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What you need to know as the tax clock ticks

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published April 13, 2003


You may be trying to forget about income taxes, but we're not about to let you. If you have been putting off the inevitable, it's time to get cracking.

Midnight Tuesday is the deadline for getting your income tax return, or your request for an extension, in the mail. Even if you plan to ask for more time, the IRS expects you to send along any taxes you owe. Otherwise, count on having to pay interest and getting hit with a late-payment penalty.

Here are a few tips to help with the last-minute details:

Deductions you don't want to miss

Don't overlook the new saver's credit if you participated in a company retirement plan such as a 401(k) or you made a contribution to an IRA. You'll be rewarded for your savings if your adjusted gross income is $25,000 or less (single) or $50,000 or less (married.) The credit is worth up to $1,000.

Did you buy or sell a house last year? Check the settlement statement from your closing for deductible points (if you were buying) or real estate taxes (if you were selling).

Did you refinance your mortgage in 2002? Points paid on a refinancing are deductible over the life of the loan. If you pay off your loan early, through refinancing or the sale of your home, you can deduct any remaining points. That means you may have a deduction on your old loan, your new loan or both.

Are you an elementary or secondary teacher? You get a gold star this year from the IRS, a new credit of up to $250 to cover classroom expenses.

Did you pay college tuition and fees this year for yourself or for someone in your family? Unless scholarships covered the whole bill, take time to sort through your options for education credits and deductions. In addition, benefits from the Florida Prepaid College Program are now tax free as long as they are less than your education expenses, including costs such as room and board.

Still paying on student loans? Your interest costs may be deductible.

Details you need to get right

Double-check Social Security numbers for yourself and your dependents.

Check the math if you did your return without the help of a computer.

Sign and date your return if you are mailing it in.

Keep a copy of your return for your records, along with documentation to support your deductions, credits and losses.

What to do if you can't pay

File a return or request an extension by April 15 no matter what. Otherwise, failure-to-file penalties will be added to the interest and late payment penalties.

The late payment penalty is 0.5 percent per month, up to 25 percent of the balance due. The interest rate on late payments, which is set quarterly, is currently 5 percent.

Here are some options for borrowing the money to pay your tax bill:

* Pay by credit card through Official Payments Corp. (www.officalpayments.com), toll-free 1-800-272-9829, or Link2Gov Corp. (www.pay1040.com), toll-free 1-888-729-1040. The big drawback: a 2.49 percent "convenience fee," plus the usual interest on your card if you carry a balance.

Use a convenience check, if you have them, for your credit card. Read the terms and conditions for your card to find out the fee and interest rate that will apply.

Write a check against your home equity credit line if you have one.

Set up an installment agreement with the IRS. This option is available if you owe less than $25,000 and you can pay what you owe within five years. Attach Form 9465 to the front of your tax return to make your request. Be sure to include the amount of your proposed monthly payment. There is a $43 setup fee. Interest charges still apply, along with a reduced late payment penalty of 0.25 percent per month.

Borrow from a bank or credit union or from one of the tax preparation companies offering short-term loans.

If you owe more than you can ever hope to pay, you may want to apply for an "offer in compromise" to settle your debt. Send in Forms 656 and 433A. You can't just plead poverty; the IRS will want you to prove it. More details are on the IRS Web site, www.irs.gov.

How to ask for more time

Get an extension of time to file by filing out Form 4868. The IRS will automatically grant your request, giving you until Aug. 15. This doesn't extend your time to pay, so you should mail in a check for what you think you will owe to reduce your chances of being hit with late payment penalties and interest.

You can ask for an extension of time to pay by filing Form 1127. However, this request isn't automatically granted. The IRS says you have to demonstrate that immediate payment would cause "severe loss and undue hardship." Statements regarding your assets and income have to be attached, and you may be asked to put up collateral.

If you are serving in the armed forces in a combat zone or filing a joint return with someone who is, you get an interest-free extension of the filing deadline for 180 days beyond your combat service. Some pay earned during combat duty is also tax free.

Places to stash extra cash

If you aren't sending every spare dime to the IRS, you may want to take advantage of some special tax breaks for savers.

You have until Tuesday to make a 2002 contribution to an individual retirement account (or to a SEP/IRA for the self-employed). Your contributions may be deductible, reducing your taxes. At the very least, your investment earnings will be tax deferred. For most people, the annual IRA contribution limit is $3,000 ($3,500 for those 50 or older.) If you've got the money available, you can make your 2002 and 2003 contributions at the same time.

If you are saving for college expenses for a child or grandchild, Tuesday also is the deadline for setting up and making a 2002 contribution to a Coverdell Education Savings Account (formerly known as an Education IRA.) The limit is $2,000.

Final notes

Tax forms and publications are available at the IRS Web site, www.irs.gov, along with links to sites offering free electronic filing. To ask a question, call toll-free 1-800-829-1040.

If your financial situation has changed since your 2001 return, you might benefit from professional help with your return.

If you discover you made a mistake on a previous return, you can file an amended return. If it is within three years of the original filing, you may be able to get a refund based on a deduction or credit you missed the first time around.

-- Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.

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