The taxman cometh: Need an extension? | Inman News

 

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This year, because of weekends and holidays, your federal tax return is due on April 18 instead of the usual April 15 deadline. April 18 is also the deadline for several other important tax-related actions. For example, your first estimated tax payment for 2011 is due April 18. But that’s not all. There are several other important steps you should consider taking before the deadline.

File an extension

If, like many people, you don’t want to have to file your completed return by April 18, you can obtain an automatic six-month extension of time to file. This is very easy to do. You simply fill out Internal Revenue Service Form 4868: Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

You can either email the completed form to the IRS or send it by postal mail. It must be sent by April 18, 2011.

     
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You don’t have to tell the IRS why you want the extension, and you can’t be denied the extension — you get it automatically by filing the form. However, when you file Form 4868 you must estimate your total tax liability for 2010 and list it on the form.

It’s important to understand that obtaining an extension of time to file your return does not relieve you of the duty to pay your taxes in time for the initial deadline (by April 18).

You can send in any balance due, along with the Form 4868, but this is not required. If you don’t pay balance due by April 18, you’ll have to pay interest on the amount and may also be charged late payment penalties by the IRS. The late payment penalty is usually one-half of 1 percent of any tax (other than estimated tax) not paid by April 18, 2011.

Fund your retirement accounts

One of the best ways to reduce your tax liability is to establish and fully fund a tax qualified retirement account. These include traditional and Roth IRAs (individual retirement accounts), SEP-IRAs, SIMPLE IRAs, 401(k) and solo 401(k) plans, Roth 401(k) plans, and Keogh Plans (defined contribution plans and defined benefit plans).

Your contributions — other than those to Roth plans — are tax deductible. Contributions to Roth IRAs and Roth 401(k) plans are not deductible, but withdrawals after age 59 1/2 are tax free.

The maximum 2010 contribution you may make depends on the type of plan you have and the amount of your net self-employment income. Contributions to traditional and Roth IRAs are limited to $5,000; $6,000 if you were at least 50 by the end of 2010.

Contributions to the other plans can be much larger — as much as $49,000 for the most generous plans. There are several online retirement plan contribution calculators you can use to figure out your maximum contribution for 2010; including one at CalcXML.com.

If you already have a retirement account, but have not funded it for 2010, you still have time to make a 2010 contribution. You have until April 18 to make contributions to a traditional or Roth IRA, 401(k) plan, SEP-IRA, SIMPLE-IRA, or Keogh Plan, and have them count for the 2010 tax year.

Make sure to tell your plan administrator that your contribution should be applied to 2010, not 2011.

Filing an extension of time to file your return does not extend the deadline to contribute to an IRA. However, filing an extension does extend the time to fund a 401(k) plan, SEP-IRA, SIMPLE IRA, or Keogh Plan until Oct. 15, 2011 — the extended due date for your return.

So if you have one of these plans and need more time to come up with the money to contribute to them, be sure to file an extension.

What if you don’t have any retirement accounts? You still have until April 18 to establish a traditional or Roth IRA, or SEP-IRA and make contributions for the 2010 tax year. It is too late to set up 401(k) plan, SIMPLE-IRA, or Keogh Plan for the 2010 tax year.

Contribute to a Health Savings Account (HSA)

If you have a Health Savings Account, April 18 is also the last day you may make contributions for the 2010 tax year. As with IRAs, obtaining an extension to file your return does not extend this deadline.

If you have an individual plan, you can contribute a maximum of $3,050 for 2010. If you have a family plan, the maximum 2010 contribution is $6,150. These limits are increased by $1,000 if you were 55 or older at any time in 2010.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including “Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants,” “Deduct It,” “Working as an Independent Contractor,” and “Working with Independent Contractors.” He welcomes your questions for this weekly column.

     

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