The Finance Gourmet

Personal Financial Advice from a former Certified Financial Planner

Taxes Due Today

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As you are probably aware, your taxes are due today. Tax Day came a bit late thanks to a Washington D.C. holiday, and the 15th being on a Sunday.

Don’t forget if you are little bit behind that you can get a free, no-questions asked, automatic extension to file your taxes just by filling out Form 4868. All of the major tax preparation software packages offer a way to file an extension through them electronically, as well.

Form 4868 works just like your 1040 Form. It is due on Tax Day (today) by midnight, so mail it (and get it postmarked) or file it electronically.

Note that the 4868 extension does NOT give you more time to pay. Your money is still due on April 17.

get extension on taxes 4868 irs

Confused?

You aren’t alone. The reality works a little like this:

If you are doing your taxes now, and it looks like you are going to owe the IRS money, then send money with your 1040 Form. How much should you send? Whatever your best guess is, but it is much better to overpay than underpay. If you overpay, you’ll get the money back as a refund. If you underpay, you will owe the difference plus interest and penalties. Remember the IRS cannot except a single check for an amount greater than $100,000,000. If you need to send more than $100 million, you’ll need to send multiple checks. (I know, no one reading this owes that much, but a little humor can help when it comes to doing taxes.)

Which brings us to the next point. If it looks like you are going to owe money on your taxes (or even if it looks like you MIGHT owe money on your taxes), then finish them as quickly as possible. If you file an extension, then your taxes are due on October 15. But, even though they aren’t due until then, if you may owe, finish them right away. If you were wrong on your calculations and you owe more than you think you are going to, your penalties and interest are time based. In other words, you owe more interest for four months, than for three months.

What is the point of filing an extension if you still have to pay?

The extension prevents you from having to pay the late filing fee. The penalty for filing taxes late is generally 5% of the amount due, for EVERY MONTH it is due, with a minimum of $210 if you are more than 60 days late.

So, file the extension.

If you don’t owe money, or are sure you are getting a refund, then this is even smoother. Just file the extension, don’t send any money, and when you finally get your taxes finished, they’ll send you the refund you are due. Unlike you, however, the IRS will not pay interest, so if you are getting a refund, it is still in your best interest to file as quickly as possible.

How Long To Keep Tax Documents

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Wondering how long you should keep tax documents in case of an audit? In most cases, you only need to keep things like receipts, non-profit letters, and other tax deduction proof for three years. There are some exceptions, of course.

When To Destroy Tax Records

Most of the exceptions to keeping your tax records for three years involve improper or illegal filings. For example, you have to keep records for income you do not report (you’re supposed to report all income), you have to keep records indefinitely if you don’t file a return at all, or if you file a fraudulent return. What is that all about, really?

The idea is that while you can destroy tax documents after three years if you file normally, you don’t get to use the three year rule as cover for improper filing. So, assuming that isn’t you, let’s move on.

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The other exception is that you must keep records for deducting worthless securities, or for a bad debt for seven years instead of the usual three, and employment records should be kept for four years.

The final exception is if you paid your taxes late, then you have to keep your documents for three years from when you filed, or two years from when you made final payment, whichever is later. This mostly applies to taxpayers who end up on payment plans for large tax bills. You basically have to keep your records longer if it takes you more than 12 months after filing to finish paying your taxes.

shred taxes destroy records

Tax Audits and Records

Now, just because you destroy your tax records doesn’t mean that the IRS can’t, or won’t, come asking about taxes older than three years, but here is the big difference.

During the three years, you are required to have supporting documents, or proof, of various tax situations, mainly for deductions you take. If, for whatever reason, you do not have those records during that first three years, then the IRS is allowed by law, to assume that the deduction is invalid because you do not have the documentation to prove it.

After those three years, however, the rules change. If you get audited in year four, for example, and you do not have a receipt or donation letter from a non-profit, the IRS must actually assume that you did have the proof and that your documentation was valid. But, there are two catches. If you (or your accountant — ALERT, ALERT!) DO STILL HAVE those documents, then you must provide them to the IRS, and the IRS can use those documents to validate — or invalidate — your deductions. So, it is to your advantage to not have them after year three.

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The other catch is that just because your proof is deemed to be valid, doesn’t necessarily make the deduction valid. For example, if you claimed your wife’s Valentine’s Day gift as a tax deduction four years ago and get audited, the IRS will assume that you did have a valid receipt for the gift. However, that doesn’t make the deduction valid, because receipt or no, you cannot deduct a gift to your spouse from your taxes.

Basically, the short, non-legal, way to understand your tax record storage requirements is that if you do not have your supporting documentation during the first three years, the IRS gets to assume you are lying. After three years, they have to assume you are telling the truth.

When To Shred Tax Returns

You don’t necessarily need to shred your returns after three years. Remember, the IRS already has those, so you gain nothing by destroying them. However, if they are starting to take up too much space in your filing cabinet, you can shred them anytime later than three years after your filed. Assuming you did not file late, or get an extension, then that would be after April 15th + four years past the date on the returns. Do not accidentally destroy your records early by forgetting that you must keep them for three years after the are FILED, not three years after the date on the top of the forms.

In other words, even though you only have to keep tax records three years, remember you file your taxes in the year following when you “earned” them. So, you file your 2017 taxes in 2018, therefore, you need to keep your records for the 2017 taxes until three years after 2018, not three years after 2017.

As always, this article is not legal or tax advice, and is for informational purposes only. Consult your tax professional for specific advice regarding your individual tax situation.



How To Deduct Property Taxes

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When it’s tax season, everyone’s thoughts turn to tax deductions. Financial advisors and accountants alike are flooded with calls from frantic clients looking to save money on taxes by finding new deductions or other tax tricks. The most common question by far is, “Is this Deductible?” Remember, this tax season is tricky. The new tax law passed at the end of 2017, applies to the taxes you will file in 2018, not the ones you are filing right now.

Unfortunately, many tax deductions are either too small to have very much impact on how much taxes you pay, or are too narrowly tailored to actually be a tax deduction that most people can take. Add into the mix the fact that many of the things that people “just know” are tax deductible, actually are not tax deductions until they are higher than a certain “floor”, and most searches for new tax deductible items end in disappointment.

The good news is that some big items are deductible for almost everyone. These are the best tax deductions out there and they are good for high-income taxpayers and lower-income taxpayers alike. These include deducting mortgage interest, many educational expenses, and tax deductions for children, and the related child tax credit. One of the other biggies that can bring tax burden relief is deductible property taxes.

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Deducting Property Taxes on Income Tax Forms

Many people are surprised to find out how much property taxes they pay on real estate, particularly on their primary residence. This is because a large percentage of home owners pay their property taxes via their mortgage loan.

That is, that the mortgage company collects an extra amount of money with each payment which it keeps in an escrow account. Over the year, that extra money adds up to enough cash to cover the amount of property taxes due. If it the escrow account comes up short, the mortgage company fronts the money and then increases the part of the monthly loan payment for escrow.

Even though the mortgage company handles paying the property taxes for you, it does so with your money, which means you are the still the one who paid the property taxes, and therefore, you are the one who gets the property tax deduction. Check the 1099-INT tax form the mortgage company is required to send you each year. Both the amount of mortgage interest paid for the year and the amount of property taxes paid annually should be listed. Enter the amount of interest you can deduct on Line 6 of Schedule A Form 1040 from the IRS.

 

Deducting property taxes graphic
Use Schedule A to deduct property taxes paid on your home.

 

Don’t forget about other property taxes too! The most common type of property taxes that are deductible, other than real estate property taxes, are the property taxes on cars. Automobile property taxes are deductible if they are computed based upon a percentage of the car’s value. In other words, the taxes that are levied by the state, county, or city that are a variable amount depending on how much the car is worth are deductible. Flat taxes and fees, such as a $25 annual fee,  that are the same amount no matter what the car is worth are not deductible.

Keep an eye on the mail for all tax forms, including 1099 Forms for real estate and brokerage and banking accounts. There are important tax numbers on each of these.

Can I Use My 529 Plan to Pay For K-12 Expenses

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A 529 plan is a tax-advantaged account that allows saving and investing for college expenses. Before last year’s new tax law was passed, one got tax-deferred growth in the account, and tax-free withdrawals for qualified college expenses. Even better, there were very few 529 contribution limits on most plans. Now, the recent tax law has opened up another possible way to use 529 funds tax-free.

529 Plan Withdrawals

Until 2018, you could not use your 529 plan to pay for anything other than higher education expenses, in other words, college. Withdrawals from a 529 plan for any other purpose were not only taxable, but subject to a 10 percent tax penalty. But, the new tax law passed at the end of 2017 changes the rules.

The new tax law allows parents to use up to $10,000 per child for elementary, or secondary education. In other words, you can use up to $10,000 from a 529 plan to pay for private school during the K-12 years. This is a big boon for those who send their kids to private schools.

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Using 529 Money To Pay for Private School

There is a catch.

Of course there is.

You see, when Congress set up the 529 program, they didn’t the Federal government to be the ones who actually implemented it. That would require hiring people, and money, and that isn’t how the Feds usually roll. Whenever possible, Congress likes to dump the responsibility for its brilliant ideas on the states, and that is just what it did here.

All 50 states offer a 529 plan. Those plans are each governed by Federal law in that they must do certain things, and have certain rules and requirements for the money in those 529 programs to qualify for the preferential tax treatment 529 plans receive. Specifically, the funds inside of a 529 plan grow tax-deferred, and if withdrawals from a 529 are used for qualified education, they are tax-free.

Those rules have now been changed so that tax-free withdrawals for K-12 schools, such as private schools, now count as qualifying education.

Remember, however, that the 50 states each set up their own 529 plans, and those 529 plans have rules implemented by the states. While the states cannot change the federal taxation of money in a 529 plan, that isn’t the only consideration. For example, many states offer a state tax deduction for contributions made to the state’s 529 plan. Usually, the states piggy back on the federal rules saying that if you make an unqualified withdrawal, then you have to pay some sort of state tax, and possibly a penalty on that withdrawal.

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The murky part is the exact language of how a 529 plan is setup. For example, if a state copied the former federal rules into the state rules (law), then those rules need manually changed by the state legislature. If the state did not copy the rules, but rather said something like, “qualified deduction under federal tax law,” then those rules were automatically changed along with the federal tax law change.

In the state of Colorado, it seems there is something of a gray area, as this pop-up window shows when you log into the Colorado 529 plan website. The New York 529 plan website  has a similar alert.

529 plan tax law changes states

So, before you run out an pay second semester tuition at your child’s private school from the 529 plan you have saving for college, be sure and research your state law and state 529 plan rules to be sure you aren’t setting yourself up for a state tax hit, or state tax penalty.

States With 529 Plan Issues For K-12 Tuition

This is not an exhaustive list and represents just a quick look. Be sure to check your own state’s 529 plan rules and consult with your financial advisor for specific advice on your situation. Keep in mind that even if the state doesn’t automatically comply with the new 529 plan federal tax law, that doesn’t mean they do not intend to. In some states it is just a matter of having the time to update a rule or pass a law.

These state have either officially said NO to K-12 education spending from their 529 plans, or have said that there is a question or other ambiguity of if it will work. Again, this list is not complete, and other states may have issues now, or later. Also, these states may change their rules at a later date to allow for K-12 tuition payments. Check your own plan’s rules. Currently, these states have official answers ranging from “We don’t know yet,” to “No.”

  • Colorado
  • Connecticut
  • Illinois
  • Iowa
  • Nebraska
  • New York
  • Ohio
  • Vermont

These states have affirmed that paying tuition from the state’s 529 plan is OK. This list is also not complete. Check your own plans’ rules and procedures.

  • Delaware
  • Missouri
  • Utah
  • Texas

 

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