Mitt Romney's Tax Return

A few weeks ago, Gov. Mitt Romney released his latest tax return. People who follow politics might be interested in some of the details, but that's not our main purpose here -- instead it's to consider his tax strategies.

But aren't those things just for rich people? Hey, remember the saying: If you want to be rich, do what the rich people do! (I want to be rich; don't you?) Of course not everything he does is applicable to "ordinary" folks like you and me, but there are some lessons to be gained.

Bob Green, a CPA specializing in tax issues for active traders (I highly recommend his site's free information and webinars, plus his paid publications and services), wrote an excellent article on Romney's tax return. He certainly benefits from favorable tax rates because of the way most of his income is structured (i.e, from income taxed as capital gains rather than personal services or wages). But Romney actually was not quite as aggressive on some aspects as he could have been, including certain deductions. He left some money on the table. Read the article and see how. Then learn, and try to do the good stuff he does, and don't miss the stuff he missed (you can't afford to miss it as much as he can afford to).

Three Extra Days to Do Taxes In 2012

You may (or may not) have read there are two extra days to do your income taxes this year. Actually, it turns out there are three.

Normally the U.S. income tax return must be postmarked (or electronically submitted) by April 15. However in 2012 April 15 occurs on a Sunday, so the date is pushed forward one day.

But April 16 is Emancipation Day in Washington, D.C., a holiday. So the due date is moved forward one more day, to April 17.

So what's the third extra day? Well, it's February 29 -- because 2012 is a leap year!

So you have even less excuse than usual for not getting your taxes in early. But I know many of you will still wait till the last minute. Some post offices will even stay open till midnight to handle the final rush. Not that I've ever done that, you understand ...            :-)

File Income Tax Quickly To Get Your Rebate Sooner

You've probably heard about the tax rebate the U.S. government is sending, to stimulate the economy. But I'm still hearing from people who have been misinformed about various aspects of it.

Some people think you can't get the rebate if you don't file by April 15. That's not the case -- you get the rebate after you file, so if you wait till later in the year you're not missing the rebate, just delaying it. So file as early as you can! And file electronically if possible to speed things up more. Furthermore, if you specify direct deposit for your refund, then you'll get the rebate that way too -- and quicker.

Some people think the rebate will end up being "paid back" on their next year's taxes. No, that was because of some misleading terminology in some of the early descriptions of the rebate. The rebate is really, truly, extra money -- not just an advance on next year's refund. In fact, if you don't qualify on your 2007 tax return, you may qualify on your 2008 return if you meet the requirements at that time.

For more details, you can go to the IRS web site. Here are a few things you will find there:

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The vast majority of people who file a 2007 income tax return qualify, and many who don't regularly file a tax return may qualify as well. You're eligible if you have a valid Social Security Number (SSN), can't be claimed as a dependent on a tax return and have either an income tax liability or "qualifying income" of at least $3,000.

How do you get it? Just file a a federal tax return for 2007, even if you normally don't have to because your income usually doesn't meet the filing threshhold. You can't get it if you don't file.

How much will you get? The actual amount depends on the information contained on your tax return. Eligible individuals will receive between $300 and $600. Those who are eligible and file a joint return will receive a total of between $600 and $1,200. Those with children will get an additional $300 for each qualifying child.

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The web page for all the information, straight from the IRS, is http://www.irs.gov/newsroom/article/0,,id=177937,00.html. It even has a calculator so you can get a better idea of how much you will get.

Procrastinators: Get Those Taxes In -- Beware Backup Withholding

It's almost October 15, which means that the six-month automatic extension of time to file your taxes is running out. If you have a refund coming, you didn't even have to request an extension by April 15. The only penalty is a percentage of tax you owe, and since you didn't owe anything, you will receive no penalty.

However, the IRS takes the October 15 deadline more seriously. If you miss it, they will probably notice and start sending you letters -- prodding at first, then demanding. If you receive interest and/or dividends, they will stick you with backup withholding.

Backup withholding is generally for those who have improperly reported interest and dividends -- in other words, tax cheats. However, they will also use it for taxpayers who have done nothing wrong except to miss the October 15 deadline.

Backup withholding means they will notify your bank, stockbroker, etc. -- anyone they know that pays you interest or dividends -- that they must withhold a percentage. The exact portion has varied over the years; at this writing it's 28%. The withholding will be in effect till the end of the year they notify you; and if you're late again, they will extend it another year and so on.

You get the money back on your tax return for the year in question, but it's embarrassing, and a bookkeeping hassle to boot. Besides, if there's one thing you don't want to do, it's to attract the IRS's attention! If you open any new financial accounts, you also have to tell them you are subject to backup withholding.

So get that return filed by October 15. If you don't have all the figures in line by then, you can always file an amended return later. Just make sure to tweak the numbers so you pay a little extra on the earlier return (i.e., so that the amended return results in a refund), or else they'll hit you with penalties because even though you filed on time, you didn't pay on time.

Donate Stock to Save Taxes

So you've finished your taxes (or gotten an extension), and you're wondering how to save tax money next year. Here's one easy way.

I've alluded to this in previous posts, but haven't given the details. If you donate money or goods to charity, you get a tax deduction (if your total itemized deductions are high enough to exceed the standard deduction). But if you donate appreciated stock, it's even better.

Say you have stock you bought for $1,000, and now it's worth $2,000. If you sell it and donate the proceeds, you have to pay tax on the $1,000 gain, but you get a deduction of $2,000. However, if you just donate the stock outright, you pay no tax on the gain but you still get the $2,000 deduction. It's like getting a double benefit.

Of course there are certain rules. The most important one is that you must have held the stock for over a year.

To do this, just contact the charity and find out their broker and account number. Then contact your broker and have them transfer the stock directly to the charity. Most brokers will do this, and they have a special form to fill out.

A few specialized brokers, such as my favorite, Interactive Brokers, won't do this. But you can first transfer the stock to a "general purpose" broker that does allow it, and then transfer from there to the charity.

Get Your Money

Just a short note today. The market comments of last week pretty much still apply. If you've been watching the weekly MACD indicator, you know it hasn't signaled a buy yet for the major indexes, although it's extremely close for the Russell 2000 small-cap stocks, and pretty close for the Nasdaq 100. It's got further to go on the large-cap indexes.

Meanwhile I normally talk about income taxes this time of year, but due to the market scare I've been concentrating more on that. But I do have two short tax tips:

1. Don't ignore the phone tax refund! This is free money (basically $30 to $60) for almost everyone, but many thousands of taxpayers have not claimed it. There's even a special line near the end of the tax form: "Credit for telephone excise tax paid." So fill it in and get your money.

2. You have till the tax-filing deadling (Tuesday, April 17) to make your IRA contribution for 2006, and then it goes away forever. If you mail it in, it just has to be postmarked by April 17. Don't ignore this tax break. The limit for 2006 is $4,000 (which is reduced for higher-income taxpayers), but if you turned 50 or more during 2006 you can contribute $1,000 extra.

Deduct "Hidden" Student Loan Interest

If you have student loans, or parent loans, you probably know the interest is generally tax-deductible, up to a maximum of $2,500 a year depending on income. The lender (or their servicing agent) sends you a Form 1098-E telling you how much interest you paid; and as long as you meet the requirements, you can deduct this amount.

Except you might not get this form, and even if you do, it may not show the complete deductible amount! There are three areas you need to check to find "hidden" interest.

1. According to the form itself, the lender is only required to send it if you paid at least $600 in interest for the year in question. So if you're under that threshold, you may have to calculate the interest yourself, based on the various statements the lender send you throughout the year, and/or your account and payment information on the lender's website.

It gets better. Form 1098-E shows only the interest you physically paid the lender during the year. But according to the IRS rules in Publication 970, Tax Benefits for Education, you may be able to deduct more than this.

2. Loan origination fees count as interest also. Publication 970 says if it's not on Form 1098-D, "you can use any reasonable method to allocate the loan origination fees over the term of the loan." So you can't deduct it all at once, but you have to spread it out.

3. Capitalized interest is deductible as well. This is interest that adds up while you aren't making payments, and which is added to the loan balance. Once you start making payments, you can take the deduction by essentially treating the entire payment amounts as interest until all the capitalized interest is paid off. See Publication 970 for all the details of the calculation you have to use. A spreadsheet will be very helpful in tracking the numbers.

So make sure you get all the student loan interest deduction to which you're entitled.