984,000 Could Lose their Tax Refund

Last week the IRS announced it is holding $917 million in unclaimed refunds for the 2009 tax year. If the claims for these unpaid refunds are not made by April 15^th the refunds will no longer be available. Here is what you need to know:

1.   Timely filing. To receive the refund your 2009 tax return must be properly addressed, mailed, and postmarked by April 15^th. It is best to send this certified mail in case there is a dispute with the filing of the return. To play it safe, it is also best to plan for the IRS to receive the return prior to April 15^th.

2.   Haven’t filed a tax return? There is no penalty for filing a late return that qualifies for a refund.

3.   There may be delays. If you have not filed a 2010 or 2011 tax return, your refund may be granted, but delayed until the other tax returns are filed. In addition, the refund may be used to pay for any unpaid tax obligations.

4.   It will be tough. Remember all of the country is busy preparing 2012 tax returns, so getting help can be a challenge.

If this impacts you, act now. If you fail to file a tax return, the government can collect any taxes owed long after three years. However, if the government owes you money, you only have three years from the original tax filing due date to collect it. There are no exceptions to this time limit.

Tax Surprises for Newly Retired

5 surprises to know about

You’ve got it all planned out. Your retirement savings plans are full, you have started receiving Social Security benefits, and your Pension is ready to go. Everything is planned, what could go wrong? Here are five surprises that can turn your plan on a dime.

1. Health emergency and Long-term Care. When a simple procedure could cost thousands, health care costs can put a huge dent in your plan. Long-term care can cost thousands per month. Have you planned for this? If your health insurance is not adequate you may need to pull money out of your retirement plan to pay the bills. While this withdrawal may not be subject to a penalty, it might be subject to income tax if the funds are from a pre-tax account.

Tip: Look into creative ways to enhance your health insurance coverage including supplemental health insurance and prescription drug cost coverage. Consider long-term care insurance and other alternative ways to reduce your potential living needs.

2. Taxability of Social Security benefits. If you have excess earnings, your Social Security benefits could be reduced. Even worse, if you are still working, your benefits could be subject to income tax.

Tip: If this impacts you, consider conducting a tax planning session to better understand your options including the possibility of delaying the receipt of Social Security benefits.

3. Your pension plan. Understand if your pension is in good financial health. Often pensions will offer a lump-sum payout option for you. Should you take it?

Tip: Review your pension plan’s annual statement. How solid is it? If there are risks, consider cash out alternatives and planning for the potential drop in future income.

4. Minimum Required Distribution (RMD). Forgot to take your minimum required distribution from your retirement plans this year? The tax bite could be quite a surprise as the penalty on the amount not withdrawn is 50%!

Tip: Select a memorable date (like your birthday) to review your RMD and take action so this tax surprise does not impact you.

5. Future Tax Rates. The federal government is spending over $1 trillion more than it brings in each year. Cash starved states are looking for new tax revenue. Don’t be surprised when future tax rates continue to rise during your retirement.

Tips:

• Create a retirement plan with higher state and federal tax rates
• Plan for increases in health care costs through Medicare
• Plan for more tax on Social Security benefits

Plan for higher capital gain and dividend taxes (now 20% versus 15%)

Is Being Effective Better Than Being Marginal?

Understanding the difference between these two tax rates

The tax code is filled with terms we rarely use in everyday conversation. Two of the more common are Marginal Tax Rates and Effective Tax Rates. Knowing what they mean can help you think differently about your potential tax obligation.

Definition

Marginal Tax Rate: This is the tax rate applied to the “next” dollar you earn. Since our income tax rates are progressive, the next dollar you earn could be taxed at as little as zero or as high as 39.6%!
Effective Tax Rate: This is the tax rate you actually pay. This is simply taxes you pay divided by your total taxable income. Said another way, after taking your income and then applying taxes, deductions, credits, exemptions, and other adjustments you are left with your true tax obligation. This obligation is a percent of your income.

A Simple Example

Consider two people; Joe Cool who earns $50,000 and Chuck Browne who earns $500,000. If we had a flat tax of 10%, Mr. Cool would pay $5,000 in tax and Mr. Browne would pay $50,000 in tax. Both of their Effective Tax Rates would be 10% AND their Marginal Tax Rates would also be 10% because each additional dollar they earn would be taxed at the same 10%. However it is a different picture when you apply our progressive tax rates:
If we use the 2013 U.S. tax table for a single filer, Joe Cool pays $6,608 and Chuck Browne pays $151,065 in federal tax. This is because tax rates applied to Joe Cool’s income are (10 – 25%) while Chuck's income over $50,000 gets Marginal Tax Rates of (25 – 39.6%). Ignoring other tax factors, our two taxpayers’ tax rates are:

Joe Cool Chuck Browne Diff +/- Comment Effective Tax Rate 13.2% 30.2% +17.0 Chuck pays 30.2% of his income in tax; Joe 13.2% Marginal Tax Rate 15% 39.6% +24.6 The next dollar each earns will be taxed at this rate.

Why Care?

• Calculating Returns. The true return you receive on any taxable investment will be determined by your Marginal Tax Rate. A $500 profit from a new investment could cost Joe Cool 15% in federal tax, but it could cost Chuck Browne 39.6% in federal tax.
• Phase-outs can provide a dramatic impact on Effective Tax Rates. The simple examples above do not account for income limits applied to many tax benefits. Additional income could have a very dramatic impact on Joe Cool if it triggers losing things like an Earned Income Credit, or Child Tax Credit. This could increase your Effective Tax Rate while not touching your Marginal Tax Rate.
• Extra work can help the taxman more than you. There have been cases where adding a second job can actually cost you money by not understanding the impact of the income on your Effective Tax Rate. This is especially true for retired workers receiving Social Security Retirement Benefits. That extra job may make your Social Security benefits taxable.
• It’s not that simple. In addition to all the different income phase-outs for credits and deductions, your Effective Tax Rate could be impacted by the elimination of itemized deductions, reduction of exemptions, the Alternative Minimum Tax, and the marriage penalty.

It is a good idea is to understand your Effective Tax Rate and your Marginal Tax Rate. Look at last year’s tax return and calculate your Effective Tax Rate. Then look at your income and determine what your Marginal Tax Rate is if you earn additional income. If you anticipate an increase in earnings, consider forecasting the impact on your Effective Tax Rate.

Often Overlooked Medical Expense Deductions

Avoid taking the easy way out To take your medical expense deduction in 2012 your allowable expenses must exceed 7.5%  of your Adjusted Gross Income (AGI). In 2013 and beyond, unless you are 65 or older, this  amount goes up to 10% of AGI. So why bother? You might be surprised at how much this expense  might be. Here are some tips: 1.   Don’t take the easy way out. So many think itemizing deductions is such a pain, that they forgo the work of collecting valid receipts. Don’t let this happen to you. Collect the receipts and determine if you may be giving away money to Uncle Sam by not itemizing your deductions. 2.   Insurance Premiums. Many insurance premium payments are deductible, including long-term care insurance. Many seniors omit their Medicare Part B premiums because they are automatically deducted from their Social Security benefit check. 3.   Look to your face. Eye care and Dental care are allowable deductions. This includes overlooked expenses for: o    Eye care: exams, glasses, contact lenses, laser eye corrections, and insurance premiums o    Dental care: exams, fillings, fluoride treatments, crowns, dentures, orthodontics, and related premiums 4.   Travel expenses. Parking fees, tolls, and mileage to and from appointments also count. So keep a travel log. 5.   Get a prescription. While over the counter purchases are not deductible, if the doctor prescribes the medicine or service it is. So get a prescription for your acid reflux versus buying over the counter meds. Get a prescription for a weight loss program and that could be deductible as well. 6.   Other missed opportunities. Some other commonly overlooked items include; smoking cessation programs, alcohol and drug treatment programs, home remodeling for handicap access, and visits to other health providers (acupuncture, chiropractor, and podiatrist to name a few). Medical care is very expensive these days, and it won’t be getting any cheaper. It does not take much to make your expenses meaningful tax deductions, but only if you keep track of them.

Avoid Common Tax Filing Mistakes

With the backlog of tax return filing due to late changing tax laws, want to ensure your refund gets to you in the shortest amount of time? More importantly, how can you avoid receiving a letter from the IRS? Here are some of the most common tax filing mistakes:

Forgetting a W-2 or 1099: The IRS does an effective job in comparing W-2s and 1099s they receive from organizations to the amounts you claim on your tax return. If they do not match, rest assured you will receive a notice in the mail asking for clarification.

Duplicate dependent reporting: If more than one tax return claims the same person as a dependent, the second return will be rejected. The IRS does not try to determine which tax return is correct. They leave that up to you.

Forgetting a name change: If you fail to change your name with Social Security after marriage and you file a tax return with your "new" last name, be prepared for either a rejected tax return or an adjusted tax return.

Other missing information: When preparing your tax return, often the return is held up because key information is missing. These missing items range from property tax and mortgage interest statements, to 1099s and W-2s.

Signing the e-file authorization form: Your tax return cannot be e-filed without proper authorization. After reviewing your return, a properly signed Form 8879 must be received.