Happy tax filing month. To help celebrate, this month’s newsletter has a fun tax quiz surrounding our first 1040 tax form introduced for the 1913 tax year. Also included is an article reviewing better alternatives for money parked in traditional bank accounts and an insightful article helping determine when filing a tax extension may make sense.
Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.
1913 Form 1040 Quiz
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!
Is an Extension a Good Idea?
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.
|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.|
Is There a Better Use for Your Bank Funds?
|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.
As always, should you have any questions or concerns regarding your situation please feel free to call.