We start the year off with tax legislation that finally makes it possible to do some definitive tax planning. Some of the measures affect your 2012 taxes; the rest cover 2013-17, with permanent changes.
The single most helpful tool for keeping your tax resolutions is a checklist. Every successful self-improvement course, study program - and even job - benefits from one. Have you ever noticed how many checklists you use on a daily basis?
Consider consolidating them, so you can see your daily, weekly and monthly responsibilities at a glance. Let’s build your tax checklist for January 2013:
- Set up your 2013 tax file. Pull out your labelmaker and put new labels on file folders, expanding files, or drawers, so you have a place to drop your 2013 records and receipts. Now you can consistently file all relevant documents for the year in one place. Instead of a set of file folders, consider using an expandable file. While you’re at it, do the same for last year - and get a head start on locating and organizing your 2012 papers.
- Set up your 2013 tax calendar. Individuals can use IRS Publication 509 to locate deadlines for the year. Small businesses can use the IRS’s colorful “Important Tax Dates for Small Business” calendar to set reminders for 2013 due dates. Not only is it available online, but there’s also a desktop version and a tool to integrate it with a variety of personal electronic calendars. The Spanish print version is sold out and won’t be reprinted again this year due to budget limitations. But the calendar is still available in English.
- Update your address. If you moved in 2012, be sure to update your address with everyone who is expected to send you tax-related documents: Former employers (W-2s), banks (1099-Int), lenders (1098), brokerages (1099-DIV, 1099-B), the IRS, your state tax agency, clients (1099-MISC), investments (K-1s) and trusts (K-1s).
- Update your name. New brides generally remember to change their names on driver’s licenses and paychecks, but often forget to notify the Social Security Administration. You won’t be able to e-file your tax return with your new name if it doesn't match the Social Security Record.
- Get a special IRS PIN. Were you the victim of identity theft last year? Make sure to contact the IRS and have them issue you a special Identity Protection Personal ID Number. Notifying the IRS about the identity theft will flag your account. By getting the IP PIN issued to you, no one will be able to file a tax return under your Social Security Number without it. Your refund will be safe.
- File a new W-4 with your employer now - and again in March. The legislature did not extend the 2% reduction of Social Security payments from paychecks. Your paycheck will be a little lower this year. Consider increasing your withholding if you have refinanced your mortgage and your mortgage interest has been reduced, or if your child or children are no longer dependents. You can reduce your withholding if you are making a payment for private mortgage insurance (PMI). The deduction has been restored, retroactive to Jan. 1, 2012. Also, reduce your deductions if you have bought a home, gotten married, have a new child or expect large, deductible losses in 2013. Use the IRS withholding calculator to help.
- Send out W-2s this month. Have you been paying household employees? Although the IRS has sort of a short-cut - Schedule H - for reporting and paying taxes for those workers, you’re still responsible for sending them a W-2 in January. Your state will require full, year-end payroll tax returns.
- Send out 1098s this month. Folks collecting payments on private mortgages or loans must send out Form 1098 showing the amount of interest paid by their borrowers. Even if you don’t send out the form, be aware that your borrower will be reporting the interest on their Schedule A. There’s an area on Schedule A to list your name, address and taxpayer ID number. So remember to report the private mortgage interest income you receive.
- Send out a 1099-MISC this month. Although owners of rental properties don’t need to send 1099s to folks who worked for them, all other business owners must still comply. Send Form 1099-MISC to anyone who was paid $600 or more during the year for services. There’s no need to send it to vendors who supplied merchandise or supplies - just service providers. There’s no need to send 1099s to corporations, except attorneys and medical care providers. When a company operates as an LLC, you don’t know whether or not they are filing as a corporation. So get a Form W-9 from each vendor and have them tell you. In fact, it’s a good idea to send a new Form W-9 to each vendor in January, so you can have the most up-to-date information before paying them.
- Use up your medical Flexible Spending Account (FSA). If you haven’t spent enough money on medical care to get all your FSA deductions back, you might still have some time. Turn in your receipts from your doctors, dentists, clinics, therapists and pharmacies immediately. If you don’t have enough receipts to get all your money back, contact your FSA administrator or payroll department to find out if your plan gives you extra time. Some plans are set up to give you until March 31 to get the medical care and the related receipts. Naturally, if you get reimbursed by your FSA plan for these costs, you may not list them as itemized deductions.
- Retirees: Make contributions from your IRA in January. Congress has restored the special provision for those age 70.5 or over to transfer up to $100,000 from their IRA to a charity for 2012. You have until Jan. 31, 2013, to make this donation. You will not get a deduction for the charitable contribution. But you will avoid all taxes on this withdrawal. It will count as your required minimum distribution.
- Make your fourth estimated tax payment. Jan. 15 is the due date for the fourth quarter estimated tax payment for 2012. This is important for folks who have investment income, unemployment income or any freelance income. If your business profits were over $400, you will owe self-employment taxes, even if you don’t owe income taxes.
Make 5 tax resolutions for 2013.
- Resolve to pay no more than your share of taxes.
- Resolve to pay no penalties and interest this year.
- Resolve to take advantage of every tax credit and deduction legally available to you.
- Resolve to make your tax return audit-proof.
Resolve to read MarketWatch’s tax columns year-round.