8 tax moves to make now : How to stay on track despite this season’s tax delays

Eva Rosenberg, MarketWatch writes:  Transmitters have been storing up tax return data for weeks, just chomping at the bit, waiting for the starting pistol to go off. Finally, this week, the IRS opened the e-filing gates.   Still, things are running behind schedule this year. Common refund-generating forms, like the Education Credit, for instance, are not being processed until the end of February. This is holding up refunds for taxpayers, as well as fees for tax professionals — who often don’t get paid until the tax return is filed. One tax pro even asked me whether it would be unethical to complete and file tax returns without the Form 8863 — and amend them later.

Here’s what we can and should be doing in February. 

1. Track down stray forms. 

W-2s and 1099s are rolling in. They should all have been postmarked by Jan. 31. If you don’t receive them by mid-February, track them down — especially if you’ve moved since filling out W-4s and W-9s. Contact your former employers — and clients. But remember, if you’re self-employed, don’t do your bookkeeping by collecting 1099s. It’s up to you to keep your own records. 

2. Get an IP PIN.

Identity theft is on the rise. At a recent San Fernando Valley Breakfast Meeting for tax professionals, practically every single tax pro said they had clients who’d been ID-theft victims. If your identity has been compromised, make sure you get your special IP PIN. Fill out Form 14039, the Identity Theft Affidavit ( find Form 14039 here ). If you did that last year and still haven’t received a PIN, contact the IRS immediately ( see the IRS Identity Protection page ). If you find yourself getting nowhere after 30 days, contact the Taxpayer Advocate Service at 1-877-777-4778 (or find them online).

This special IP PIN is issued to people who have informed the IRS that someone may have filed a fraudulent tax return using their Social Security number. Getting an IP PIN will ensure that only you are able to file a tax return using your own Social Security number. Even if you were a victim of credit card-related identity theft rather than tax-related theft, alert the IRS. 

3. File a new W-4.

Provide your employer with a new W-4 Form for 2013 if you told them you were exempt from withholding last year. If you end up with a refund for 2012, or owe less than $1,000 ( see Tax Withholding rules here ), you may file exempt again this year. 

4. Businesses: Submit paper 1099s.

Businesses that file 1099s on paper must submit them by Feb. 28. Those who file electronically can wait until March 31. Remember, W-2s and 1099s should have been sent to recipients by Jan. 31. One of the reasons to hold off filing the forms for a month or so is to wait for corrected information. Some workers may have moved. Others may find discrepancies between their numbers and yours. Making corrections before filing the 1099s and W-2s means that you don’t have to file amendments with Uncle Sam. 

5. Check for duplicated income.

Steven Aldrich, CEO of Outright.com, a Go Daddy company, recommends reviewing1099-MISC and 1099-K forms carefully. It’s quite possible that you could get a 1099-MISC from your vendors, and a 1099-K from your merchant account processor for the same work. There may be overlapping amounts, making it appear that you earned more than you really did. Keeping good books — using a system like Outright.com, FreshBooks or QuickBooks — will ensure you know how much you really earned. (Note: TaxMama is holding a workshop in late February on how to adjust your tax returns to avoid paying tax on duplicated income. 

6. Schedule your tax appointment.

Aldrich also recommends that you say hello to your accountant. Remind your tax pro that you want an appointment with him or her. If you don’t already have one, choose a tax preparer or accountant now so that they have time to talk with you about tax-planning as well as tax-preparation matters. You can work with an Enrolled Agent ( link ), a CPA ( link ) or an RTRP ( link ). (Note: The IRS has suspended the Registered Tax Return Preparer (RTRP) program, due to a court order. However, over 53,000 tax preparers have already earned the RTRP license.) 

7. Set up a filing system for 2012 documents.

In January, we talked about setting up your 2013 filing system. With all the 2012 documents coming in now, this is also a good time to set up your 2012 filing system. Aldrich thinks it’s wise to keep everything in one place. Organize the information into folders if it’s on paper, or enter the data into spreadsheets. Remember to separate personal spending from business spending to make tax preparation easy, regardless of how you prepare your returns (paper and pencil, tax software, accountant). These expense categories were used by many e-commerce businesses last year: cost of goods sold, marketplace fees, shipping costs, office supplies, and utilities. Service businesses generally reported expenses in these categories: taxes/licenses, office supplies, meals, and travel.  When it comes to organizing and storing your documents in the cloud, you have a free resource at TaxACT’s DocVault ( link ). Or you can dump your boxes and bags of records on ShoeBoxed.com ( link ) and let them organize it for you. Incidentally, every resource mentioned in this article has mobile apps to let you upload or transmit data on the go. 

8. Set up your EFTPS account.

Taxpayers who expect to be making estimated tax payments should set up an Electronic Federal Tax Payment System ( EFTPS ) account this month. This will enable you to pay all federal taxes, without a fee, directly from your bank account. This is perfect if you’re a procrastinator and often make payments at the last minute.

Check to see if your state has a similar system. ( Find your state’s tax site here .)

Incidentally, one of the fun things to do this month is to watch the tax commercial wars. TurboTax got so aggressive in its commercials this year that H&R Block filed a motion in the U.S. District Court to get an injunction against several of the ads. They didn’t get the injunction. Instead, H&R Block is running some ads of its own, highlighting the skills of its tax professionals. Keep watching, all the tax ads are getting better.

How to Be Smarter About Taxes : With many fund investors facing new levies this year, here are strategies for reducing the bite

Michael Pollack for the Wall St. Journal writes: For fund investors, it's time to brush up on your tax smarts. Thanks to the fiscal-cliff negotiations, rates are going up for the highest earners. Even those a few rungs lower on the earnings ladder are getting hit with new levies connected to the 2010 Affordable Care Act. And all of these tax increases are arriving just as funds look ready to pay out larger taxable gains, says Tom Roseen, head of research services at Thomson Reuters Corp.'s Lipper unit. Unfortunate timing, some might say.

But what all fund investors should know is there are ways to limit and even reduce the bite that taxes take out of their fund returns. Here's how:

Know which popular fund strategies result in more taxes

For starters, investors may want to think twice about sexy strategies marketed recently as good plays for volatile markets. Some "long-short" and "go anywhere" strategies, for example, may be good in dealing with the ups and downs of the market, but also may produce more tax obligations than investors like, says Dan Moisand, a certified financial planner in Melbourne, Fla.

The reason: The more actively a fund is managed, the more potential it has to produce short-term gains and thus higher taxes. Gains from securities owned for a year or less are taxed as ordinary income—rates that for most investors are much higher than the new maximum 20% on long-term gains.

Investors also should be aware that for certain popular assets, the tax rates soar past 15% no matter how long the investment is held. Even long-term gains in an exchange-traded fund that owns physical gold, for example, which is classified as a collectible, are taxed at rates of up to 28%. And when funds hold commodities futures, part of the appreciation each year is taxed at ordinary-income rates, which now go as high as 39.6%. On top of that, this year marks the beginning of the health-care law's new 3.8 percentage point surtax on investment income for individuals with adjusted gross income of $200,000, and couples with $250,000.

To see how big a bite taxes will take out of a fund's return, go to Morningstar.com. When you reach the page for a certain fund, click on the tax tab. There you'll see the fund's tax-adjusted returns broken down for various periods. Morningstar also shows how funds rank with their peers in terms of how much of their returns are lost to taxes.

Be strategic about what funds you put into taxable accounts versus tax-sheltered accounts:

Funds that throw off a lot of interest (taxable bond funds, for example) or short-term capital gains (such as funds with active trading strategies) should go into a tax-deferred account, like an IRA or 401(K). Distributions from retirement accounts are taxed as ordinary income, and most investors tend to be in a lower bracket when they retire. But regardless of what bracket you retire in, many advisers recommend deferring paying tax on interest and capital gains for as long as you can, within the law.

Meanwhile, use your taxable account for stock funds whose trades mostly qualify for the long-term gains rate, tax-exempt municipal-bond funds and equity funds that focus on dividends that qualify for the maximum 20% rate.

A fund's prospectus usually will state whether its portfolio is managed with an eye toward holding down taxable distributions. Look also for the "turnover rate," or the percentage of a fund's holdings that change in a 12-month period. Many funds have turnover of around 100%. For a fund to be in a taxable account, the rate should be about 25% or less.

Check actively managed funds for embedded gains or losses

It's like finding money in the laundry. When a fund sells more securities at a loss than a gain, the excess losses can be applied to canceling out taxes in future years. Before 2010, funds could carry losses forward for up to eight years. But following a change in tax law, losses incurred in fund tax years that begin after Dec. 22, 2010, can be carried forward indefinitely.

Since the 2008 market downturn, many funds have been able to keep distributions low by using losses to offset gains. But most funds are likely to have exhausted their loss carry-forwards by now. When funds sell profitable positions now, they likely will have to pay out taxable gains.

Be especially wary of funds that had sizzling performance over the past three years.

"If you buy a fund near the end of a hot streak and a lot of investors bail out, that could force the manager to realize gains to meet redemptions," says Jim Holtzman, who oversees client portfolios at Legend Financial Advisors Inc. in Pittsburgh. Such a fund may have to pay out substantial gains, even though its net asset value is declining.

A fund's annual report should say whether it is carrying unrealized gains or losses. Or click the tax tab on the fund's page at Morningstar.com, which shows how much of a fund's portfolio represents embedded gains or losses.

"If you see a big embedded gain, like 30% or higher, and a fund has high turnover, it's likely to distribute gains in the next couple of years," says Russel Kinnel, director of mutual-fund research at Morningstar.

One fund that still is carrying significant embedded losses is T. Rowe Price Financial Services . According to T. Rowe Price Group, the fund at the end of 2012 had about $143 million in capital-loss carry-forwards and nearly $59 million in unrealized capital gains. So if all its holdings were sold, it would have capital losses equal to nearly 22% of its assets.

Think about harvesting tax losses year-round

Advisers caution against letting taxes alone drive investment decisions. But there can be advantages to harvesting losses when the chance arises, especially if you plan to raise cash later in the year by selling securities at a profit. During a time of sudden market shifts, losses may not stay losses for long.

Use appreciated securities instead of cash for charitable giving

Under tax law, you can avoid taking a big gain in appreciated fund shares by donating the shares to a charity. This is a good way to be both charitable and tax-efficient, says Andrew Altfest, executive vice president at Altfest Personal Wealth Management, New York.

For example, suppose you wanted to donate $10,000 to a charitable foundation. You might consider using fund shares that you originally bought for $5,000, that you have owned for more than a year, and that now have a $5,000 unrealized gain. By giving the shares to the charity, you can deduct the full $10,000 value, and avoid paying capital-gains tax on the appreciation.

Once the donation is completed, you could buy new shares of the same fund at the current, higher price, establishing a higher cost basis and reducing the tax bill on any future sale, Mr. Altfest says.

Consider a fund that tries to limit taxable distributions

Many firms offer "tax-managed" equity funds that aim to minimize taxable distributions. When such funds sell part of a position in a stock, they pick shares that will trigger the lowest tax bill, and they try to match up gains with losses taken elsewhere in the portfolio, says Duncan Richardson, chief equity investment officer at Eaton Vance Management, which has 12 such funds.

Among other firms, Vanguard Group has five tax-managed funds that invest in stocks or stocks and bonds. There are also Dreyfus Tax-Managed Growth and Manning & Napier Tax Managed . USAA Growth and Tax Strategy is a conservative-allocation offering that owns a mix of stocks and tax-exempt bonds.

Keep in mind: index funds and ETFs produce taxable gains, too

Passive funds that are based on broad market indexes can be among the best at avoiding taxable gains distributions. Their portfolios change only infrequently, and primarily because of component changes in the indexes they track.

Vanguard Total Stock Market ETF, VTI +0.97% which owns more than 3,000 U.S. stocks, has a tax-cost ratio of just 0.3% for 10 years, according to Morningstar. Tax-cost ratio is the percentage of a fund's annualized return that is reduced by taxes paid by shareholders on its distributions. The average tax-cost ratio for all funds followed by Morningstar is around 1%, which is another way of saying that an average one percentage point of fund return is lost to taxes each year.

Some passive funds, like small-cap index funds, change more often. As small-cap companies mature, they graduate to other categories and need to be replaced in an index. Vanguard Small Cap ETF VB +0.87% has a five-year tax-cost ratio of about 0.5%.

Choose funds that best fit your tax situation

Tax implications should be of less concern than whether a fund meets your investment objectives. But the funds that you own should be tailored to your specific tax situation.

A taxpayer in one of the two lower federal tax brackets may do better by owning a taxable bond fund than a tax-exempt municipal-bond fund. An investor in a long-term municipal-bond fund would get less than 3% interest. Even after paying tax at 15%, an investor might get nearly 4% from a taxable high-yield bond fund.

"At the end of the day, it's after-tax total return that matters," says Joel Dickson, senior investment strategist and principal in the investment strategy unit of Vanguard Group.

Paying Your Tax Debt to the IRS: "Offers in Compromise"

Dennis M. Haase, Esq.  writes: If you owe back taxes, the IRS may let you settle your tax debt for less than the amount you owe if you can’t pay the full amount due or if paying the amount due would create a financial hardship for you. This is known as the IRS Offer In Compromise program.

Additionally, as part of this program, the IRS in May of 2012 unveiled the Fresh Start initiative to make it easier for individual and small business taxpayers to pay back taxes and avoid tax liens. The Fresh Start initiative gives the IRS greater flexibility in considering your ability to pay and greater flexibility in determining the equity in your assets and determining your allowable living expenses, all of which are used by the IRS to evaluate your offer in compromise and improve your chances of having your offer accepted by the IRS.

For example, in the past the IRS looked at four years of your future income to determine your ability to pay your delinquent taxes. Under the Fresh Start initiative, the IRS will now look at only one year of future income for offers that will be paid in five or fewer installments. The IRS will look at only two years of future income for offers that will be paid in six to 24 months.

In addition, the IRS, in determining your ability to pay, allows other monthly expenses in addition to your living expenses to be claimed, such as amounts to repay student loans and delinquent state and local taxes.

The IRS will accept a taxpayer’s offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential, or when special circumstances exist. More specifically, the IRS will compromise liabilities when:

1. there is a doubt as to the existence or amount of the tax liability;
2. there is doubt that the total amount due can be collected; or
3. there is no doubt as to the liability or as to collectibility, but compromise would promote effective tax administration because either collection of the liability would create economic hardship, or compelling public policy or equity considerations provide a sufficient basis for compromising the liability.

An additional benefit of the Offer in Compromise is that while the IRS is considering your offer, the IRS is legally prohibited from seizing your assets or your wages. This is an excellent opportunity for those who are burdened with the federal tax debts to enter into the Offer In Compromise program to reduce and eliminate their outstanding taxes, interest and penalties owed to the IRS.

New York City - Sales and Use Tax: Application Deadline for Hurricane Emergency Tax Exemption Program Extended

The deadline to apply for the New York City sales tax exemption provided under the Hurricane Emergency Sales Tax Exemption Program (HESTEP) (TAXDAY, 2012/11/19, S.16) has been extended from February 1, 2013, to April 1, 2013. The program is administered by the New York City Industrial Development Agency (http://www.nycedc.com/program/hurricane-emergency-sales-tax-exemption-program-hestep) and provides emergency assistance to small businesses impacted by Hurricane Sandy.

Filing and Payment Deadlines Extended for Some Hurricane Sandy Victims

As part of a coordinated federal response to the damage caused by Hurricane Sandy and based on local damage assessments by FEMA, the IRS on February 1 announced additional tax relief for affected individuals and businesses in the counties of Monmouth and Ocean in New Jersey and Nassau, Queens, Richmond and Suffolk in New York. The tax relief postpones various tax filing and payment deadlines that occurred starting in late October; as a result, affected individuals and businesses will have until April 1, 2013, to file these returns and pay any taxes due.

The relief includes the fourth-quarter individual estimated tax payment, normally due on January 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on October 31, 2012, and January 31, 2013, respectively, and calendar-year corporate income tax returns due on March 15. It also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period. Further, any interest, late-payment or late-filing penalty that would otherwise apply will be abated. The IRS automatically provides this relief to any taxpayer located in the disaster area. Taxpayers need not contact the IRS to get this relief.

The IRS will work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located in the areas affected by Hurricane Sandy. All workers assisting in the relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are also eligible for relief. Taxpayers who live outside of the impacted area and believe they may qualify for this relief need to contact the IRS at 866-562-5227.

In addition, Taxpayer Assistance Centers in several New York and New Jersey locations will be open additional hours to provide help to taxpayers impacted by the hurricane. Special assistance will also available at several New Jersey and New York locations on Saturday, February 23 from 9:00 a.m. until 2:00 p.m.