LOS ANGELES – This time of year, W-2s and 1099s are streaming in. Don't panic if they're not in your hands right at the beginning of the month.
This year, the IRS granted extra time to employers and vendors who file their forms electronically. This is designed to provide them with enough time to get correct taxpayer information, and to correct any accounting errors without having to amend the forms. The result is that there may be some delays in businesses getting paperwork to you.
Consider gift-giving now
With Valentine's Day coming up, gifts of flowers, chocolate or other perishables are on everyone's mind. Perhaps it's time to start thinking of more tangible gifts - to your children, family members and others to whom you feel close enough to give the very best - such as money or capital-gains assets.
Early in the year is the best time to dispense your annual $12,000 gifts, said Joseph Kluemper, the New York-based senior tax manager of BDO Seidman's family wealth planning group. Doing it early means all income and future appreciation on the gift is also given away. And you have plenty of time to get all the valuation paperwork taken care of well before year-end.
Still, when it comes to giving gifts to your children, remember that the kiddie tax now applies to the investment income of children under age 18, said Neil Becourtney, a certified public accountant. (It formerly applied to kids under age 14.) So you get no tax benefit from transferring assets that produce investment income to your children.
On the other hand, there's no reason you can't transfer assets that produce passive income right now, or that will produce capital gains once your children turn 18, to pay some of their college expenses that aren't covered by tax-free withdrawals from 529 plans.
Assess what's coming
This is a great time to start plugging numbers into your handy income-tax estimator, even before you go to your tax appointment. Get an idea of how much money you're getting back - or that you will owe.
Naturally, if you're expecting a large refund, it will give you the incentive to gather your records sooner. Or at least it should. Make a quick list of the documents or information you'll need to finish preparing your return. And get it done.
Learning that you will owe money can be a blessing. Armed with that information two months before you have to pay the taxes, you can plan a campaign to generate the money without borrowing or drawing on savings. If you're in sales or in business for yourself, you can arrange a "tax sale" — a sale designed specifically to generate the income or commissions to cover your taxes. Customers tend to be amused and sympathetic at the theme. Of course, you'll be paying taxes on those profits next year. But, for now, you have cash you don't have to pay back.
You'll need extra data to collect dependent-care credit
In order to get the credit for child and dependent care, you must fill out the Form 2441 completely. If you are missing the name, address or taxpayer identification number of the provider, IRS will reject the credit.
That's what happened to a client of Roger Adams, an enrolled agent whose tax practice is in Portugal. He works with Americans overseas. In this case, a client hired a local nanny who was paid $9,000. He put the information on Form 2441. But the form required a Social Security number for all caregivers. Naturally, the Portuguese national did not have a U.S. Social Security number, nor did she need one.
Adams couldn't get the tax return processed, or the credit released, despite months of Catch-22-type communications. Adams pushed every button he knew at the IRS, and his client kept getting notices about unpaid tax. He was just about to write to the Secretary of State, Condoleezza Rice, to complain, when some friends of his at IRS finally took notice and resolved the problem. Not everyone has that kind of clout — or that kind of time.
Adams suggests that if you're in a similar situation, you enter "tax exempt" in the place for the taxpayer identification number. Then add a statement prominently on the form: "Tax Exempt - nonresident alien, citizen and resident of (Country), Sec. 862(a)(3)" and the Treaty citation, if available.
For the rest of us, simply get the name, address and taxpayer identification number now, while you're thinking about it, so it doesn't hold up your tax return when you're ready to file, or cause the electronic-filing software to reject it.
Divorce requires special considerations
If you've ever gone through a divorce or known someone who has, you know just how much extra fuel tax-return filing can put on an already-combustible situation. Leaving discussions and decisions to the last minute is not only foolish, but costly.
Lee Rosen, president of the Rosen Law Firm in North Carolina, says you need to plan on two fronts. First, if you are considering a divorce, gather all of your important financial documents together so you know what your situation is or will be at the date of separation. Second, address this year's tax issues.
Things you will have to sort out include:
What is your filing status - married filing separately, single, or head of household? Should I be filing jointly with my spouse, or do the drawbacks and dangers outweigh the tax benefits? Are my divorce costs deductible? Can my attorney help me prove which costs are deductible? What are the tax effects of alimony - to you and your spouse? And is there a way to pass along the same amount of money, with less costly tax effects? When there are children involved, who will get the exemptions and credits related to the children? And, can they be split? Who will get to deduct the mortgage interest paid all year? If you're not getting along and you live in a community-property state, how will you file your tax return, even separately, without knowing your spouse's income? If your spouse itemizes but you don't have deductions, do you still have to itemize? And what if you don't know what your spouse is putting on his/her tax return?
As you can see, there's a lot to do. If you start now, you're apt to get answers in time to file by April.
Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the book, Small Business Taxes Made Easy. Reach her at <a href="mailto:firstname.lastname@example.org">email@example.com</a>.
Copyright (c) 2006 MarketWatch, Inc.