The tax filing deadline is quickly approaching, and the many of us who are deadline oriented are feeling the stress level rise. However, there is a bit of good news, for the extreme procrastinators. April 15, the normal deadline, has been pushed back to the 18^th–an entire extra weekend to deal with that paperwork! (Thanks to an obscure holiday in Washington DC.)

For those with personal emergencies, and many who are dependent upon others and normally experience delays while waiting for those late K-1’s or delinquent 1099’s, know that there is a right way and a wrong way to deal with the deadline.  The wrong way is to shrug it off or to go (the uncompleted) extension route..  The extension process (now available on line) is simpler now that the IRS and FTB both recognize that automatic approvals encourage more people to at least try to comply with the deadline.  What many don’t realize, or don’t bother to read far enough into the instructions to form 4868 (IRS) or form 3519 (FTB), is that any tax expected to be due with returns when finally completed, is due NOW.  The extension only secures time to process the data and file the returns, NOT to pay the tax! But how do we know how much is owed?

For many years there was no solution, and penalties were rampant.  But a few years ago the Tax Court got involved in a case and ruled in favor of a Dr. Sullivan, establishing a precedent for future late filers.  Basically, the ruling provides that so long as a taxpayer makes a diligent effort to accurately estimate the tax due, there will be no penalty later if the estimate is wrong! Soooo, the right way to deal with extensions is to go through the exercise of return preparation, and for those places where data is unavailable, refer to last year’s return, GUESS, and continue with the preparation process.  But make some notes on how or why you arrived at the ‘guesstimates’ used, and you will be fine! Pay the tax you calculate, and you now have six more months – until October 15, to complete the job.

For many who are self-employed, or who fund IRA’s in early April, the April 15 deadline is a BAD day!  Cash flow is critical at this point, since funds are needed to pay 1) last year’s tax, 2) any retirement plan funding needed to minimize that amount, AND 3) the first quarterly estimate for the current year’s tax.  On top of that, many small businesses need to make their monthly payroll tax deposit by that day as well!  Mid-April is a time that many taxpayers dread and that truly alienates them from the legislators that continually argue for increasing taxes, while they are enjoying the exemption from dealing with the laws the rest of us can’t ignore.

But the key pointer, for those too busy or disorganized to get their tax act together properly, the simple thing to do is estimate high, overpay a little, and when returns are complete, have the excess payment applied to the next year! That way you begin getting ahead a little, since the carryover will provide a cushion, or enable you to reduce the last estimated payment, or cut back your withholding later in the year, to compensate for the overpayment/credit. SIMPLE and effective!  And for those expecting refunds, not to worry at all, since penalties are only based on tax due, and the reverse does not apply.  Penalties are ignored when refunds are involved! So while it is best to deal with returns timely, if life’s emergencies have happened to you during 2010, do not stress out over the tax deadline, since there is an easy way to buy the extra time you need– with an application for extension of time to file.  And the FTB is even easier to deal with IF you don’t owe them anything!  NOTHING needs to be filed now at all, and the federal extension covers your intent.

Question – My adult son is in failing health and has come to live with us so we can care for him. Since he is part of our household now, can we claim him as a dependent?

Answer – It depends. There are 5 criteria that need to be satisfied before anyone can be properly claimed as a dependent.
They are: relationship, citizenship or residency, marital status, age and ‘qualifying support.’ He obviously meets the first two, but if he’s married and being included on another tax return, you can’t claim him. The last one is the tough one to meet for an adult dependent. But it is possible, if his income or support payments being received or provided by another person (pension, social security, disability benefits, child or spousal support, etc.) is small or he has none, then the ‘support’ you are providing may be sufficient. Support is his share of the cost of food, clothing, shelter, transportation and medical care. Figure the amount you spent last year for those categories of cost, divided by the number of people in your household, = his share.  It must be more than ½ of his separate income or support described above. Taxability of his ‘income’ is not a factor.  Failure to make sure he’s not being claimed by anyone else will likely result in both returns being audited!  Multiple support agreements are common between children caring for aging or disabled parents, or any ‘supported’ adult.

Question – I heard recently that IRS expects me to pay income tax on the stuff or even the services I receive when I exchange something with my neighbor or help her in return for her helping me! How can that be, since no money changes hands?

Answer – Congress established our system of taxation by designing it around transfer activity. Basically, we have to pay tax anytime there is an agreed-upon transfer/exchange between parties – goods for goods or for services. The parties agree on the fairness of the exchange of value.  It is up to each to assign a monetary amount to the transaction and yes, to report it as part of their income subject to tax. The occasional transaction value would be reported on the ‘Other income’ line on page 1 of form 1040. If a business does exchanges, the income received is also potentially subject to self-employment tax! A business owner reports bartered benefit value on Schedule C as Other Income. And the IRS finds out about any ‘bartering’ activity by asking you directly at the very beginning of any audit.  Rules about bartering are clearly a part of the Internal Revenue Code!