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Strategies could save money on extended tax returns

Taxpayers who needed extra time to complete their federal income tax returns likely filed for an extension. The government allows an automatic, six-month extension of time to file your tax return, making it due Oct. 15.

The government allows only an extension of time to file, however, and not an extension of time to pay. Taxpayers are required to make a good faith estimate of the balance of any taxes due with their returns and pay that amount when they file for their extensions.

Those who underestimate the taxes owed on their extensions, likely will owe interest and penalties when they file their returns on or before Oct. 15. The balance must be paid on or before the extended deadline. Of course, those who’ve overpaid and expect a refund can’t get an “advance” when filing an extension. The actual tax return must be filed before any refund check will be issued.

Now that you’re beyond the regular tax deadline and ready to complete your extended tax return, consider a few of the following common, yet often over-looked, tax strategies that could save you money. They could result in you owing less. Or, you could get a bigger refund than you expected, even if only one of these strategies applies.

n Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2010? That might help you years down the road when you take tax-free payouts from the account (if you’re eligible). But the contribution isn’t deductible. If you realize you need the deduction a contribution to a regular IRA yields, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution in a process called “recharacterization.” The IRA deduction is avoidable if neither you nor your spouse is covered by an employer-provided retirement plan. If either you or your spouse is covered by an employer-provided retirement plan, then the deduction starts to phase out when adjusted gross income (AGI) exceeds certain limits, depending on filing status. For 2010, the phase-out for joint filers starts at $89,000 of AGI.

n It might pay for you not to claim a dependency deduction for a child in college. This can work to your family’s benefit if you pay college tuition for your child, your income is too high to claim education credits (the American Opportunity tax credit, Hope credit or Lifetime Learning credit) and your child has enough taxable income from a summer job or work-study program to use most or all of the credit. If you forego the dependency deduction, your child can claim the education credits on his or her return for expenses paid by the child, even though the education expenses were paid out of gifts, loans or personal savings, including savings from a qualified tuition program (also referred to as a 529 plan). The tax-cutting value of the education credits the child can claim could be greater than the value of the dependency exemption for the child to you.

n Make a tax-deductible contribution to a retirement plan. If you own a small business or are self-employed, you might be able to make a deductible contribution to certain types of retirement plans. These contributions can be made all the way up to the extended due date of the tax return and still be deducted on your 2010 tax return. Be aware this rule does not apply to traditional and Roth IRA accounts, which required 2010 contributions be paid into the account by April 18. However, SIMPLE-IRA plans, SEP-IRA plans and 401(k) plans allow for contributions up to the extended deadline. Be careful! Some types of plans require the plan to be established before certain dates. A SEP-IRA, however, may be established and funded at any time leading up to the extended due date.

Tax laws are complicated. Before implementing any of these strategies — or any tax strategy — discuss it with a professional tax advisor who can help determine how good tax strategy can help gain maximum advantage of the tax laws for you and your situation.



Chris West is a principal at Dalby, Wendland & Co., a full-service auditing and accounting firm that opened its doors in downtown Grand Junction in 1948 and is now entering its 63rd tax season. For more information about Dalby, Wendland & Co., including tax updates, visit www.dalbycpa.com.
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