7 Last-Minute Tax Tips That Could Save You Money
The deadline for filing taxes (April 15th) is fast approaching. With good planning, tax season can be relatively stress-free. But many people, pressed by the demands of busy, modern life, put off this onerous task as long as possible. Here are some tips to save you money even if you are filing at the absolute last minute.
1. File on time even if you can’t pay
This one comes straight from the IRS themselves. If you owe money, it will cost you less in the long run in interest and penalties if you file on time and pay what you can rather than waiting to file when you have the funds.
The IRS also has an Online Payment Agreement Application where you can apply immediately for a payment plan. You qualify if you owe $50,000 or less in combined tax, penalties and interest, and have filed all required returns. You may also qualify for a short term agreement if your balance is under $100,000. Unfortunately, payment agreements aren’t free: the IRS charges $105 for setting up the agreement or $52 if the payments are deducted directly from the taxpayer’s bank account ($43 for qualified lower-income taxpayers).
It’s also important to keep in contact with them if you owe taxes and cannot pay in the immediate future. They have an entire FAQ devoted to struggling taxpayers, and will generally work with you if you are facing financial hardship. The first step towards working out any payment arrangements with them, though, is to file your returns on time. Otherwise, you will owe them a late filing penalty.
2. If you are owed a refund, there is no late filing penalty.
If you are truly squeezed for time due to life circumstances and believe you will be owed a refund, you’re in luck! There is no penalty for filing after April 15th if (and only if) you do not owe money.
So you can breathe now, but you might want to get that return in asap anyway for a couple of reasons. The first one is obvious – if you’re owed a refund, you’ll get it faster if you file sooner. If you still need more time, you can file an extension using your tax program or IRS form 4868. You can file an extension even if you owe money, but you will accumulate penalties and interest – so ultimately an extension is a costly way to go for the tax liable.
3. Double check for deductions.
In the rush to pull all of your records together at the last minute, you may skip over much-needed deductions. Try not to let that happen! Go through your credit card and bank statements as closely as you can to make sure that you haven’t missed anything that you can deduct. Maybe you got married or divorced, had a baby, or adopted a child in 2014? Did you incur expenses looking for a job or move for employment? Maybe you paid for dependent care, started a business or went to school? These sorts of major life changes might qualify for a tax deduction, so be sure not to take them into account.
One category people tend to underreport is charitable contributions. Make sure you are counting all of the contributions you made all year long and not just the major ones. Many financial institutions now offer an end of year report with categorized spending and charitable contributions highlighted. This is a great way to save time when you are pressed. If you’ve been saving money for a child or grandchild’s future education in a 529 savings plan, check with your state to see if your contribution is eligible for a state tax deduction.
4. Contribute to your IRA
If you have the money to spare, one way to reduce your 2014 taxable income (and thereby reduce your tax burden) is to contribute to a traditional Individual Retirement Account (IRA) by April 15. If you’re eligible, you can fund it with up to $5,500 ($6,500 if you’re over 50).
Your traditional IRA contribution may be tax deductible. Eligibility for that write-off depends on your 2014 marital status and whether you or your spouse had a retirement plan available at work last year. If neither you nor your spouse had access to an employer-sponsored retirement plan, you’ll be able to receive full tax deductions. Remember to note on your tax forms that the IRA contribution is for the 2014 tax year. If you don’t specify the year, the contribution might go toward your 2015 IRA. This would have the net effect of decreasing your taxes a year from now, but won’t be much help this time around.
Roth IRA owners take note: if you convert your traditional IRA to a Roth IRA, you are liable for tax on the entire balance after conversion. However, the IRS does allow you to “recharacterize” it into a traditional IRA anytime before the tax deadline in order to avoid paying tax on the balance. This would be one situation where an extension could benefit you; since the conversion might take some time, an extension would eliminate this obligation. Additionally, if you are self-employed and have a SEP IRA you can also make your contribution (and even start your account) when you file. An extension could also benefit you as similarly outlined above.
To find out if you’re eligible for an IRA contribution deduction and for more details on the deductibility rules, visit the IRS’s web page on IRA Contributions.
5. You might qualify for a home office tax deduction
The eligibility rules for claiming a home office deduction have been loosened to allow more tax relief for those who qualify. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there. For example, doctors who consult at various hospitals or plumbers who make house calls can now qualify. You must use the space exclusively for business. Many taxpayers have avoided this deduction because it has been a notorious red flag for audits in the past. If you legitimately qualify for the deduction though, you have nothing to fear from an audit.
You are entitled to write off expenses that are associated with the portion of your home where you exclusively conduct business (such as rent, utilities, insurance and upkeep/maintenance). The percentage of these costs that is deductible is based on the square footage of the office to the total area of the house. Someone who pays $1,000/month for a 2-bedroom apartment and uses one bedroom exclusively as a home office can easily save $1,000 in taxes a year, according to TurboTax. For a full, detailed explanation of how this works, visit the IRS’s page on Home Office Deduction.
6. Claim the Saver’s Tax Credit
The Saver’s Tax Credit flies under most people’s radar but it may work to your benefit, especially if you are on the lower end of the income scale. The Saver’s Credit is a tax credit that’s applied to the first $2000 ($4000 for married couples) of contributions to their 401(k), 403(b) or IRA plans. The credit is 10%, 20%, or 50% of your contribution up to $2000 ($1000 for individuals).
To qualify for this credit this year, your income has to have been less than $30,500 if you were single, $45,000 if you file as the head of household, or $61,000 if you were married filing jointly. To get the maximum 50 percent credit, the respective ceilings are $18,000, $27,000 and $36,000. But don’t dismiss this just yet if you don’t think you qualify; the figure used is your AGI (Adjusted Gross Income) from your 1040 tax return. If your AGI is just above the maximum required to claim the credit, you can put the balance in a traditional IRA or other form of tax-deferred savings to get under the AGI limit (assuming the funds are at your disposal).
Like the Child and Dependent Tax Credit, this is not a “refundable” credit. This means that any credit you receive won’t get you money back; it will just offset any tax owed.
Head spinning yet? For more questions, visit the IRS – the source of all pertinent tax information – and their page on the Saver’s Credit.
7. Provide SSN and/or taxpayer IDs for dependents
Make sure to add in the Social Security numbers (or taxpayer ID numbers if they have no SSNs) for your children and other dependents on your return. Just adding this number entitles you to a personal exemption of $3,950 for each dependent and the $1,000 child tax credit for each child under age 17. If you’re divorced, only one of you can claim your children as dependents each calendar year. The IRS checks closely to make sure both spouses aren’t claiming this deduction. If you forget to include a Social Security number for a child, or if you and your ex-spouse both claim the same child, it’s likely that the processing of your return (and any refund) will be delayed. More info on the Child and Dependent Care Credit is available at the IRS’s comprehensive Tax Topics website.
Have last-minute tax questions?
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This article is meant to provide general advice and does not constitute suggestions for your personal situation. Please check with your accountant or professional tax preparer for advice regarding your unique situation.