Home > Magazine > Moneywise > Tips for Filing Your Tax Return

 

Tips for Filing Your Tax Return

Email
April 2007
Tips for Filing Your Tax Return

Tax Year 2006

Tips for Filing Your Tax Return

As we get into the busy tax season and approach the filing due date of April 17th, 2007 for individual returns, here are some tips for filing for the tax year 2006.

Automatic extension

For any reason, if you think you will not be able to file the tax return by the April 17th deadline, please ensure that you (or your accountant) file Form 4868 for extension of time. There is no need to provide any reason or even sign the form. The form is available from the website of www.irs.gov. Upon filing this form, you will get an automatic extension of six months. If this form is not filed and also the tax return is not filed by the due date, then a ‘late filing of tax return' penalty will be applicable.

Avoiding Interest and Penalty

Even though you file for an extension of time for filing your tax return, it does not mean that the liability to pay taxes is also extended. You must pay the taxes due by the original tax return filing deadline, otherwise there will be another penalty and interest on late payment of taxes. There are two different penalties and interests. One is for ‘late filing of tax return (including extension)' and another is for ‘late payment of taxes.' There is no extension of time available for paying taxes. So, if you think you will owe taxes, try to estimate (with the help of your accountant) and pay at least that much to avoid or reduce penalty and interest. If estimated payment turns out to be higher than actual liability than there will be a refund due to you.

Tax installment agreement

If for any reason, you are not able pay all the taxes due with the tax return, it is better to contact the IRS and request for paying tax in installments, normally every month. If this is not done, and the total tax is not paid with the tax return, then you are in default and the IRS, apart from other actions, can file a tax lien on your credit report. A tax lien on a credit report is the most unfavorable credit history, as all lenders take a serious note of tax default while considering any loan application. The IRS will charge some user fees for an installment arrangement. Even with this agreement, you will be required to pay ‘late payment of taxes' interest and penalty.

Rental income

If you turn your primary residence into a rental property during the year, all the expenses related to property, such as mortgage interest, utilities, and so on, are deductible only from the date when the property was converted as rental property against rental income. However, repair expense carried out after turning the property into rental will be fully deductible. You need to be careful whether the expense is revenue (regular repair) or capital (one which increases the value of home, with benefits to be for a period of more than one year). Capital expenses are not deductible against rental income but will be added to the cost basis of home, and depreciation can be claimed.

Rental losses are subject to various limits under the passive activity and at-risk rules. It is advisable that you take the help of a qualified tax expert. Rental losses can be carried forward for set-off to subsequent years.

Foreign Bank accounts

If you are a citizen or green card holder of USA and you have ‘financial interests' including foreign bank accounts, securities, etc. out of USA, and the ‘aggregate' value of all these financial interests exceeds $10,000 ‘at any time during the calendar year,' you need to file Form TD F 90-22.1, the Report of Foreign Bank and Financial Accounts, for each such year.

Often we (South Asians in particular) have quite a substantial amount in banks or securities in our home countries, the total value of which may usually exceed $10,000. Legally everyone needs to report all such financial interests to the IRS every year. The form must be filed by June 30 each year to US Department of Treasury, PO Box: 32621, Detroit, MI 48232. As usual, there will be a penalty and other consequences for failing to comply.

Direct Deposit of Refund

Most people overlook providing banking information when filing a tax return that has a refund. If there is a refund due and bank information of routing and account number is provided in the tax return, the IRS will refund the amount directly to your bank account instead of mailing a check out to you. Refund will be deposited to your bank account, avoiding mail delay and the inconvenience of you going to the bank to deposit the refund check.

Capital Gain/Loss

If a capital asset is held for more than one year before it is sold, the gain or loss on sale of the asset will be long term capital gain or loss, and if held for less than one year, then short-term capital gain/loss. Net capital gain (long term capital gain less short term capital loss) is taxed generally at a lower rate of 15 per cent, with certain exceptions. Net capital loss can be set-off against other income up to $3,000 (if filing jointly, otherwise $1,500). If it is more than $3,000, the remaining capital loss can be carried forward to subsequent years for set-off. However, at present the limit is $3,000 each year.

Donations

Perhaps because of wide spread misuse of donations in kind of unusable items, new rules relating to donations in kind have come into effect from August 17th, 2006. No deductions will be allowed for ‘clothing and household items' unless they are in ‘good' condition or better. That is, if such items are not in a good or usable condition, then there will be no donation deduction allowed. Also, all cash contributions are to be supported by a dated bank record or a receipt. So be careful to obtain donation receipts and keep a record, otherwise you may lose the credit.

Taxpayer Advocate Service

Taxpayer Advocate Service is a part of the IRS that helps you if your problem with the IRS is not resolved by normal or regular representation. While they cannot change the law or make a technical decision, they can help your case get a complete and impartial review. You can call 787-622-8940 or write to: IRS, Attn: Taxpayer Advocate Service, San Patricio Office Building Room 200, 7 Tabonuco St., Guaynabo, P.R. 00966, USA.

Record Retention

Once the tax return is prepared, you must retain records for a certain period. For different incomes, credits, deductions that you claim on the return, retention time varies. However, generally you need to keep records for at least three years from the date of filing the tax return unless fraud or under reporting is detected. Records for tax basis of a property purchased are to be kept until it is sold and gain or loss is reported on tax return.

Tax Return Preparation

While there are quite a few non-profit organizations that provide tax preparation services for free during tax season, there is another important source for help—none other than the IRS itself. On its website www.irs.gov there are number of tax software available to prepare federal tax returns for free. Some software have income level restrictions, but some are without any limitations. However, you may have to pay $10-$20 per state tax return.

If your return does not have any complicated tax situations, you can definitely try one of these software, for free for the federal tax return.

By MUKESH PAREKH, CPA.

[Mukesh Parekh is a CPA specializing in accounting, payroll, sales tax and small business financing services. He can be reached at mparekh@yahoo.com]


Enjoyed reading Khabar magazine? Subscribe to Khabar and get a full digital copy of this Indian-American community magazine.


  • Add to Twitter
  • Add to Facebook
  • Add to Technorati
  • Add to Slashdot
  • Add to Stumbleupon
  • Add to Furl
  • Add to Blinklist
  • Add to Delicious
  • Add to Newsvine
  • Add to Reddit
  • Add to Digg
  • Add to Fark
blog comments powered by Disqus

Back to articles

 

DIGITAL ISSUE

12-17-Cover-TrainJourneys.jpg
 

 

eKhabar

Sign up for our weekly newsletter
eKhabar

Click here    

DineshMehta-CPA-Banner-0813.jpg

PrimeTravels_Banner ad_1017.gif 

Raj&Patel-CPA-Web-Banner.jpg

Mytaxfiler_1117_New.png

Krishnan Co WebBanner.jpg

SERVITIX.gif

SDK small banner 7-16.jpg

IndiaTravelDiscount.jpg

PCPD- RED.gif

QA_135X140_GreatFaresToIndia_11_17.jpg