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Tax Filing Deadline Looms

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Nobody likes to be nagged, but I'm going to risk reader displeasure by reminding everyone that there are hefty financial consequences if you owe taxes and do not file a return on time -- or at least request a filing extension.

Ordinarily, the deadline is April 15; but because this year the District of Columbia is celebrating Emancipation Day on that date, the IRS has granted a reprieve until Monday, April 18. This is also the deadline for people who file quarterly estimated tax returns, such as retirees and self-employed individuals. (State income tax deadlines may vary, so check your state form carefully.)

Here's why procrastinating is a bad idea:

If your 2010 federal tax return (or extension request) isn't postmarked or electronically filed by midnight on April 18, the penalty on any taxes you owe increases dramatically. Generally, you'll have to pay an additional 5 percent of taxes owed for each full or partial month you're late, plus interest, up to a maximum penalty of 25 percent. However, if you file your return or request an extension on time, the penalty drops to 0.5 percent per month, plus interest.

Here's how it can add up: Say you owe $2,000 in federal income tax. If you haven't requested an extension, you would be charged an additional $100 (5 percent) for each month you're late. Had you filed for an extension, the penalty would drop to only $10 a month (0.5 percent).

Be sure to contact the IRS early if you won't be able to pay on time. They may even waive the penalty, depending on your circumstances. Call 800-829-1040 or read Filing Late and/or Paying Late for more information.

Another way to avoid a penalty: The IRS accepts payment by credit or debit card, with a small convenience fee that is tax deductible if you itemize expenses. Just be sure you can pay off your credit card balance within a few months, or the interest accrued might exceed the penalty.

Tax law change highlights. Most of the tax breaks contained in the last-minute tax legislation signed in December 2010 impact future tax years, but several provisions that expired on December 31, 2009, have been retroactively put into effect for the 2010 tax year, including:
  • Once again, Congress raised the alternative minimum tax (AMT) exemption amount, thereby ensuring that millions of taxpayers will not be subject to AMT. The IRS's online AMT Assistant calculator can help you determine your status.
  • Taxpayers who itemize deductions can still deduct state and local sales tax on their federal return instead of taking the state income tax deduction if that's more favorable.
  • The above-the-line deduction for tuition and fees was retained. ("Above the line" means you can take the deduction even if you don't itemize.)
  • Educators can still take a$250 above-the-line deduction for out-of-pocket expenses for classroom supplies.
  • People who itemize deductions may continue to deduct primary mortgage insurance, subject to certain income limits.
  • People over age 70 ½ may continue to donate up to $100,000 to charities directly from their IRA without first having to declare the distribution as taxable income and then deducting it as a charitable contribution.

A few additional tax-filing tips:

Find out what's new. Because the tax code changes every year, scan the IRS' Tax Information for Individuals for updates before diving in. Many of your questions are likely answered in the Frequently Asked Questions section. Another good resource is Kiplinger's Tax Guide, which features a wealth of tax-related information.

Make sure your return is accurate. Common tax-filing errors include:
  • Omitting or filling in incorrect/illegible taxpayer ID numbers, filing status, dependent names and Social Security numbers
  • Documentation not attached (W-2s, supplemental forms, etc.)
  • Omitting income items
  • Tax return not signed and dated
  • Information entered on the wrong lines
  • Child tax credit incorrectly calculated
  • Math errors. (Tax software does the math, but you're still responsible for entering correct numbers initially.)

Ask for help. If calculating your own taxes is too confusing or time-consuming, consider using tax-completion software like TurboTax. Or hire a tax professional such as a certified public accountant, tax attorney or IRS-designated enrolled agent. A sharp preparer could save you a bundle by finding hidden credits or deductions.

If cost is an issue, several free options available to seniors, military and low- and middle-income taxpayers:
  • The IRS sponsors the Volunteer Income Tax Assistance Program (VITA) and Tax Counseling for the Elderly (TCE). Read Free Tax Preparation on the IRS website for information.
  • AARP Tax-Aide volunteers, who are trained by the IRS, provide free tax preparation to low- and middle-income taxpayers, with special attention to people over age 60. You can submit a question online or visit a volunteer in person (click HERE to find a site near you).
  • Military personnel and their families worldwide can get free assistance through a program overseen by the Armed Forces Tax Council and offered through VITA. Check with your base for details.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

Follow Jason Alderman on Twitter: http://twitter.com/PracticalMoney