April 15th - What’s the Rush, What’s New, What if I Owe, Where’s My Refund?

Add comment April 7th, 2008

  Scott K. Laue, J.D., CRPS 

It’s looming – The annual ritual for millions of Americans hoping to be able to find a mailbox by midnight April 15^th.  If you haven’t yet filed your tax return resist the temptation to put off your taxes until the very last minute.  Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risks of making an error.

Some stress relieving ideas to help you: 

1)      Visit the IRS Online at www.irs.gov.  Anyone with internet access can find tax law information and answers to frequently asked questions.

2)      File your tax return electronically.  Nearly 80 million taxpayers filed their returns electronically in 2007.  Aside from ease of filing, it’s the fastest and most accurate way to file a return.  If you are due a refund, the waiting time is half that of paper filers.  You also don’t need to find that mailbox that still has a pickup before midnight.

3)      Don’t panic if you can’t pay.  If you can’t immediately pay the taxes you owe, you can apply for an IRS installment agreement. Other alternatives include charging your balance due to your credit or debit card.  There is no IRS fee for doing so, however make sure you understand the processing companies’ fees for this convenience.

4)      Request an Extension of Time to File – But Pay on Time.  If the clock runs out, you can get an automatic six-month extension of time to file (October 15^th).  However, this extension of time does not give you more time to pay any taxes due.  You will owe interest on any amount not paid by the April deadline, plus a late payment penalty if you have not paid at least 90% of your total tax by that date. 

Tips for Last Minute Filers: 

1)      Standard Deduction or Itemize?  We all are given the choice to deduct from our Adjusted Gross Income the greater of the standard deduction or itemizing our deductions (IRS Form Schedule A).  In helping to make this determination keep in mind a change in the charitable contribution area.  Starting in 2007, in order to deduct any cash charitable contribution, taxpayers must have a bank record or a written communication from the charitable organization of the amount of the contribution. Your word of a $20 bill every Sunday in the church’s pot will not pass muster. 

2)      State Income Tax or Sales Tax – If you itemize, you can deduct the greater of either the State income tax that you paid-in over the year (your withholding plus any estimated tax payments) or the sales tax you paid.  The sales tax can be determined by tracking every expenditure over the course of the year (nobody does this!!) or utilizing the predetermined deduction figures from the IRS.  In addition to these table amounts, the taxpayer can deduct additional actual sales tax paid on the purchase of major items such as a car, boat, plasma TV, etc.   

3)      IRA Contribution – If you qualify, consider making a deductible IRA contribution for 2007.  It’s the only tax move you can still make for last year.  Certain income limits apply if you are covered by a retirement plan through your employer.  If you are eligible, you can deduct up to $4,000 or 100% of your earned income in addition to the potential tax savings you may also be eligible for the Retirement Saver’s Credit.  Certain income limitations also apply, but remember, credits are good things as they reduce your tax liability dollar for dollar.

4)      Residential Energy Tax Credits – Installing those new energy efficient windows, doors, and insulation might result in a nice surprise.  If the installed property meets certain technical requirements related to energy savings a lifetime credit of $500 is allowed.

5)      Direct Deposit of Refund – If Uncle owes you money, apply to have the refund directly deposited into your bank account.  It’s safe, quick, and you are not earning any interest on the refunded amount so the sooner the better!

Finally, use your tax return to help minimize the tax bite for future years.  Generally there are four basic ways to reduce your tax bill – 1) reduce your income (by making contributions to your IRA or retirement plan at work), 2) increase your deductions (by taking full advantage of the mortgage interest, real estate taxes, and charitable contributions you’ve made), 3) take advantage of tax credits (educational, adoption and retirement savings), and 4) finally avoid additional taxes (early withdrawals from an IRA or retirement plan).

Happy filing… 

Who Could Have Guessed?

Add comment April 7th, 2008

 Brent R. Brodeski, MBA, CPA, CFP®, CFA, AIFA® 

After reviewing the year-to-date asset class returns for 2008 through the first week in April, I was set back by something that at first glace seemed unreal.  As you are all aware, the stock market has struggled this year due to challenges from the ongoing subprime and credit crisis.  This began in 2007 as result of the bursting of the real estate bubble.  Increasing defaults in real estate has caused a general malaise that has frustrated global equity investors so far in 2008. 

I was not at all surprised that nearly all stock asset classes are in the red this year.  Still, one area stuck out as a big exception.  This stock asset class has actually has done very well in 2008.  Where you ask?  Believe it or not, Real Estate Investment Trusts (REITS) are up big time so far this year.  How could that be?  Especially when real estate has been the big fat culprit that has left investors and even venerable firms like Bear Stearns in shambles?  I double checked the numbers and was not dreaming this up. Consider the following returns YTD through April 4, 2008:

Global Stock Asset Class                     YTD as of April 4, 2008

REITS (Real Estate)                            +8.3% (gain)

US Large Stocks (S&P 500)                -6.1% (loss)
US Large Value Stocks                        -4.1% (loss)
US Small Stocks                                  -6.5% (loss)
US Microcap Stocks                           -7.6% (loss)
Int’l Large Stocks (MSCI EAFE)        -4.5% (loss)
‘Int’l Small Stocks                              -3.8% (loss)
Emerging Markets                              -6.0% (loss) 

Source:  Dimensional Fund Advisors 

The lesson here?  Market timing is just simply impossible.  While no one saw the demise of Bear Stearns coming, everyone knew real estate was troubled.  Yet, investors in Bear Stearns saw their stock fall from $150 to $2 (before it recovered to $10).  And REIT investors have earned almost an entire year’s return in just the first three months of this troubled year.  This is a testament to the importance of diversification.  You never know which stock is going to go bust nor which asset class (i.e. REITs) will do the best at any given time.  Stay diversified!