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I Forgot To File My Taxes

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Every year I meet a couple people who tell me “I forgot to file my taxes.” How do you forget to file???? Here’s the steps to make it all right with the government.

Did you file your taxes this year? Did you know that nearly 10 million U.S. citizens fail to file by April 15th each year? Some avoid filing on purpose, but many just plain forget. So don’t worry. If it slipped your mind, you’re not alone.

If you still have yet to calculate your refund/payment, do this immediately. Even though you’re late, the process is still the same. Get the appropriate forms and gather all of your tax information and either head to your accountant or calculate your taxes yourself (whatever it is that you typically do). Once you know whether you owe money into the government or if you’re getting a refund, you can take the next steps to file.

 

What Is The Penalty?

 

For most of us, we plan on receiving a refund each year. Some of us even plan on getting as much back at $4,000 or more. This shouldn’t really be your goal since you’re basically allowing the government to use your extra money interest free, but that rant is for another article I suppose. If you have always received some money back each year, then you have absolutely nothing to worry about for filing late. There is no penalty. I was actually surprised to learn this, but it makes complete sense. Why should the government charge you if they just get to keep your money a little longer. In fact, they would probably rather that you never filed your taxes!

If, however, you typically owe money into the government each year, then you will most likely have to pay in a little extra for your late payment. There are three types of penalties that you’ll have to pay: Failure to File Penalty, Failure to Pay Penalty, and Interest.

Failure to File Penalty

This penalty occurs because you did not file your taxes by the deadline and you owe money to the government. The amount of money you owe depends on how late you are to file. If you’re a month late, then you owe and additional 5% on top of what you already owe. For each month that it’s late, you have to add an additional 5%, up to a maximum penalty of 25% (if you’re 5 months late or more).

Failure to Pay Penalty

This penalty occurs when you file, but you just don’t pay the amount you owe. The penalty is 0.5% for each month that you have still not paid in full. There is not maximum penalty, so it’s definitely best to pay the full amount as quickly as you can.

Interest

In addition to the traditional penalties, the government also want’s the money back with interest. While this amount changes all the time, it is currently set at 3% interest per year, but it is calculated based on every day that your return/payment is late. Again, it’s best to pay this sooner rather than later.

Basically, to sum it up, if the government owes you money, you have nothing to worry about. Just file your taxes and you’ll receive your check shortly, with no penalty. If you owe money in, then you’ll have to pay quite a few penalties. So, rather than play the “wait and see” game, you should calculate your taxes and file them as soon as possible.

Photo: 401(k) 2013

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How to Cut Your 2012 Tax Bill Today

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Did you know there are still ways to save on your 2012 taxes?  Many people (mistakenly) believe that once the clock strikes midnight on January 1, all tax strategies need to be in place–hardly!  Here are two ideas you can take to the bank today (assuming you meet some requirements) to keep your Uncle Sam from digging deeper into your pocket.

 

 

Good Old Fashioned IRA

 

Sit down, kid, and Grandpa OG will tell you a story….

Long before all the Roth IRA hoopla, there was just an”IRA.”  Now, to distinguish them, we called one a ‘traditional’ IRA. That’s where your opportunity lies. In 2012, the maximum contribution to an IRA was $5,000 ($6,000 if over age 50).  However, you have until whenever you file your taxes, or April 15, whichever is earlier, to contribute to an IRA and count it for your 2012 tax bill. Contributions are tax deductible, which means it lowers your overall income that is taxed (page one of the 1040), thereby reducing your tax. If you were in the 25% bracket, a $5,000 contribution would reduce your income taxes by $1,250. Not exactly dollar-for-dollar, but it’s better than a sharp stick in the eye!

 

Traditional IRA Deduction Limits

 

Here’s where the funky requirements come into play: first, as long as you’re under age 70 1/2 and have earned income, you’re eligible to contribute to an IRA. Whether or not it’s deductible will depend on a couple of things:

If you’re covered by a company sponsored plan (401k, etc) then your contribution’s deductibility is phased out as follows:

-Single: $58,000-$68,000 AGI

-Married Joint Filer: $92,000-$112,000

-Married Separate Filer: $0-$10,000

If you not covered by a company plan, then there is no phase out.

Your spouse is covered by a company plan? then your phase out is $173,000-$183,000.

 

Small Business Owner Plans

 

If you’re fortunate enough to own your own business, there’s another way for you to cut into your tax bill. It’s called a SEP IRA, which stands for Self-Employed Pension, and its available to most business owners. They work very much like traditional IRA’s, but the limits are much different.

Small business owners would first calculate their profit. The maximum SEP contribution is 25% of that profit number (up to a maximum of $50,000).  The tricky part of small business plans? You must offer all your employees the same thing you offer yourself. For example, let’s say your profit is $50,000 and you decide to contribute the maximum, 25%, into your SEP. That’s $12,500–nice job!  But, if you have employees, you must contribute 25% of their salaries into a retirement plan for them, too!  That can add up quickly–so be careful!

 

Bonus Tax Savings

 

In 2012, eligible lower-income taxpayers can claim a nonrefundable tax credit for the applicable percentage (50%, 20%, or 10% depending on filing status and AGI) of up to $2,000 of his or her qualified retirement savings contributions as outlined in the Saver’s Credit chart.

 

So there you have it-a couple of last-last minute tax strategies to lower even last year’s tax bill!

Photo: Philip Taylor

Year End Business Tax Planning – Stop Uncle Sam From Eating Your Lunch

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Two weeks ago I received a call from an agitated client: “O.G.!  I need your help. My taxes are going to be out of control!  We made too much money this year!”

My first thought: “Oh, poor baby.  You’ve made too much money.”

Then I ran to the nearest phone booth, twirled around in it a bit, and walked out the looking the same as I had 30 seconds earlier, although I was much dizzier.

Time to be the last-minute tax superhero!

If you own a business and you’re doing a little accounting at the end of the year piling up your nickels, you may notice you have a little extra scratch laying around.  The bad news is that if you’re like most business owners, whatever is left as of December 31 is rolled up to your personal tax forms and you’re going to pay taxes on it, no matter what your plans are.

For example: You paid yourself $50,000 in 2012 and your business now shows a $50,000 profit.  If that extra $50k isn’t spent or expensed by December 31, you’ll be taxed on the entire $100,000.  Lovely, isn’t it?

Here are a couple things you can do in the 11th hour to minimize your bill:

1)    Pre-pay as many expenses as you can.  If your sudden profit is because a client paid earlier than expected, this is probably the best bet.  Take a look at January and February expenses and start writing checks.  Now you won’t have to worry about expenses next year and can rebuild your excess cash pile.

2)    Contribute to your company’s retirement plan.  If you don’t have one established already, you’re pretty limited with options, but you can contribute up to 25% of your profit if you’re a sole proprietor to your SEP IRA plan.  You have until your tax filing deadline to make that contribution, though, so no hurry.  It would make sense to reach out to a tax professional or retirement plans specialist to create a plan for the future.

3)    Give some money away – to your employees.  If you bonus employees now, there will be two benefits: first, they’ll pay a lower FICA tax before January 1, 2013 and second, you can expense the cost.

4)    Buy capital expenditures for your business.  Section 179 expenses, as they’re called, are expenses that usually are amortized but can be ‘pulled forward’ to the year of purchase.  If you’re considering a technology upgrade, or a company car, today may be the right time.

5)    Take a couple bucks and hire a good CPA, EA, or business financial planner.  The best time to prepare for unexpected profit is in August, not December.  A good advisor on your team will have mapped out all these (and other) strategies long ago and now they’ll be ready to be executed, without having to scramble through year end business tax planning.

A good CPA or financial planner will also be able to implement and run cloud financial management systems for increased efficiency.

Moving into 2013, here are a couple ‘sneaky’ tax ideas that help offset income taxes for some people:

1)    Rent your home to your corporation.  According to the IRS, “If you use the dwelling unit as a home and you rent it fewer than 15 days during the year, that period is not treated as rental activity. Do not include any of the rent in your income and do not deduct any of the rental expenses.”  Fewer than 15 days means 14 days, by the way.  Your company has to have monthly board meetings, right?  Ever consider renting a hotel banquet hall?  No?  Why not?  Oh…because it’s $1,000 a day!  Do the same thing, but from your home!  There are a lot of pitfalls here, so you have to do it the right way.  But if you had 14 corporate meetings a year…and the lease rate was $1,000 per day…you do the math.  Tax free money.  Boo-yah.

2)    Hire your kids.  If your kids are over 7 years old, they can be hired in the family business to do menial tasks.  Don’t hire your kids as Senior VP of Sales, but he or she can lick envelopes, take out the trash, etc.  Then pay them commensurate with their age and activities.  Anything up to the standard deduction (this year is $5,950) is tax free.  Pay them $10,950 and contribute $5,000 to their IRA.  Again, pitfalls abound, but it may work for you.  By the way, a $5,000 annual contribution from age 7-14 growing at 8% until age 60 is worth about $1.8 million.  Just sayin’.

3)    Establish a real retirement plan and set up a sweet company match system.  Remember, you can only do for you what you do for all your employees, so this only works if you’re by yourself.  But, you can set up a pretty sweet 401(k) plan and a stellar matching program for yourself if you want.  You just need to do it before December 20.

Hopefully this gave you some year end business tax planning ideas to mull over while you enjoy your Williams Sonoma peppermint bark next week.  Enjoy Christmas and be sure to take some days off away from work to recharge the batteries.  Smart business owners know they’re most productive when they’re fully charged up!  Merry Christmas and Happy New Year!

Five Money-Saving Tasks That’ll Help You Cha-Ching! in the 4th Quarter

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I love the sound of the cash register ringing, don’t you?

If you’re going to be successful in your financial life, treat it as if it’s a business and you’re trying to hear that awesome cash register sound. If you don’t, you’ll always prioritize yourself behind more “important” activities like your job (nevermind that the job is there to help your net worth…that’s probably the subject of another post).

Every business has a mandatory list of activities that can’t be ignored. So does your financial life.

Here are five items that MUST be on that list this quarter:

1) Mutual fund capital gains. Even if you don’t have mutual funds outside of an IRA now, you should learn how these rules work. When the manager (or system, for an index fund) trades stocks or bonds inside of the fund a capital gain is generated. Someone has to pay it, and there’s no real fair method, so the mutual fund company declares a date and divides the gain among shareholders of record. Even if you didn’t sell the fund, you’re responsible for your portion of the manager’s buying and selling.

With results so far in 2012 looking up, there’s a good chance you might get hit with a tax bill this year. Avoiding this tax is legal and easy. Find the dates the fund declares capital gains and transfer your money to a different fund in the same family. This avoids fees for switching and the manager’s capital gains tax.

Grab a calculator before you move any money. You’ll still be on the hook for capital gains taxes you generate by selling as well. The cost of switching might outweigh the savings you’ll realize from avoiding any taxes created by the fund manager.

2) The lemon drop. Hoping to skim off some of that skyrocketing Apple stock? Cover a portion of your capital gain by also selling your brother in law’s “can’t lose” loser. There’s no time like now to weed your portfolio of positions that aren’t going anywhere. Although you’re only allowed to show $3k in net capital losses each year, leftovers can be carried over to deduct in future years.

3) Charitable giving. Hopefully you’ve given to your favorite community non-profits throughout the year, but if not (and especially if you itemize), you’ll want to make cash and in-kind donations in before December 31. Keep receipts for your gifts. The IRS has tightened charitable giving laws in recent years.

4) Estimate your taxes and decide when to pay property taxes. If you own a home winter taxes are deductible either in December or January, your choice. Did you receive a big bonus this year? Take the extra deduction now to help lower your tax due. If you make too much, it might be a better idea to wait until next year. High income earners aren’t allowed to claim all of their itemized deductions (ask your accountant about whether you’re subject to phaseouts).

5) Goal evaluation and setting. The 4th quarter is the perfect time to begin thinking about your short and long term goals. Did you hit your benchmark in 2012? If not, what are you going to change in 2013?

While people generally talk a good game about benchmarking, most of my clients were surprised when I pulled the actual number out of their plan to see if they’d hit the mark during a year. By sticking with actual data and avoiding the “Yeah, it feels like I had a good year” you’ll be able to make the necessary course corrections to save the right amount of money in the upcoming year.

I’ll be addressing each of these areas in more detail during the course of the quarter, but do yourself a favor and schedule these tasks now. These are five activities that you don’t want to miss!

What other events are on your 4th quarter financial calendar?

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How to Split an IRA or 401(k) in a Divorce

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Divorce is ugly.  Except under the most limited circumstances, no one wins in the divorce game.  Then, you add the complexity of money into the equation and it gets downright hideous.  In that emotional time, it’s easy to understand why so many people divide IRAs, 401(k)s, and other retirement accounts sub-optimally.

You can’t just “take the money out and give it to my spouse”  That would be a big mistake.  Let me count the ways:

Let’s assume you own a $250,000 401(k) balance.  The judge rules that you’re required to split that 50/50 with your spouse, so you decide it would be easiest to make a phone call and take the money out.  Ouch.  If you do that, you’ll be hit with a 10 percent early withdrawal penalty (yes you, not your spouse, and only if you’re under 59 1/2) and then the amount you removed is added to your taxable income for the year.  Now, for many reading this blog, you’ve just lost 35-45%.

So how do you give $125,000 to someone?  Oh that’s easy – you gift that to them.  But in your haste, you didn’t do this correctly either. To gift it, you either need to reduce your lifetime exemption by filing a form 706 with your income taxes next April, or pay a gift tax of 50%.

Long story short: “taking it out” could be a massive financial mistake.

Instead, consider asking for a QDRO, or Qualified Domestic Relations Order (pronounced quad-row).  A QDRO put together by a competent attorney and signed off on by the judge makes this transfer a ton easier.

First, it directs your retirement plan company to establish another qualified plan in the name of your spouse.  Then, it directs a tax-free transfer to that newly established account.  No taxes, no penalties.  Easy as pie.

Once you’ve begun working on that, you’ll want to make sure the QDRO says that your soon-to-be ex-spouse can’t make any loans or transfers from the account until it’s been split; or you could just pick a date to make the transfer effective on (retroactive) and put a fixed dollar amount based on that date’s plan balance.  This would protect the new beneficiary from being bamboozled by his or her ex.

Finally, don’t forget about pension plans.  A lot of those can be “QDROed” too.  For example, let’s assume your spouse earned a pension at his job of $4,000 during the 30 years he worked.  He was married to you for 20 of those 30 years – making you the owner of 2/3 of his $4,000 per month.  By putting the QDRO in place before he retires, she can have her own pension plan – quite the deal!

At the end of the day, divorce planning with money is just as important as married couple planning.  If you don’t do it, you’ll regret it.  Take the time to review everything – hire a professional and don’t try to cut corners.  The costs are too severe.


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Oops…I Forgot to File My Taxes

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Whew!  You’ve filed your taxes…or did you?

Most of America now have the 2011 tax year “in the books” so-to-speak…but what happens if you…ahem…’forgot’ to file?  What should you do?

Extensions

First of all, let me exclude all those who, like me,  filed an extension.  If you filed an extension, your taxes are due no later than October 15, 2012, but the tax bill (any money still owed to the government) was due yesterday.  An extension to file is just that: an extension to file, not to pay.  If you filed an extension and didn’t pay, but think you may owe money, it’s best to pay as soon as possible to avoid more penalties.

Get Moving!

What happens if you just didn’t file?  You didn’t file an extension, you didn’t file anything. What now?  Most professionals would recommend that you get filing done as soon as possible.  If nothing else, print out form 4868 and file for an extension.

Five Steps to File Your Taxes Quickly

Step 1:  Determine the reason you didn’t file.  Was it because you didn’t receive a form you needed?  Or, was it due to laziness?  Perhaps apprenshension?  Do you owe money and don’t know what to do?  Acknowledge why it happened and move on.  If you were lazy, get out your calendar and schedule a couple hours to work on them.  If you’re scared of the taxes you owe, work on filing the appropriate tax forms first, then worry about the bill.

Step 2:  Call your accountant, CPA, or other tax preparer and get in their schedule for when they return from vacation.  It’s likely they’re headed out of town to enjoy a much-needed vacation, but they have plenty of time available in May.  Call today and get your appointment scheduled.  What about doing them yourself?  Listen: You’ve had 4 months to get them done on your own.  Acknowledge that you won’t do it if you have 400 months and hire someone.

Step 3:  Set aside a 30-90 minutes to gather your tax-related documents and throw them in an envelope for your tax meeting.  Don’t think about it – just put stuff in the envelope.  Accountants will have more time to spend with you after they get back in May.  Don’t know if you should include that form?  Yes, you should.

Step 4:  Make sure you attend your tax appointment.  I know this sounds obvious, but hey, it’s been since January and you haven’t got them done.  You’re not the best time manager.  Commit to attending this meeting.

Step 5:  Begin 2012’s tax planning now.  Go to Office Max or Staples and buy a box of manila envelopes.  Every week, go through your paperwork and put the necessary receipts in this month’s envelope.  By the time taxes roll around next winter, you’ll be 90% done.

Remember, it’s a criminal offense to not file your taxes.  Not being able to pay them is civil.  Don’t be a criminal.

Four Tips for Tax Season

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This is a guest post from Eric at Narrow Bridge Finance as part of the Yakezie Blog Swap. This week, we are discussing the topic “Best Tips for Your Taxes.” You can see my post on the same topic at Eric’s site.

 

 

People around the United States are in a last minute flurry to find their W2s, 1099s, 1098s, and find the easiest and cheapest way to load all of that onto a 1040. If that sounded like a foreign language to you, don’t worry. Here are some of my favorite tips for navigating tax season.

Tip #1 – File Early

I guess if you are reading this, you probably already missed this one. But there is no time like the present to start planning to avoid next year’s procrastination.

I sent my taxes to my accountant around the end of February. Avoiding the stress of last minute filing can do wonders for your health and sanity. Planning ahead and filing early just makes life easier on you.

Tip #2 – Understand Your Forms

Decoding that foreign language is important. Knowing which tax forms to look for is a big first step. Here are the most common items to look out for:

· W2 – Earnings report from your employer

· 1099 – Miscellaneous income forms. These include bank interest, investment income, and freelance income.

· 1098 – Deduction forms. If you pay mortgage interest or higher education expenses, expect 1098s that you can use to lower your tax liability.

· 1040 – This is the form that you submit to the IRS that summarizes your annual taxes paid, taxes owed, and any refund or additional payment.

Tip #3 – Stay Organized

My taxes this year were two inches thick. Getting everything from my banks, investments, employer, and other income sources is a chore on its own. To stay organized, I made a checklist outlining everything I was expecting and marked forms off as they arrived.

When the form arrived, via mail or online, I filed hard copies in manila folders by type. My personal forms went into one folder and each of my side income sources had its own folder.

Make sure to keep each year separate but filed away in case you need it. It is important to understand how long to keep bank statements and other financial records.

Tip #4 – Understand How Your Taxes Work

You pay taxes every time you get a paycheck. You earn money all the time, and you might not remember it around tax time. To make sure you file correctly and avoid penalties and audits, you should understand how your taxes work.

Take time to learn about itemized deductions versus the standard deduction. Take time to learn about tax brackets. Whether you use tax software to file or have an accountant take care of it for you, you should understand the complexities of your taxes in case you are contacted by the IRS and to make sure you are not overpaying.

Get To It!

Now that you know my best tips, get those taxes done. The filing deadline is swiftly approaching, and you don’t want to get in trouble for being late.

(Photo credit: Tax Sign – 401k, Flickr; Chance Card – OhioProgressive, Flickr)

The Worst of the Free Financial Advisor #2: Top 5 Reasons We Like the Roth IRA – Are Tax Refunds Bad? – Hiring an Advisor

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Holy big topics, Batman! We’ve got a great show for you today.

First – Joe & OG talk Hiring an Advisor. Should you hire one? If so, what should you look for? What questions should you ask?

Then – Len, Carrie, Dom  and of course Dr. Dean discuss tax refunds. Should you avoid one?

Finally – Our top 5 reasons we love the Roth IRA.

Subscribe to the show (or just listen) on iTunes here.

Download the show directly by right-clicking here.

 

Hiring an Advisor

FINRA.org BrokerCheck

CFP – Questions to Ask When Hiring a Financial Planner

5 Jaw-Dropping Financial Advisor Interview Questions

Ric Edelman: The Truth About Money (Amazon page)

Our Roundtable Members Sites:

Carrie Smith = CarefulCents.com

Dominique Brown = YourFinancesSimplified

Dr. Dean = The Millionaire Nurse Blog

Len Penzo = Len Penzo (dot) Com

The Squirrelers.com article we’re discussing: Tax Refunds Are Not Taboo