Five Lessons From Your ’09 Tax Return

From MoneyWatch.com:

These Money-Making Tips Will Help you Analyze Last Year’s Finances in Order to Lower Your Taxes in the Future

(MoneyWatch.com)  This story, by Jill Schlesinger, originally appeared on CBS’ Moneywatch.com

Your 2009 taxes are done. Congratulations! But you’re not done yet. (Sorry.) While you have all your 2009 tax forms and documents handy, this is the perfect time to analyze last year’s finances and use those insights to lower your taxes in 2010 and beyond.

The sooner you get started, the more you can save. So, take a big breath and then take these five steps:

1. Avoid a Big Tax Refund

You think you love getting a tax refund. What’s not to like about found money? But a refund is really just the return of a year-long, interest-free loan that you extended to your spendthrift Uncle Sam.

You can do much smarter things with that money, like putting it into a retirement plan or a college savings fund. So if you will be receiving a 2009 refund of more than a few thousand dollars and you’re an employee, adjust your withholding at work. If you’re self-employed, lower your quarterly estimated tax payments accordingly.

If your 2010 income will be less than $75,000 ($150,000 if you’re married and will file jointly), be sure your tax withholding has been properly adjusted for the new Making Work Pay Tax Credityou’re entitled to receive this year. This credit (up to $400 for singles and $800 for couples) should be reflected in the amount of taxes taken out of your paycheck. But you may need to submit a revised W-4, especially if you’re holding down multiple jobs or you’re married, since your employer wouldn’t know about your extra work or your spouse’s income.

2. Save More in Your Retirement Plan

If you are not maxing out your employer-sponsored, tax-deferred retirement plan, you’re missing outon the single best opportunity to save on taxes.

I know that the idea of saving more may be difficult these days, as so many people are just getting back on their feet. But if you can squeeze just an extra 1 or 2 percent out of your paycheck and pour that cash into the plan, you’ll reduce your taxable income and your 2010 tax bill.

Doing so might also bring your income under certain thresholds that will let you qualify for bigger tax breaks you’d otherwise miss – such as personal exemptions, itemized deductions, an Individual Retirement Account, the Child Tax Credit, the Child and Dependent Care Credit, and the Hope and Lifetime Learning Credits for college.

Here’s an example, courtesy of Research401k.com: Say you’re a single person earning $50,000 and in the 25 percent tax bracket. Without making a 401(k) contribution, you might owe $12,500 in taxes this year. By contributing $4,000 to the plan, however, you’d lower your taxable income to $46,000 and might owe $11,500 in taxes. Essentially, the government lends you $1,000 to invest for your future and you don’t have to pay the loan back until you withdraw the money from the 401(k) in retirement.
3. Look into Muni Bonds and Funds

If you have money in interest-paying bank accounts, CDs, money market funds, or taxable bonds or bond funds, you could be adding to your tax liability. High-income taxpayers need to be especially concerned since their tax liability will rise as a result of the passage of health care reform.

You may want to consider moving some of those taxable savings and investments into tax-free municipal bond funds. I’m a fan of ones from Vanguard (VWITX), T. Rowe Price (PRTAX) and Fidelity (FLTMX).

After a stellar 2009, muni funds are not quite as good a deal as they were last year, compared with taxable investments. Still, if you are in a high tax bracket, muni funds could offer a better tax-exempt yield. To see how much more in your case, use this taxable-equivalent yield calculator. Just be aware that the sweet yields on munis come with some extra risk, since there’s always a possibility that a few bond issuers won’t make their payments. Historically, that risk is pretty slim, but it’s not zero.

4. Lower Your Mutual Fund Taxes

As the equity and fixed income markets recover from the financial meltdown, be on the lookout for mutual fund taxable distributions. A distribution is one of the most aggravating features of a managed mutual fund: You are on the hook for capital gains on the fund’s investments as well as the fund’s tax liability. You may even be taxed on gains the fund incurred before you owned it!

One way to limit the damage before you invest is to ask the fund company if it will be making a distribution soon. If the answer is “yes,” hold off buying until afterward.

Or you might invest in funds with low turnover ratios, such as index funds, since they’ll be less likely to throw off taxable distributions. A turnover ratio below 10 percent is generally tax-efficient. (A fund’s annual report will show its turnover rate.) Morningstar’s Fund Screener tool can help you find low-turnover stock funds.

One class of mutual funds, tax-managed funds, is all about keeping your tax liability down. These funds do so by keeping turnover low and avoiding dividend-paying stocks. Some tax-managed funds own stocks; some own stocks and bonds. Morningstar and Yahoo! Finance’s Mutual Funds Center can help you find them.

5. Keep Better Tax Records

Organizing your tax records might not only lower your tax liability, it could help you get rid of the tax-filing headache sooner. Create a file called “Taxes 2010” and throughout the year toss into it business receipts; bank, brokerage, and mutual fund statements; W-2s; 1099s; property tax bills; and mortgage interest statements. And keep track of your purchase price, commission, and sales price for any investment transactions in 2010. You’ll thank yourself in April 2011.

• Last-Minute Tax-Filing Strategies

• How to File for an Extension

• What if You Can’t Pay the IRS?

• Save Time Filing Your Taxes

• Lower Your Taxes in 2010

Also important: self employment tax information, paying your estimated taxes

Don’t Have Enough To Pay Your Taxes?

What do you do when you finally get all of your information together to file your income taxes, and you find out that not only aren’t you getting a tax refund, but you actually have to pay taxes?! It’s not a problem if you have enough money set aside to pay it off, but for people who don’t have enough money in their bank account to pay their taxes, this can be a very scary experience.

First of all, you don’t need to panic. You are not the first (or the last!) person to owe the IRS money and not have access to the money immediately to pay them back. These are some tips for paying your taxes when you don’t have the money to pay on time.

File your taxes on time.

Even if you owe a ton of money and have no idea where you’ll get it, you need to file your taxes on time (including filing for an extension). If you send your information in late, you’ll be adding fees and penalties to the amount you owe. If you decide not to file your taxes at all — you’ll be looking at criminal charges.

Check all resources.

Take a look in all of your savings accounts and investments to see if there is any way you can come up with the money to pay your taxes. Think about friends or family who may be able to lend you the money.

Get an installment plan.

The IRS can also help you set up a payment plan if you can’t pay for your taxes in one lump sum. When you file your return, you’ll receive a letter from the IRS that states how much you owe. Begin saving money and looking for ways to pay your taxes. If you know for sure you won’t be able to pay your taxes in a lump sum, ask the IRS for the installment plan. You can indicate how much you feel you can afford and as long as you will pay off the balance in a 12 month period, the IRS will usually grant you an installment plan. Having an installment plan will cost you additional money in fees, but it gives you an opportunity to pay it over time.

Apply for Offer of Compromise.

If you get turned down for the installment plan with the IRS, you might consider the Offer of Compromise. This lets you make a one time payment or schedule several payments over time but is a much more involved process than asking for an installment plan. It also costs $150 to apply and each person is evaluated individually based on their financial situation. You are not guaranteed approval even if you pay the $150 application fee so you will want to try the installment plan option first.

If you owe money to the IRS, the worst thing you can do is sit back and hope it goes away. The longer you wait, the harder it will be to pay it because the penalties and fees will continue to add up. The best you could hope for after waiting and hoping it will all go away is a tax settlement of some sort! You need to establish a plan of action that works for your financial situation right now, and follow through with it until the amount you owe is paid in full.