KMIR 6 - Palm Springs News, Weather, SportsMinding your P's and Q's at tax time

Minding your P's and Q's at tax time

By Andrew Housser

Tax season is upon us, and with many people keeping a close eye on their finances these days, this tax season could be especially important. Many people will have complicated filing situations this year, but some people also will benefit from additional credits available to them.

With six weeks left before the U.S. federal income tax filing deadline of April 15, now is the time to review your tax situation and take any needed action.

1) Don't forget to file

It is very important to file your income tax return on time. If that is impossible, file an extension. The Internal Revenue Service (IRS) is more forgiving of those who follow the rules than those who skip filing. Even if you have too much tax debt to pay, filing the required forms will result in smaller penalties.

2) Estimate how the economy will impact your taxes in the future

If you get a large refund, you might be having too much tax withheld. As a result, you are lending the government money, interest-free! If your income will be lower this year than in 2009 or 2008, you might wish to adjust withholding to put more in your paycheck. If you owe money or anticipate your income recovering this year, you might need to save more or have more withheld to stay on top of your tax bill. Talk with a tax advisor to determine whether to change your tax strategy.

3) Understand tax on unemployment benefits

Disheartening news for the jobless: Unemployment income is taxable. If you received unemployment benefits during 2009, you should have received a Form 1099-G showing you much you received. If your employer paid separate unemployment compensation, that income should be reported on your W-2 form as income. However, the first $2,400 of government benefits received in 2009 is exempt from tax, thanks to the American Recovery and Reinvestment Act. If you are receiving unemployment compensation in 2010, you can request that tax be withheld from your payments to avoid a surprise tax bill later. Visit IRS.gov for more information.

4) Take credit where it is due

Most Americans have already benefited from the "Making Work Pay" credit, which increased the amount available to workers in their paychecks. Review your annual expenses to understand whether you qualify for other credits, such as tax credits for investments in your home's energy efficiency, child care costs, higher education or medical expenses. Also, remember that expenses you incurred from looking for a new job in your current occupation may be tax deductible.

5) Calculate future estimated tax payments

If you are self-employed, or for other reasons must pay estimated income tax, re-estimate your annual earnings. Those who have lost work, for instance, might owe less total tax than previously anticipated. The IRS recommends people who estimated their earnings too high or too low complete a new estimated tax worksheet to calculate their true estimated tax due for 2010. It is important to pay enough tax each quarter to avoid penalties.

6) Pay how you can

If you have a large tax bill, the IRS suggests taxpayers find any means possible to pay that bill, including bank loans, cash advances on credit cards, using savings, borrowing against retirement or life insurance, or using equity in assets (such as a home) to pay. However, if you are in dire financial circumstances, exchanging one debt for another will not make things easier, and putting a home at risk is almost always a bad idea. Consult a tax and/or financial adviser before making a decision.

7) Ask the IRS for help

Taxpayers who absolutely cannot pay their tax bills should contact the IRS. The agency sometimes gives some leeway to taxpayers who contact the IRS or pay a late bill voluntarily. The IRS might waive penalties for those who cannot pay because of a death in the family, serious illness, financial records lost in a natural disaster or another "reasonable cause."

8) Do not count on bankruptcy protection

Historically, consumers in severe IRS debt might file for Chapter 7 bankruptcy protection in order to wipe out certain unsecured debts, thereby reducing their overall debt burdens. Now, with the bankruptcy "means test," many consumers must file Chapter 13 bankruptcy, which establishes a repayment plan, rather than eliminating all debt.

9) Get help

Specialists, often found at or through reputable debt settlement firms, can negotiate directly with the IRS on behalf of consumers who owe $10,000 or more. Tax relief specialists usually are attorneys, enrolled agents or certified public accountants with special training and experience. They can navigate the maze of IRS forms and calculations, help consumers understand what the IRS wants, and help them resolve their tax debt.

As the saying goes, the only things you can count on are death and taxes. With tax season upon us, it is time to face up to the inevitable demands of the IRS -- but it is good to know that help is available for those who need it.