For many of us income taxes are an annual chore to delegate to a tax preparer. You hand in all of your forms, later you get back a return, and soon your refund is deposited into your account. It’s almost painless, but do you know if your return is correct?
While taxes may be something you outsource, ultimately you are on the hook for submitting an accurate return. It’s like shoveling the snow off your sidewalk. You may pay a local kid to do it for you, but if it doesn’t get done right you’re still going to receive the citation.
Most professional tax preparers are working with hundreds of returns a season. They may not have time to scrutinize every line of your tax forms. About one quarter of prepared returns we see in our office have something that has been missed or misstated.
So what can we do except pray for the best? It’s important that your tax preparer is qualified and keeps up on tax law as a CPA, Enrolled Agent, tax attorney, or Registered Tax Preparer. Also have your tax professional walk through the prepared return with you. One client forgot to submit numerous smaller charitable donations to our office. With a client review we uncovered this missed deduction that saved them hundreds.
Last minute tax moves
Another advantage of discussing your return is identifying strategies to reduce your tax this year and in the future. You should see your relationship with your tax pro as strategic in that the most valuable advice they can give is when you have some time to implement it.
One common move to make by April 15th is contributing to a Roth IRA or Traditional IRA if you’re eligible. The big advantage of the Roth is that the investments inside can grow without ever being taxed. For the Roth, you need to have earned income for the last year at least equal to the amount you contribute. With an adjusted gross income of $173,000 or less for a married couple ($110,000 if filing single), you can make a $5,000 contribution for each of you for 2012 ($6,000 if you’re 50 or over). Even if your income exceeds this level, you may qualify for a “back door Roth” with a non-deductible IRA contribution and later Roth conversion. Also, self-employed taxpayers may have the option to reduce their taxes through a last minute 401(k) or SEP-IRA contribution.
Once you have calculated how much tax you owe, you may find out you have an estimated tax penalty listed on the bottom of your 1040. It sounds like a major transgression of IRS rules. Instead it’s just the IRS charging interest. The federal government counts on our paying taxes with wage withholding and estimated tax payments throughout the year. If the IRS determines you have underpaid your tax, it levies interest. The good news is that “borrowing” money from the IRS costs you 3 percent annual interest at today’s low rates. What the IRS terms a penalty may be the cheapest money you can access.
You can avoid penalties next year by making sure you’re in the IRS designated safe harbor. Just meet one of the following three requirements. Owe less than $1,000 at tax time, pay at least 90 percent of your tax owed for this year, or pay 100 percent (110 percent for high income earners) of the previous year’s tax owed. Conversely if you have a big refund this year, don’t celebrate your interest free loan to the IRS. Change your withholding next year so you (rather than the government) can make money on your savings.