if you can't file BY april 18, get an extension
April 18, the tax filing deadline for 2010 returns, will be here before you know it. If you won’t be able to file your income tax return by then, be sure to file a Form 4868 with the IRS. The extension is automatically granted, and it gives you until Oct. 17, 2011, to file your return.
Be aware, however, that an extension to file does not extend your time to pay. The IRS will still assess interest on any unpaid tax balance. In addition, unless you pay at least 90 percent of your estimated tax liability by April 18, you may be hit with a late-payment penalty.
In certain circumstances, even if you have no problem submitting your tax return by the April 18 deadline, getting an extension might still be a good idea.
If you aren’t able to pay all of the taxes that you owe by April 18, an extension will allow you to defer paying some of your taxes until Oct. 17. As long as you have paid 90 percent of your total tax liability by April 18, you should not be subject to IRS penalties on the balance due. And even though you will owe interest on the shortfall, the rate of interest charged by the IRS may be less than the cost of borrowing elsewhere.
If you are self-employed and you need a few extra months to gather the money necessary to pay your income taxes and to fully fund your retirement plan, you might also benefit by filing for an extension. To deduct contributions made to a retirement plan, the contributions must be made prior to the due date of the tax return, including extensions. By filing a Form 4868 with the IRS, you have up to six additional months to fund your retirement plan. One strategy commonly used by self-employed individuals is to pay the full amount of tax due with the extension, and then to fund their retirement plan six months later.
ROTH IRAS: A smart tax idea FOR CHILDREN
Persuading your working children to make retirement contributions may not be easy, but investments in Roth IRAs may be the wisest possible use of their earnings. The nature of Roth IRAs, coupled with the effects of long-term compounding, can create exceptional returns on such early investments.
Although contributions to Roth IRAs are not deductible, earnings within the accounts (such as interest or dividends) are not taxed and qualified withdrawals are completely tax-free. Tax-free compounding can result in sizable accumulation in a Roth. For example, if a 15-year-old contributes $2,500 for each of four years, and the account earns 5 percent annually, the fund will be worth about $85,000 when the child reaches age 60.
It’s generally best to leave IRA funds untouched until retirement, but if necessary, your child’s contributions to a Roth IRA (excluding the earnings) can be withdrawn at any time without triggering taxes or penalties. This flexibility provides an advantage over a traditional IRA, where most withdrawals before the owner reaches age 59½ will be taxed and penalized.
The owner’s ability to deduct contributions is the one advantage a traditional IRA offers over a Roth IRA. However, this feature is relatively insignificant for most young earners. The first $5,800 of a child’s 2011 income will be entirely sheltered by the standard deduction, and any earnings above $5,800 are likely to be taxed at very low rates.
This year, most working people can contribute up to the lesser of their earned income or $5,000 to a Roth IRA. Although Roth eligibility is phased out for individuals with income above certain ceilings (e.g., $107,000 to $122,000 for a single person in 2011), a working child’s revenue rarely will approach such thresholds.
Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail [email protected] or [email protected].
Finance
IRS OFFERS NEW 2011 AMNESTY FOR FOREIGN ACCOUNTS
The IRS is reviving an amnesty program for people with unreported foreign accounts. The 2011 voluntary disclosure initiative imposes somewhat higher penalties than the prior voluntary disclosure initiative which ended in 2009, but still allows qualifying participants to obtain certainty about avoiding criminal prosecution. To qualify, individuals with foreign accounts must disclose any unreported income from 2003 on and pay all taxes, interest and penalties due on the understatement. The initiative is currently set to expire on Aug. 31, 2011.
The definition of what constitutes an international account is quite broad, and includes all accounts over which an individual or business has signature authority. The definition of who is required to file on behalf of such accounts is quite broad also, often causing the beneficial owners of accounts legally owned by another (trusts, business entities, etc.) to be reportable by those beneficial owners.
For taxpayers seeking to participate in the initiative, the IRS will require the participant to agree with the following terms if the participant otherwise qualifies (i.e., is not currently under an IRS investigation or audit):
- Payment of a 25 percent penalty on the highest aggregate annual balance for the unreported international account during calendar years 2003 through 2010 (reduced to 12.5 percent when the balance in all international accounts does not exceed $75,000 during these years, and reduced to 5 percent for certain inherited accounts);
- Payment of any U.S. income tax due on unreported income for an unreported account during the calendar years 2003 through 2010; and,
- Payment of a 20 percent penalty on any U.S. income tax due under No. 2.
Participants accepted into the initiative must file amended returns and make an arrangement for payment of all taxes, interest, and penalties on or before Aug. 31, 2011. The time frame for determining whether to participate and arranging for the appropriate filing and payments is fairly short and requires timely action.
It is also important to note that taxpayers accepted into the initiative must also agree to surrender certain defenses in order to participate in the initiative. The surrender of these defenses could result in a significant reduction in the above monetary penalties. The decision regarding whether to participate in the voluntary disclosure initiative depends on a participant’s facts and circumstances as well as the participant’s risk tolerance with the IRS. Other unpublicized procedures are available to reduce criminal exposure yet retain any defenses you may be entitled to; however, such procedures do not provide the same level of certainty that can be obtained from participating in the initiative.
The disclosure initiative, with its reduced penalty framework, is unlikely to be offered again in the near future. Disclosure to the IRS involves a number of strategic decisions that can have broad implications. Disclosure should not be undertaken without qualified professional assistance.
Satya Shaw, CPA, MBA, of Shaw Tax Advisory Group is an investment advisor representative. He can be reached at (o) 813-960-7429, (c) 901-550-2920 or email [email protected]