It is never too early or too late to get your state and federal income taxes under control.
At this time of the year, everyone has a cocked eyebrow at the calendar, counting the last of the last shopping days until Christmas. (By the way, if you are reading this on November 30th, that number is 24.)
Tax professionals, however, are already thinking 139 days. You should too. There are only 139 days until April 17, 2012 — the date when state and federal tax returns are due. (Returns are traditionally due on April 15th of the calendar year; but in 2012, the 15th falls on a Sunday and the 16th is a holiday in Washington, D.C.)
Before spending your very last dollar on that Christmas gift for your great aunt Hattie, considering your tax obligations for 2012 is crucial. The easiest way to do that is to review your tax returns for 2010.
Did you have a refund on your 2010 return and, if so, how much? If your refund is larger than $500 (that’s a generalized rule of thumb), congratulations are not in order. You just gave the government free use of your money for one year, which it merely returned to you interest free. Regardless of your love for your country, you are under no obligation to make it an interest free loan. In other words, you are over withholding on your wages. Consider filing a new Form W 4 (Employee’s Withholding Allowance Certificate) with your human resources office to reduce your withholdings. If you are married, consider your spouse’s withholdings too.
Did you have (shudder) a balance due? The interest and penalties when you owe the IRS money are stiff. Again, you should consider filing a new Form W 4 with your employer. Do so now for it may take several weeks for the increased withholding to take effect. If you have unpaid taxes, consider requesting a payment plan with the IRS. You can apply online at the IRS website (www.irs.gov) or by mail by completing Form 9465 (Installment Agreement Request), which is also available online. The Connecticut Department of Revenue Services (DRS) has a similar application, Form TPG 171 (Short Term Payment Plan Request). The DRS application is far more complicated and is far more financially intrusive, and is not granted automatically. According to the informational instructions attached to the form, approval of the plan is based on current DRS policies.
When reviewing your last year’s return, keep in mind these tips:
• The value of each personal and dependent exemption has increased to $3,800 — up $100.
• The new standard deduction is $11,900 for married couples filing a joint return; $5,950 for singles and married individuals filing separately; and $8,700 for heads of household.
• The amount of many deductions and credits has increased to keep pace with inflation. Visit the IRS online newsroom (at www.irs.gov/newsroom/index.html) for more details.
• The Making Work Pay credit, which was worth up to $400 for individuals and $800 for married taxpayers filing joint returns, has expired. Review line 63 of your 2010 federal return. If your refund was partly due to this refundable credit, then you may have a balance due on your 2011 federal return.
• The Connecticut property tax credit for real estate and autos has been reduced from $500 to $300.
• Most importantly, traditional IRAs (Individual Retirement Arrangements) can reduce your AGI (that is, your adjusted gross income or the amount on which you pay taxes). To contribute to a traditional IRA, you must be under age 70 and a half at the end of 2011 and have some form of taxable compensation (such as wages, salary, or even alimony). Banks and other financial institutions often offer IRA accounts. Visit one for more details. It is a great way to save for retirement as your contributions may be fully or partly deductible and your earnings grow tax free. Also, don’t forget to ask your banker about Roth IRAs. Roth IRAs are a great savings tool.