This Labor Day reflect on how hard you work for your money. Utilize proactive tax planning to minimize how much you pay in taxes.
Electronic Filing Requirements
Starting on January 1, 2011, the IRS is requiring larger accountants, tax preparers, and CPAs to file current year tax returns electronically. They are doing so in order to reduce the governments processing costs. I always encourage clients to file tax returns electronically as it is generally more secure and quicker. Some clients with balances due are hesitant to do so. However, they can still file their returns electronically and make payments (possibly via EFTPS) just prior to the due date.
Direct Deposit Requirement
The federal government has recently announced that it is going to start requiring that all distributions from the federal government take place via direct deposit. Those people that do not own a bank account will be issued a prepaid debit card to use. I have not seen tax refunds directly mentioned in this new proposal, but assume that the IRS will move in this direction in the next several years.
Although I have not seen any proposals that the North Carolina Department of revenue will follow the IRS in their changes, they typically do. I will keep abreast of these potential changes and other changes that may affect taxpayers in the future.
As always, if you have any any specific tax, accounting, or consulting questions, please do not hesitate to call me.
Electronic Payment Options
The Electronic Federal Tax Payment System allows for both individuals and businesses to make tax payments from a checking or savings account online via a secure government site. One of the advantages of such a system is that you don't have to worry about your payment getting lost in the mail. In 2005, a delivery truck containing 30,000 tax payments crashed off a bridge into a waterway. All payments were lost. Although the IRS did not charge penalty and interest for those payments, people had to worry if their payment vouchers (which contain social security numbers, names, and addresses) were going to wash up and end up in the wrong hands.
Another benefit of the electronic payment option is that it allows you to set your payment to be delivered on a specific date. You can wait to pay until close to the due date without risking forgetting to make the payment and incurring penalty and interest charges. The government currently does not require use of the EFTPS, but as you will see below they are heading in the direction of requiring more and more electronic interactions.
Corporate returns with extensions are due 9/15. Individuals 10/15. Don't be late and remember an extension is an extension to file taxes and not an extension to pay taxes!
THE YEAR OF THE ROTH IRA CONVERSION =
2010 has been dubbed the year of the Roth Individual Retirement Account (IRA) conversion. I need to start with a little background on the differences between regular qualified retirement accounts and Roth IRAs. Regular retirement accounts (401(K)s, IRAs, etc) are funded with pre-tax dollars. As a result, distribution from those accounts are taxable. Roth IRAs are funded with post-tax dollars. As a result, normal retirement distributions (conditions apply) from Roth IRA accounts are not taxable. In addition, unlike traditional IRAs there is no minimum distribution requirement (upon reaching age 70 1/2) for Roth IRAs.
Conversion of a qualified retirement account to a Roth IRA results in normal income tax on the conversion but avoids the additional 10% penalty for early distributions. As a result, your anticipated tax rates for the present and the future can come into play when evaluating the attractiveness of a conversion.
2010 has been called the year of the Roth IRA conversion because of special provisions that exist for 2010. The special conditions that exist for 2010 are as follows:
1) The annual adjusted gross income (AGI) income limitation of $100,000 for Roth IRA conversions has been removed.
2) Roth IRA conversions done during 2010 may spread the income recognition of tax years 2011 and 2012. This could result in lower marginal tax rates and taxes on the conversion.
Typically, a Roth IRA conversion is attractive if an individual would like to reduce their taxes down the road and reduce tax implications for their beneficiaries. Many financial advisors will tell you that it is beneficial to have retirement money coming from both taxable and non-taxable accounts. With a Roth IRA conversion, you really need to look at the specifics of your scenario to see if it will be beneficial for you. If necessary, an accountant can assist you in analyzing the tax implications and point you in the direction of qualified financial professionals to assist in the process.
Look closely at your tax payments to the state of North Carolina. Local news story made it sound like they wouldn't be paying out any refunds, but that is not the case. That being said, it is getting tougher and tougher to get money back from them so I would plan well to avoid excessive overpayment to them!