Your Last-Minute Tax Questions Answered | Ed Slott and Company, LLC

Your Last-Minute Tax Questions Answered

By Jeffery Levine, IRA Technical Expert  

Follow Me on Twitter: @IRAGuru4EdSlott

We are now less than 2 weeks away from the big April 15th tax filing deadline. Regrettably, but not surprisingly, many people are just now getting around to gathering up their tax information or filing their returns. With crunch time upon us, the questions have been pouring in, so with that in mind, here are the answers to 5 of the most common questions we have been hearing over the past few weeks.

What’s the difference between a tax deduction and a tax credit?
While both a tax deduction and a tax credit are good things, a tax credit is generally much, much better. A tax deduction reduces your overall tax bill by reducing the amount of income you have subject to income tax. So, for example, say you are in the 25% tax bracket and have $100,000 of income. If you were able to take a $10,000 tax deduction, your tax bill would drop by about $2,500 ($10,000 x 25% rate). That’s nothing to sneeze at, but if you were somehow eligible for a $10,000 tax credit, your tax bill would be reduced dollar-for-dollar by $10,000. For instance, let’s say the tax bill on your $100,000 of income was $16,000. If you had a $10,000 credit, your tax bill would be reduced all the way to $6,000.

I got married/divorced in 2012. What’s my filing status?
Your filing status is generally determined on the last day of the year, so even if you were single for the entire year and got married at 11:59 p.m. on December 31st, you can file a joint return with your spouse as if you were married for the entire year. The reverse, of course, would be true if you got divorced on December 31st.

There are a few exceptions to these rules that you should be aware of. For instance, if you are married, but legally separated at the end of the year you may be able to file as single or head of household. Also, if your spouse passed away in 2012 and you did not remarry, you can file a joint tax return.

I received a K-1 for my IRA investment. Where do I report this on my return?
If this question has got you stumped, you are going to love this answer… you generally don’t! Gains and losses inside an IRA are generally not taxable. Instead, you are taxed at ordinary rates on distributions you take from your IRA. Therefore, information on a K-1 issued to an IRA, just like 1099s issued to an IRA, for interest, dividends or capital gains earned in an IRA account generally does not have to be reported anywhere. Of course, there are always exceptions to the rule, such as if your K-1 shows unrelated business taxable income, which can be taxable to your IRA (and not directly to you). However, even in this case, your IRA custodian will generally charge you (or your IRA) a fee and file the appropriate form (Form 990-T) with IRS.

If I file an extension, do I have more time to pay my tax bill?
No. Think about it this way… if that were the case, wouldn’t everyone file an extension? Filing an extension only gives you additional time to file your tax return. If you owe money to the IRS, you still have to pay by April 15th or face potential penalties and/or interest on your outstanding liability. You might be wondering “Well how do I know how much to pay if I haven’t filed my return yet?” Simply put, you have to estimate. And if you want to avoid any interest or penalties, estimate on the high side.

If I don’t have to file a tax return because I have very low income for the year, should I file one anyway?
I’d say yes. I mean, what’s the downside? There’s not really any, other than maybe a short amount of time, but there are certainly some benefits to doing so. For instance, maybe you’re wrong and your income is high enough to warrant filing a tax return. If you never file, your statute of limitations never begins to run, so IRS can come back indefinitely and assess any tax (and interest and penalties) you might owe. If, on the other hand, you file your return in good faith, there is generally only a 3-year window in which IRS can challenge your return.

Another good reason to file a tax return is to substantiate the compensation used to make an IRA or Roth IRA contribution. For instance, let’s say you have a working child who earned $2,500 last year. They probably don’t have to file a tax return, but if they made a contribution to their IRA or Roth IRA (or you made one for them), it might be worth filing a tax return to substantiate the fact that they had compensation during the year.


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