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.

One topic affecting increasing numbers of people is: Cancellation of Debt income. The IRS has implemented a new information reporting form that is intended to inform IRS about transactions involving debt restructuring and / or cancellation.  Since the long standing rule is affecting so many, the rules are worth visiting, and a small sample of the kind of transactions are included in the following questions:

1)    I just received a 1099-C from our mortgage company and I realize it must be related to our house foreclosure.  Do we have to pay tax on the amount they included on the form—on top of losing our house?
Answer—It depends on whether you have refinanced or not. Purchase money mortgages, original mortgage loans in California, are non-recourse debt, and as such will not constitute taxable income.  But you will have to report the sale of your house, using the balance of the loan at the time of foreclosure as the selling price. The other rules pertaining to sale of residence gain exclusions will likely result in no tax from the foreclosure—small consolation, all things considered.

2)    We negotiated away part of our credit card debt last year. Now we get a 1099 in the mail reporting the reduction as income. If we do have to include that in our tax return, where does it go? Any difference if the cards were all related to our business?
Answer- yes you do get to include that as income, on line 21 of your 1040. You may also note that interest and fees charged to you will be included in the computation of what is reported as cancelled. And business use may make a difference—it could result in  the reported amount showing up on Schedule C as Other Income, which would make it subject to SE tax if the net business activity shows a profit!

The variety of circumstances resulting in reported debt cancellation are substantial, and there are several exclusions provided by Congress so not all 1099-C’s will result in taxable income.  Very likely returns will have to include a Form 982 claiming which of the six (6) exclusions apply. And it is possible the reported amount is incorrect, so retaining records even in a repossession situation may be important to be confident yours has not been over reported!

Many people may wish to contribute to relief funds for the victims of Japan’s recent earthquake and tsunami. There are some simple steps you can take to ensure that your contributions go to qualified charities. Taxpayers who have a specific charity in mind can make sure that it is a qualified charity by doing a search on IRS.gov. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.

Contributions to foreign organizations generally are not deductible. To get a tax benefit for making a charitable contribution, taxpayers must itemize their deductions on Schedule A for the year in which they made the contribution. IRS Publication 526, Charitable Contributions, provides information on making contributions to charities. Publication 3833, Disaster Relief: Providing Assistance through Charitable Organizations, explains how the public can use charitable organizations to help victims of disasters, and how new organizations can obtain tax-exempt status. Both publications are available on IRS.gov.