Filing your N.J. or federal tax return? Don't miss these last-minute tips

Ed Beeson for the Star Ledger writes:   One week to go.  New Jersey’s 4.3 million federal income tax filers have until April 15 to put the finishing touches on their federal and state tax returns.   But in the rush to complete a return (and hopefully reap a refund), taxpayers easily can miss deductions that would reduce their tax burden.

Marcia Geltman, a partner with accounting and advisory firm Nisivoccia in Mount Arlington, spoke with The Star-Ledger and offered tips on what filers should look out for. A former agent with the Internal Revenue Service who’s been with Nisivoccia for 25 years, Geltman encouraged filers to not overlook oft-missed deductions for medical expenses and education. She also warned about red flags that tax collectors are searching for and discussed options Hurricane Sandy victims have.  Edited excerpts of the interview are below.

Q. What are some common deductions that get overlooked?
A. Some things people forget are that they can deduct long-term care insurance premiums, mileage back and forth to doctors at 23-cents a mile and tuition credits up to $2,500 on their federal returns
Medical expenses for federal returns have to exceed 7.5 percent of your adjusted-gross income before you can take a deduction, but in New Jersey you only have to exceed 2 percent. Many people are now required to contribute to the health care insurance they receive through work. Even though most times these contributions are taken out pre-tax at the federal level, it’s usually not pre-tax for New Jersey, which means you could deduct that contribution on your New Jersey return. When you put that down, sometimes health insurance premiums push you past that 2 percent threshold. Therefore, things like medical mileage, long-term care insurance and co-pays can really benefit you on your New Jersey return.
Also, if you have capital gains in 2012, remember that losses in prior years can be used to offset gains in the current year. But that’s only for federal returns. New Jersey doesn’t allow loss carry-overs.

Q. What are some typical errors taxpayers make, particularly if they’re in a rush?
A. If you have distributions from an IRA account, they may be taxable on your federal return because you would have gotten deductions when you put the money in. But for New Jersey, when you put money into an IRA, you don’t get a deduction for it. So when the money comes out, for New Jersey purposes you should only be taxed on the earnings. It’s possible your tax on IRA distributions would be different for New Jersey than it would be for your federal return.

Q. Are there certain red flags that the IRS or the New Jersey Division of Taxation are on the lookout for this year?
A. Obviously, very high levels of deductions compared to your income, including charitable contributions and business expenses, would be a red flag. The IRS publishes once a year the average medical expense based on income, charitable based on income, but that doesn’t mean you wouldn’t be audited if you came higher or lower than that.
If you claim an Earned Income Tax Credit in New Jersey, the state may require you to submit copies of your Social Security card, IRS transcripts or passport. If you do claim an EITC in New Jersey, be prepared to provide additional substantiation. The state has indicated there has been a lot of abuse in this area, which is why I think they’re asking for more substantiation. But personally I think it’s unfair for those who are eligible for the credit to have to provide all of this documentation.

Q. Do have any advice for self-employed filers?
A. If you’re an individual and you want to put money in an IRA account, you have to do it by April 15. But if you’re self-employed and you want to put money into a self-employed retirement plan, of SEP, you have until the extended due date for the return, which is Oct. 15. If you don’t have the money now, you could file for an extension to complete your tax return.
If you are filing for an extension, you have to remember that New Jersey doesn’t accept an extension unless 80 percent of your tax is paid by April 15. And if you file for an extension on your federal or New Jersey return, that doesn’t eliminate any late penalties or interest. So even if you’re filing for an extension, you should still estimate the amount of tax you think is due and pay it by April 15.

Q. If you were a victim of Hurricane Sandy, what are your options with taxes?
A. Unless you have a substantial loss from Sandy that was not compensated by insurance, in most cases you do not benefit from it from a tax standpoint.
You can claim a casualty loss based on the decline in the value of your property. However, once you determine that decline in the value of your property, you have to reduce it by any insurance proceeds that you are entitled to receive. Then you have to further reduce that by 10 percent of your income. Then you further reduce that amount by $100.
I’ve had a number of people ask about lost income, lost wages as a result of Sandy. Unfortunately, you do not get a deduction for that.

The Cost Of Paying Taxes With A Credit Card

Jasosn Steele for Smart Balance Transfers writes: As the tax filing deadline approaches, many taxpayers will look to their credit cards in order to meet their payment obligations. But in most instances, using a credit card to pay taxes will be more expensive than simply writing a check. This is because taxpayers must use one of the approved IRS payment processors and these companies charge a credit card processing fee.
Let’s take a look at these options:

Official Payments Corporation: This company charges a fee of 2.35% and accepts Visa, MasterCard, Discover, and American Express.

Choice Pay accepts personal tax payments only for a fee or 1.88%, but they only accept Visa And MasterCard.

Pay1040.com is operated by Link2GovCorporation and charges a 2.35% fee. They accept Visa, MasterCard, Discover, and American Express.

BusinessTaxPayment.com is also part of Link2GovCorporation and also accepts Visa, MasterCard, Discover, and American Express with a 2.35% fee.


PayUSAtax.com is run by WorldPay US, Inc and it accepts Visa, MasterCard, Discover, and American Express with a 1.89% fee.

Which is best?
Taxpayers who are using their credit card should find the one with the lowest fee. For Visa and MasterCard, Choice Pay has the lowest rate at 1.88%. PayUSAtax.com is a close second with 1.89%, and they take American Express and Discover. Both BusinessTaxPayment.com and Pay1040.com charge 2.35%, which is significantly higher.  By understanding all of the available options, taxpayers can spend the least in fees when they choose to pay taxes with their credit cards.

Calculating costs and benefits of Roth IRA strategies

Chris Farrell for Star Tribune writes:  Q: Are there any tools or resources available to help me weigh the costs and benefits of rolling over my tax-deferred savings into a Roth IRA, where I can take full charge of investment decisions? As a new retiree, I now have the time to learn and actively participate in equity investing/trading, where my gains would be maximized by the Roth IRA advantage of being tax-free. I need to find a way to weigh the costs against the potential value of such a strategy.

Answer: You really have two issues. The first is the wisdom of converting your tax-deferred savings into a Roth IRA. The second is trading within the Roth.  Let’s deal with conversion question first. I think the single best retirement savings plan is the Roth IRA. The main reason: Since you’ve already paid tax on the money going in, you don’t have to pay taxes on accumulated gains when you withdraw the money during retirement. The Roth also adds to estate planning flexibility since, unlike the traditional IRA, there is no required minimum distribution starting at age 70 ½.

You first need to figure out whether it makes financial sense for you to convert and pay the accumulated tax bill now vs. later. I’m going to lay out some of the cautions and trade-offs to think through.

Here’s a reasonable rule of thumb: The conversion is worth considering if you have additional savings to tap for the tax bill. It doesn’t make sense if you use some of your tax-deferred savings to pay the tax levy.

I would recommend figuring out whether paying taxes upfront is the best use of your savings compared with, say, maintaining a flush emergency savings account, paying off debts, and so on.

Time is another consideration. The tax-free power embedded in Roth-sheltered accounts comes into play the longer the money is in it. But if you plan on tapping the money within five to seven years, it may not be worth paying the tax on conversion.

Other considerations? The odds that you’ll pay higher taxes in the future (which favors conversion now) vs. the likelihood your tax rate will go down (an argument for the status quo).
There are a number of conversion calculators that will help you think through the trade-offs. The program at Analyzenow.com allows for a detailed analysis. The comprehensive online financial planning site ESPlanner.com is good, too. I would also check out the writing of Ed Slott, the irrepressible expert on all things IRA, for additional insight at IRAhelp.com.

You might also want to consult with a fee-only certified financial planner for an analysis, since any decision about conversion should be within the context of overall household finances.
To your second point, I’m wary of actively trading in retirement accounts, traditional IRA or Roth IRA. Not everyone agrees with me, but I would trade in individual stocks and other securities in a taxable account. This way, if it turns out that you’re bet goes wrong, Uncle Sam will share your pain and reduce the financial blow.  With your retirement money I’d focus on creating a margin of financial safety for your retirement years.

Funding a Family Member’s IRA / Contributing to the individual retirement accounts of a spouse, child or grandchild before April 15 can help boost their retirement security and potentially lower your tax bill.

Anne Tergesen for the Wall St. Journal writes: Funding the individual retirement accounts of family members before April 15 can boost their retirement security and potentially lower your tax bill.  Before putting money into the IRA of a spouse, child or grandchild, however, it’s important to understand the rules that apply to such contributions.

For married couples, the need for one spouse to contribute to an IRA for the other typically arises when one of the two drops out of the workforce or becomes unemployed. Normally, an individual must have compensation to be eligible to put money into an IRA. But in the case of a nonworking spouse, there is an exception, says Ed Slott, an IRA expert in Rockville Centre, N.Y. The loophole allows a working spouse to establish and fund an IRA in the nonworking spouse’s name.

“It is a great way for a stay-at-home parent or an unemployed spouse to keep their nest eggs growing,” he adds. Whether it makes sense to use a traditional IRA or a Roth IRA depends on your income, age and goals. With either type of account, an individual under age 50 can save up to $5,000 for 2012 and $5,500 for 2013. Those 50 and older can contribute up to $6,000 for 2012 and $6,500 in 2013.

With a traditional IRA, the nonworking spouse, who cannot be older than 70½, may be eligible to deduct from taxable income some or all of this annual contribution, thus reducing the couple’s tax bill. With a Roth, which allows contributions at any age, you invest with post-tax dollars but you withdraw earnings later on tax-free.

To qualify, though, a married couple has to meet certain requirements. If neither spouse is eligible to participate in a company-sponsored retirement plan, such as a 401(k), the couple can fully deduct the IRA contributions of both spouses—no matter how much money they make.

But if each is eligible for a 401(k)-style plan, they can only fully deduct their contributions if they earn less than $92,000. (The deduction phases out between $92,000 and $112,000.)

If one spouse—say, the husband—is eligible for a 401(k)-style plan but the other isn’t, the husband can deduct his contribution if the couple earns less than the $92,000 phaseout amount. But the wife can deduct her contribution even if they earn as much as $173,000. (Her deduction phases out between $173,000 and $183,000.)

Because nonworking spouses typically are ineligible for 401(k) plans, they often qualify for a deduction at the higher income limits, which can help some couples claim an extra deduction, says Mr. Slott.

Roth IRAs are good options for couples who expect to pay higher future tax rates or want to leave an IRA to beneficiaries. (The income limit is $183,000 for married couples filing joint tax returns.)

If you want to fund an IRA for a child or grandchild, a Roth is often a no-brainer, says Mr. Slott. Why? To contribute to an IRA, the child must have income. But because children often earn little, “the deduction they would receive for making a traditional IRA contribution would be almost worthless,” he says. Be aware that annual contributions to a child’s IRA can’t exceed his or her annual income.

If the child needs money for college or medical costs, he can withdraw the contributions tax- and penalty-free from a Roth IRA. And if the money is used for higher education, no early-withdrawal penalty is assessed on earnings either.

Why Social Security Taxes Are Sky-High, and How You Can Avoid Them

Dan Caplinger for Fool.com writes:   Retirees have become increasingly dependent on Social Security for the bulk of their retirement income. Yet even though most retirees have few other sources of income and rely on their retirement savings to supplement Social Security, current tax laws are designed to punish even Social Security recipients with modest incomes, with effective marginal tax rates of as much as 46%, topping what the highest-income taxpayers in the nation pay.

The strange taxation of Social Security
You won't find a 46% rate explicitly written down anywhere in the tax code. But as a recent post from financial planner Michael Kitces explains, buried in the law are provisions that phase in taxes on Social Security benefits for those earning certain amounts of other income.
Here's how it works. The IRS looks at your total taxable income and then adds in half of your Social Security benefits. For every $1 by which that figure exceeds $25,000 for single filers or $32,000 for joint filers, another $0.50 of your benefits get added to your taxable income. Once the figure exceeds $34,000 for singles or $44,000 for joint filers, the amount added to your income jumps to $0.85 per $1.

The net impact of those provisions can dramatically increase the tax rates that Social Security recipients pay. In some cases, those in the 15% tax bracket pay an effective marginal rate of almost 28%, while those in the 25% bracket pay more than 46%.

Are Social Security taxes fair?
Proponents of the tax argue that if you have enough other income, it's only fair to add a tax on Social Security. But the big problem is that in determining the tax, taxable withdrawals from retirement accounts like traditional IRAs and 401(k)s are included in income. Essentially, those who've saved all their lives for their retirement get penalized for their smart financial planning.
Fortunately, there are steps you can take to minimize the impact:

• Use Roth IRAs. Roth IRAs are different from regular retirement accounts in that their distributions are tax-free. They also aren't included in the income figure the IRS comes up with for deciding whether Social Security benefits are taxable, so using Roth assets can cut your tax bill even further.
• Invest in tax-smart funds and ETFs. Investors who use actively managed mutual funds often get hit with big distributions of income and capital gains that are taxable and thereby make them more susceptible to paying tax on their Social Security. But low-cost stock index funds Vanguard Total Stock (NYSEMKT: VTI  ) , iShares Russell 2000 (NYSEMKT: IWM  ) , and SPDR S&P 500 (NYSEMKT: SPY  ) usually pay out only their annual income, generally avoiding capital gains and keeping your other-income figure lower.
• Time your IRA withdrawals. Keeping taxable income below the limit is smart if you can afford it, but many people need their IRA withdrawals to pay living expenses. For them, it may actually make sense to take more money out of IRAs, because once the maximum amount of your Social Security is taxed, your marginal rate goes back down.

Admittedly, calculating the tax on your Social Security is more complex than many retirees can handle. The key, though, is to know that those sky-high tax rates are out there so that you can get the help you need to keep your taxes from soaring.
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Why pay more for a variable annuity rider?

Christine Dugas for USA Today writes:   Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisors answering reader questions about saving, protecting and growing your money.

Q: I have a variable annuity that offers a rider that it says would allow a monthly income that is constant without losing control of the principal even if the principal is depleted. What's the catch and are they a good idea?

A: There is normally a catch with annuities, and variable annuities in particular.

I am not a fan of variable annuities for several reasons, including complexity, high expenses, and limited investment choices. The distributions are taxed at ordinary income tax rates. And a variable annuity has no step-up in cost basis for your heirs, which means that if you invest $100,000 in a variable annuity, and it doubles to $200,000, upon your death, your heirs will have to pay taxes, at their ordinary income tax rate, on the $100,000 gain. 

The expenses include mortality and expense fees, which are intended to pay for different kinds of risks assumed by insurance providers under the contract. Those charges can be over 1%. Surrender charges, depending on when the annuity was purchased, can range from 1% to 7% or more. And management fees on the subaccounts can be 1% or more, depending on the underlying investment funds. When you add up these expenses, they can eat up a hefty percentage of your investment dollars. 

Before you look at riders, take a look at the cost of the annuity you have. If the costs are high when compared with a no-load annuity such as those offered by Vanguard, Schwab or Fidelity, consider making a change. And make sure your current contract is past the surrender period, to avoid costly penalties.

The rider you refer to is offered by many companies and is called a guaranteed lifetime withdrawal benefit (GLWB). It does allow you to receive lifetime income while still being able to manage the annuity's investment subaccounts, which, like mutual funds, range from conservative to aggressive investments for the premium payment. The income is guaranteed to continue even if the investment subaccount dollars are depleted. 

How much income you receive can be a fixed percentage of the benefit or income base, determined by the dollars you are investing, your age, and a specified period of time you will receive the income.Typical percentages, depending on age, are 3% to 6%.  Riders, such as the GLWB, cost extra — up to 1% depending on the company offering it and the specific type of rider. The total costs for this product overall are pretty high, at an estimated 3% or more, in comparison with the guaranteed benefit of 3% to 6%.  The reason people purchase these riders is that they are afraid that we will experience another investment year like 2008 and want to make sure their income stream will continue. This product will guarantee that income stream but it does not guarantee the value of the investment subaccounts.

You retain control of your principal but if your circumstances change and you need to take additional dollars out of the annuity, the withdrawals will not only reduce your guaranteed income amount but could eliminate the guarantee you have paid for over the years.

A better alternative may be to annuitize, which is when you convert your annuity into regular payments. Once it is annuitized, it cannot be reversed. Also, withdrawal of the funds within the annuity is no longer possible. The amount of the income stream depends on things like life expectancy and interest rates, as well as payment options. 

And don't forget that the guarantees are subject to the financial health and claim-paying ability of the issuing insurance company.  The bottom line is the details of this type of product are complex and the costs are very high. Read the information provided and make sure you understand what happens when. And if the person who is selling you the product can't explain it in a way that makes perfect sense to you, walk away.

5 tips to avoiding mistakes on dividend taxes / Not all dividends get the same treatment from the Tax Code. Here's what you should know.

Jeff Reeves for USA Today writes: One of the most powerful ways to invest in the stock market is to buy high-yield dividend stocks and hold them for the long term. These investments provide regular cash distributions that can really add up over time.

Take Coca-Cola (NYSE:KO), a favorite among dividend-stock investors. If you invested $10,000 in Coke 20 years ago, you'd be sitting on roughly $10,000 in dividends alone – not to mention the nice share appreciation as Coke's stock price has quadrupled!

Some investors simply like the additional profits of dividends, while others see their quarterly payments as "paychecks" that are a reliable income stream in retirement. But whatever your mindset is, it's crucial to get the tax forms right. There are a host of investments that deliver regular payments to investors, but not all of them play by the same rules.

Here are five tips to make sure your dividend taxes are filed correctly:

Trading around a dividend date can hurt you: "Qualified dividends" are taxed at long-term capital gains rates, but "unqualified dividends" are taxed as ordinary income, at a higher rate. To ensure your dividends are qualified, you must have "held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date," according to the Internal Revenue Service. If that language confusing check out this case study on IRS.gov, but the bottom line is that buying or selling a stock close to a dividend date could mean a higher tax rate.

Some investments are "unqualified" payers: Some very common investments do not pay qualified dividends, and are subject to higher taxes regardless of the holding period. The tax code says qualified dividends come from "domestic corporations and qualified foreign corporations." In other words, if your underlying investment isn't a set up as a corporation or is domiciled overseas, there's a chance your dividends are subject to higher tax rates. A list of holdings that aren't qualified include bond funds, emerging market investments and real estate investment trusts.

Dividends on deposits don't count: Another area that misses out: dividends paid on your deposits with mutual savings banks, cooperatives, credit unions, and savings and loan associations. All these are categorized as interest income and are subject to your marginal tax rate. Check out a full list of other unqualified dividends on IRS.gov.

The MLP mess: Over the last few years, many investors have piled into master limited partnerships in pursuit of big dividends. But MLPs are structured very differently from your average corporation, since an MLP pays no tax itself and is simply a pass-through entity. As a result, "distributions" from these investments are not even considered dividends in any form by the IRS; they are treated as a return of capital to a partner — even if you only own one share So expect a different tax form (a K-1 instead of a 1099) and a wholly different set of rules than fpr your typical dividend investment. The National Association of Publicly Traded Partnerships tries to unravel this in a handy tax guide that all MLP investors should review if you need more clarification.

High wage earners beware: The deal that averted the so-called "fiscal cliff" a few months ago brings the first major tax increase on high earners in 20 years. If you have more than $400,000 in taxable income or are filing as a couple with $450,000, your top marginal tax rate has risen and so have your taxes on long-term capital gains and dividends. If you're a high earner, keep this in mind when you file your 2012 returns.