[By Lawrence Levy, CEO of Levy & Associates. Levy has over two decades of experience helping tax payers resolve their IRS and tax related issues]
As the clock ticked down to one of the most dreaded days of the year—Tax Day—nearly 28 percent of Americans had yet to file their taxes. In the midst of the pressure, you may be prone to make some mistakes out of haste. For your convenience, we’ve put together a list of some last minute tax tricks. From e-filing to direct deposit, you may be able to your maximize your refund next year.
E-File for Convenience and Speed
Since 2001 the percent of Americans filing their taxes online has nearly tripled. The rise in technological advancements and access to the internet has allowed more individuals to make use of the electronic filing option offered by the IRS. From only 31 percent to 81 percent, the raw numbers hovered around 28.8 million in 2012. Completing your tax return from home allows you to evade pricey tax programs and if you’re a bit tight on time, you have until 11:59 p.m. on April 15th to click submit.
Refunds through Direct Deposit
Compared to paper-filed tax returns which take around six to eight weeks to process, electronically filed returns using direct deposit are generally issued in three weeks or less. The benefits seem endless when it comes to e-filing. Chalk it up to the digital era!
Put a System in Place
We cannot overemphasize the importance of organization when it comes to the IRS. Do yourself a favor and keep all financial documents in one, safe place from the moment your receive them. Sometime around late January you should get your W-2 from your employer. If you’re paid as an independent contractor, instead you’ll receive a 1099. Juxtapose these financial statements against the official tax forms to ensure that all your I’s are dotted and T’s are crossed.
Consult a Professional
With over 70,000 pages in the tax code, it not surprising that most Americans turn to a tax specialist. A tax specialist has the education and tools in place to get you the maximum refund at minimal cost to you. “U.S. tax laws are extremely complex, so it’s impossible to make a universal statement about who is and isn’t qualified to pursue specific tax routes. Your tax attorneys at Levy and Associates are specialists in this complicated legal field, and we can review the specifics of your particular case to help you understand your options for resolving your tax problems,” says Lawrence Levy, of Levy and Associates.
Procrastinators Can File an Extension
If you’re in a bind and don’t think you’ll meet the April 15th deadline, you have the option to file an extension which extends a total of six months. This does not mean that you can postpone your tax due, but it will allow you extra time to collect all the tax forms and documents you need. Moreover, it may reduce the penalties charged. The typical penalty is 5 percent of whatever your balance is per month of deferment. If you file an extension and submit your information by the October date, this penalty will be waived. Here’s a brief overview of how to file an extension:
- E-file with Form 4868. We recommend this route because it’s the quickest and most efficient way.
- Fill out the aforementioned form and send it to the IRS via mail.
- Use the Electronic Federal Tax Payment System (EPTPS) to pay what you expect to owe. Based on IRS regulations, you’re required to pay at least 90 percent of what you owe to avoid additional fees.
If this still ambiguity or uncertainty regarding your tax responsibilities, consult an tax specialist.
Photo courtesy of JD Hancock
Use Different Types Of Credit
To maximize your credit score, diversify the type of credit you are holding at any given time. Some people mistakenly believe that all types of credit are treated the same under the calculations used to determine their credit score. The truth is that people that have several types of revolving and non-revolving credit reflected in their credit history tend to have higher credit scores than people than only have a single type of credit, even if both have a spotless payment history. This is because companies want to see if you can handle all types of credit responsibly and are more likely to extend credit to the people that can demonstrate this responsibility.
Only Charge What You Can Pay Off
Carrying a balance on your credit cards will cost you a lot of money in interest payments and lower your credit score. Part of the calculation of your credit score is the ratio of the amount of credit you have available versus the amount of credit you have used. The less credit used, the higher your credit score will be. Paying off the balance of your credit cards each month will increase your credit score and prevent you from having to pay interest on the purchases you have made.
Leave Dormant Credit Accounts Open
Another thing that can unexpectedly harm your credit score is closing dormant credit accounts that you are not using anymore. Closing these accounts removes these amounts from your available credit, reducing your ratio of credit used to credit available. Instead of closing these accounts, allow them to remain open but remove the cards from your wallet so you are not tempted to use them. They can be placed in a safe spot in your home so they can be easily access in the event of a financial emergency.
A 401(k) hardship withdrawal is a distribution from a 401(k) plan based on an immediate, costly financial need by the account holder, their spouse, or their dependent and you can only obtain the amount of money needed to satisfy that financial need. Qualifying expenses typically include certain types of medical expenses; burial or funeral expenses; costs related to the purchase of a principal residence; costs related to preventing foreclosure on a principal residence; and tuition or other related educational fees. Not all plans allow hardship withdrawals and they are not required by the federal government, so you will need to read the information for your plan to see if what types of withdrawals will be allowed.
While not as expensive as just withdrawing all of your funds from your 401(k) account, the amount that you obtain under a hardship withdrawal will be subject to a 10% withdrawal penalty, taken directly from the amount disbursed by the plan. You may also face a tax penalty when you file your income taxes for the year. After obtaining a hardship withdrawal, you cannot make any contributions into the plan for the following six months. All of these things must be taken into consideration when deciding whether to obtain a hardship withdrawal from your 401(k) plan.
Obtaining The Hardship Withdrawal
If you have decided that obtaining a hardship withdrawal is your best course of action, then you will need to provide documentation to the plan administrator detailing your need and demonstrating hardship. The specific documentation needed will vary from plan to plan and based on the type of need, but the account holder must generally demonstrate that they have an immediate and costly financial need that cannot be relieved with other resources. If a review of the information provided determines that you qualify for a hardship disbursement from your 401(k) plan, you will be notified by the plan administrator and the funds will be released to you by check or by a deposit into your bank account.
You’re seventeen years old. Driving around in your first car, not a care in the world. Then, BAM! You’re in a car accident. It’s the other guy’s fault. You and the insurance company settle on a structured settlement, or annuity, which are payments received on a scheduled basis.
As a kid, and then a college student, it’s a pretty good deal. A certain amount of money drops in your lap every so often, you’re not blowing the rest of the amount on the stuff that kids blow their money settlements on, and you’re not paying a whole lot of taxes on the amount. But now you’re out of college. Priorities run to starting a family, a business, buying a home. What can you do?
There are companies in business that buy annuities, or even portions of annuities. You do not have to sell the whole thing. These companies offer the insurance companies a percentage of the remaining balance of the structured settlement and then offer the original annuitant a large lump sum. The factors involved with deciding the worth of the annuity include inflation rates and the amount of expenses the transfer will incur, so it’s always a good idea to keep an eye on current market rates when looking to sell your annuity.
The process for selling an annuity involves getting quotes from financial institutions that buy annuities, filling out the legal paperwork involved, and appearing before a judge, who will then decide if selling the annuity is in the best interests of the annuitant. The financial institution will factor in any costs brought on through the filing into their offer to the annuitant.
There is no question that a guaranteed amount of money over time is a good thing. Especially if this money is tax free. But a structured settlement doesn’t allow for the freedom that a large sum of money can. Everyone needs to fix a car sometime. And when you’re ready to buy a home, the amount received from selling a structured settlement can be just what the doctor ordered.
Selling all or a portion of your structured settlement can be a good idea. There are many legitimate companies out there that buy annuities from insurance companies and then provide the original annuity holder with a lump sum. This can be a process that takes anywhere from 45-90 days and is for the security and safety of the annuity seller in most jurisdictions, but could end up worth it in the long run. A small monthly payment could do less good than a down payment on a house could or the money used to start a business that ends up being more lucrative then the previous payments received.