LOS ANGELES – The IRS will not send 1040 tax packages to about 119 million individual taxpayers this year. And those taxpayers will never even miss those form packets.
Only 12.5 of individual taxpayers — generally those who filed a paper form last year — are getting those big printed packets these days. Everyone else gets their forms online or from tax software, either their own software or their tax professional's.
That's a step in the right direction. Now, what's the next step for January? Here's a to-do list for the month ahead.
Update your records
First of all, make sure that all your 2006 employers, clients and financial institutions have your correct address. If you've moved, or changed postal boxes, be sure those folks have your present address in time to get that flood of W-2s and 1099s heading your way. The employers and 1099 providers must mail them out by Jan. 31st. So, don't get antsy if those documents aren't in your hands by the last day of the month.
Kirsten Osolind, chief executive of Re:Invention Inc. in Chicago, Ill., reminds us about the flip side of that flood — the folks who send out 1099s. Osolind has become quite an expert on the subject, since she's spent the last five years sending out 1099s to her team of 150 independent marketing professionals.
You must send those 1099s to anyone who's not incorporated and was paid $600 or more. Note: If your business pays any medical service providers or attorneys, you must issue 1099s to them even if they are incorporated. The 1099s must be sent by Jan. 31, like the W-2s.
Here's a tip to avoid having to amend those 1099s when errors are discovered after they've been filed with the IRS. Before preparing 1099s, send out new W-9 forms to your freelancers, consultants, and anyone else who provides services to you - just in case they've moved. Form W-9 asks them to enter the business name, address and taxpayer identification number they want to appear on the 1099-MISC you'll be sending them. Here's Form W-9 on the IRS Web site (PDF document).
In fact, even after you mail out the 1099s to the recipients, hold off filing them until Feb. 28, in case you get any calls about errors. And Osolind reminds us that you have until March 31 to transmit the 1099s, if you're filing them electronically. See, it just gets easier and easier to do it right.
Assess your withholding
January is a good time to review your withholding and re-set it to reflect the income and deductions you expect to have for 2007. If it looks like you should increase or decrease your withholding, file a new Form W-4 with your payroll department. Here's Form W-4 on the IRS Web site (PDF document).
Remember to file a copy for your state, too, if that needs to be changed. What would trigger a need to make changes? Marriage, divorce, a new home, or more money going into your retirement account.
Energy tax breaks
Since Congress did not extend the consumer energy-efficiency tax credits in the recent Extender Bill, you only have one year of eligibility left to get federal income tax credits for specific energy-efficiency upgrades to your home. There's up to $500 available per household for upgrading doors, windows, roofing, insulation, and heating/cooling equipment.
Ronnie Kweller, a spokeswoman for the Alliance to Save Energy, says January is a good time for homeowners to take advantage of the credits still available. When it comes to home improvements, it's wise to schedule your work as early as possible, to avoid delays due to weather, emergencies, strikes and a rush on contractors at the last minute.
Cut taxes by paying yourself
One of the best ways to cut your taxes is to pay yourself first. David Bergstein, business development manager for CCH CompleteTax, in Riverwoods, Ill., recommends you take advantage of rules that allow you to contribute to your 2006 IRA in 2007 (through April 15).
For 2006, the maximum you can contribute to a traditional or Roth IRA is $4,000, plus a $1,000 catch-up if you are 50 or older. And, if you're in the military, new legislation last year allows certain active military to count tax-free combat pay when determining whether they qualify to contribute to either a Roth or traditional IRA.
If you're planning to fund those IRAs by April 15th to get a deduction for 2006, today is a good day to start saving up.
Hold your horses
In fact, contrary to getting on the "let's file early" bandwagon, Bergstein offers this profound bit of advice: Stock up on aspirin and sit tight.
Given the plethora of recent tax-law changes, you should expect the IRS to issue clarifications and interpretations. Wait for these supplemental publications, covering things such as deducting state and local taxes, so that you can determine on what line to put what information and what types of explanations you need to include with your 1040.
In short, Bergstein says, it's going to be a long tax season and it's apt to take even longer to get your refund. Given that the forms and current tax law aren't exactly in synch this tax season, it's not surprising that electronic tax preparation and filing is being strongly advised.
Click here to visit FOXBusiness.com's Tax Planning page.
Copyright (c) 2006 MarketWatch, Inc.
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