Last-Minute Tax Do's and Don'ts
April 12, 2007 — -- With just five days remaining until tax day, there's precious little time until your return is due. Although you have two extra days this year -- tax day is April 17 -- that deadline is fast approaching. Here, some 11th-hour tips.
What You Should Do
Do file -- even if it is an extension
Filing your taxes is not an option -- it's a must-do. At this point, if you cannot locate all your forms and you do not think you are going to make it by the April 17 deadline, file for an automatic six-month extension. Go to the IRS Web site, www.irs.gov, and download a copy of form 4868. Keep in mind, filing for an extension only gives you more time to file -- not to pay. You must still pay 90 percent of the tax bill.
Do ask for help
The IRS realizes that taxes are not easy. For low to moderate income taxpayers, the IRS offers a free service called Volunteer Income Tax Assistance Program (VITA), which connects taxpayers with trained volunteers who will help you file your taxes for free and on time. There are VITA sites all across the country -- located in colleges and shopping malls, libraries and community centers in most cities and states.
Additionally, if you are over the age of 60, the IRS offers a Tax Counseling for the Elderly (TCE) Program. There are more than 7,400 sites scattered nationwide to help seniors file for free. The best way to locate a VITA or TCE program is to call 800-829-1040.
Do go to the ballpark
This is one of my favorites. Bring your baseball mitt, Cracker Jacks and receipts to upcoming home games for the New York Mets, because you can receive free tax assistance from now through April 15. Tickets to the games start at $5. Not only can you get assistance on filing this year's taxes, but you can have your last three years of returns checked for free as well.
Do invest
You still have time to make a contribution to your retirement savings and get a deduction on your taxes. If you make the maximum contribution of $4,000 to a traditional Individual Retirement Account -- an IRA -- you would cut your tax bill by $1,000 (assuming you are in the 25 percent bracket). Better yet, if you are over the age of 50, you can sock away another $1,000, which would slice your tax bill by another $250.
Keep in mind that taxes are not one size fits all, so, depending on your income, you might not be able to get the full deduction. However, no matter the size of the deduction, think of any deduction as a bonus to any retirement savings you are able to sock away.
What You Shouldn't Do
Do not let the IRS keep your money
The IRS is sitting on a pile of money, just waiting to dole it out to taxpayers. In fact, it has about $2.2 billion for 1.8 million people who failed to file a federal income tax return in 2003. The IRS allows a three-year grace period, and April 17 marks the final day. According to the IRS, this money is owed to taxpayers in every state as well as military filers who did not file a return in 2003.
On average, the IRS estimates the median refund is $611. However, the largest refund checks of about $785 are owed to almost 10,000 nonfiling members of the armed forces who are stationed in various locations.
Do not get audited
The IRS turned up the heat last year; audits were up 20 percent from 2004. The most feared ones, a field audit in which you are required to sit down face to face with an IRS officer, were up 23 percent last year.
The best way to avoid a red flag on your return and the dreaded audit is to avoid silly errors. The biggest mistakes are incorrect math, forgetting to sign all of your forms, not stapling your W-2 to your filing and forgetting to put your Social Security number on your check. These are all missteps that can increase your chance of being audited.
The bottom line is to take the last remaining hours to double check your addition and subtraction as well as all the digits of your Social Security number.
Do not spend your refund
According to the Internal Revenue Service, the average tax refund for 2006 is up about $100 from last year -- topping out at about $2,548. Not only is this real money, but it is real tempting. It can have a major impact on the U.S. economy, with estimates of retail sales going up as much as 20 percent in March, April and May as people put their refunds toward new clothing, appliances, vacations, cars and anything else on their wish lists.
Instead of spending it, save it. With the average household credit card debt around $9,400, paying down your bill should be your highest priority. Additionally, it is a wise idea to invest the refund in an IRA or mutual fund.
If you make a one-time investment of $2,548 in a mutual fund and leave it invested for 25 years (assuming an average return of 8 percent) your onetime refund would grow to almost $17,500, a nice addition to any retirement savings fund.
Mellody Hobson, president of Ariel Capital Management in Chicago (www.arielmutualfunds.com) is "Good Morning America's" personal finance expert.