals than this.
Furthermore, contributions to a Roth IRA may not give you the tax break for 2011, but the distributions from a Roth IRA is tax free, so this could be even better than a traditional IRA for some others. Similar to a Roth IRA are the 529 plans and is not tax deductible in your federal income tax return when the contributions are made. However, a 529 plan distributions are tax-free as long as they are used to pay for qualified higher education expenses for a designated beneficiary. But be careful, the money in the 529 plan could have a negative effect on your child’s FAFSA (Free Application for Federal Student Aid) and grants. The government will assume that you have the money to pay for your child’s college. The solution is to have the child’s grandparents own the plan. In the eyes of FAFSA, the assets do not exist in this way.
Second, make sure to get the social security number (or Tax ID) for your dependents. Without the social security number, the IRS will deny the personal exemption which could be $3,700 and additional $1,000 for child tax (for qualifying child). If you have a new born baby and don’t have the social security number by the tax return due date, then file an extension. If you are divorced, make sure that only one parent can claim the child. The IRS has a sophisticate system to match and compare your return with your ex-spouse and if both parents claim the same child then the IRS will find it and contact you.
Third, good record keeping can save you from big headaches when you prepare to meet your CPA for your tax return. This is even more crucial if you are a small business owner. According to the IRS a small business owner should keep their documents such as gross receipts, proofs of purchases, expense documents, documents to verify your assets including purchase and sales invoices, real estate closing statements and canceled checks. Remember that good record keeping not only helps you reduce the time and stress about getting the information to your CPA before the tax return due date, but also it helps you respond to the IRS quickly, if they ever contact you.
Lastly, file it on time. If you don’t have all of the information to file the return by April 17th, then use the Form 4868 to file an extension. This form gives you an extra 6 more months to complete your income tax return, but you must make a reasonable estimate of your 2011 income tax liability. The late filing penalty is 4.5% per month and could be up to 22.5% of your taxes due. The late payment penalty is 0.5% per month and could be up to 25% of your taxes due. So try to file it on time or file for an extension with a reasonable estimate of the tax payment to avoid unnecessary penalties.
If you have questions, need additional information or would like to discuss more on the above topic, please feel free to call us and/or visit our office. We are a Riverside CPA firm that brings 30 years of experience to the tax preparation table.