April Newsletter

As April is tax month, included here is a short quiz to see how well you know your tax history. While Abraham Lincoln’s administration introduced the income tax to finance the Civil War, the first modern 1040 Individual Income Tax form was introduced in 1913. How well do you know what was on this original 1040? Enjoy!

What was the original due date of the initial 1040 tax form? March 1st, 1914. Failure to file on time could lead to a fine of between $20 and $1,000. A 30-day extension by reason of sickness or “absence” could be granted by the tax collector. Today we have an additional 45 days to file our tax returns (April 15th) and can file for a six-month extension. What was the tax rate applied to most individuals’ income? The “normal” tax applied to most 1913 tax returns was 1%. If you had Taxable Income of over $50,000 you became subject to the “Super Tax”. What was the maximum tax rate on these excess earnings?

Six percent. 2% was owed on income from $50,000 to $75,000. The maximum tax rate of 6% was owed on Taxable Income over $500,000. The 1913 tax brackets were; 1%, 2%, 3%, 4%, 5% and 6%. Compare this to our current tax brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Was there a marriage penalty built into the original Form 1040? Yes. If single (or married but not living with your spouse) your exemption amount was $3,000. If you lived with your spouse your exemption amount was only $4,000. If both you and your spouse worked (a rare event in 1913), you could divide the $4,000 exemption any way you wished to minimize your taxes. Name two things that are currently taxed, but were not taxed on the original 1040 tax form? There were many, but perhaps the most common untaxed items were dividends and net earnings from corporations that were already taxed. The double taxation of corporate earnings that we experience today would be added later. True or False. All the original tax returns required a signed affidavit before an authorized officer of the government prior to being filed. True. All properly filed tax returns required affidavits made before an officer authorized by law to administer an oath of accuracy. This could be a justice of the peace, a magistrate, or a certificate of the clerk of the court. Mailing in your tax return was not an option in 1914.

The clock is ticking down to the pending tax-filing deadline of April 15th. Here are some examples when filing an extension might make sense other than rushing to meet the filing deadline.

Incorrect Form 1095-A. If you received health insurance through the new Healthcare (Marketplace) Exchange, you may have received an incorrect Form 1095-A recapping this activity. Over 800,000 of them were sent out in error. If it impacted you, it might make sense to wait for a corrected form. Other Form Errors. If you receive a W-2 or Form 1099 that has errors, you may also wish to wait until you receive a corrected form. This delay may help you avoid a tax form mis-match with IRS records if you file your tax return before the form is corrected.

	Missing K-1. If you have ownership in a small business, you should receive a K-1 summarizing your share of profits or losses. If the business entity is an LLC, you may have not yet received your necessary K-1. If this happens a tax extension may be necessary.
	Conflicting Dependents. If an ex-spouse or other individual used one of your dependents in error, you may wish to have the error corrected prior to filing your tax return.
	Self-employed Retirement Contributions. If you are self-employed you have until you file your tax return (including extensions) to fund your retirement account. This tax provision applies to SEP IRAs, solo 401(k)s, and SIMPLE accounts. By filing an extension, self-employed individuals give themselves up to six more months to fund a retirement account. This provision does not apply to Traditional or Roth IRAs.
	Recharacterizing Roth IRA Conversions. If you transfer funds from a Traditional IRA to a Roth IRA, tax is due based on the fair market value of the assets at time of transfer. If, after transferring the funds, the value of the investment goes down, you may be required to pay tax on an over-inflated value. By delaying the filing of your tax return, you can buy time to convert the funds back to the original retirement account and avoid paying taxes on the higher value.

Extensions Are a Last Resort

	Start the audit clock. It is usually best to file your taxes by the April 15th due date. By doing so, it starts the Federal audit clock. Remember the window to audit your federal tax return is generally the later of three years after the due date OR when you actually file your tax return.
	Pay your tax. If you decide an extension is the right course of action for you, the form must be filed on or before April 15th for an automatic six-month extension. While this extension does not delay the requirement to pay the taxes owed on or before the April 15th deadline, it does eliminate a possible late filing penalty.

With interest rates at banks hovering near zero is there a better use for your savings besides traditional bank accounts? Here are a few ideas to consider. Remember to seek the advise of a trusted financial advisor prior to taking action to ensure the approach you wish to take is right for your situation. Fully fund an emergency account. Prior to doing anything else, review or establish your emergency fund. This fund should be sufficient to tide you over if you lose your job or have an unexpected need for cash. The amount needed varies from person to person but is typically from six months to twelve months of cash needs.

	Pay off credit cards. Why pay a bank or financial institution 9 to 20% on credit card debt when you only receive ½% on your savings account? So pay off all your credit card balances and then work to keep them at zero.
	Pay off other debt. Most interest expense is not deductible on your tax return. So paying down debt almost always provides a better return than holding funds in a low interest bank account.
	Put more into retirement accounts. Use excess cash to fully fund tax advantaged retirement savings options. This might include an employer provided 401(k) or a variety of IRA account options.
	Mortgage principal pay down. Even paying more principal on home mortgages and home equity loans can provide a better return than your bank savings account options. While these interest rates are now low and provide an itemized deduction opportunity on your tax return they are still a better return than parking excess cash in a bank account.
	Ladder CDs. Purchase a number of quality Certificates of Deposits (CDs) with different maturity dates. As each CD matures, roll the funds into a new longer-term CD. This way some CDs will mature each year making cash available, while still taking advantage of higher long-term interest rates. Example: purchase a one-year, a two-year, a three-year, a four-year and a five-year CD. When a CD matures, reinvest the funds into a five-year CD. Once built, your CD ladder will have one of your CDs maturing each year.
	Alternatives to banks. There are now opportunities to make direct loans to consumers and small businesses through alternative lending options. These alternatives to banks allow you access to those needing to borrow funds. While more risky, it is a way to give you access to those who need to borrow money.

There are many alternatives to leaving your money parked in low interest bank accounts. Just remember to conduct the proper research and seek professional help prior to taking any action.