How to Tackle Your Tax Bill

             Tis the season for all things taxes. You suspect you might have to pony up to Uncle Sam. Sorry about that. But the good news is, you still might be able to lessen the blow.

            Here’s how.

             Make a plan for filing

             Set a date to file your taxes to ensure that you will be able to file your income tax return on time. If that’s not possible, file an extension. The Internal Revenue Service is more forgiving of those who follow the rules than those who skip filing, says Jeff Staley, president of Freedom Tax Relief. “Even if you cannot pay your tax debt in full on April 15, filing the required forms will result in smaller penalties,” he adds.

              Do your return early

             Though the truth may be painful, better to know where you stand. Prepare your return early. “You will know how much you owe, then create a budget in order to save what you’ll need to pay your tax bill,” says Melissa Labant, tax technical manager with the American Institute of Certified Public Accountants.

            “Make sure the budget is realistic and stick to it.”

            Avoidance will not deter reality.

            Find the cash to pay

            You can adjust your income tax withholding for 2010, temporarily, to help you collect some extra cash. “After you pay your tax bill, you will need to re-adjust your income tax withholding again to account for the shortfall earlier in the year and take out a little extra so you do not have the same cash flow problem next year,” advises Labant.

            If you automatically contribute to a 401k plan, consider reducing your contribution rate for a few months. “Make sure you understand the company’s matching policy so you do not reduce your contribution to the extent that you lose out on free money though,” she adds. After the cash crunch is over, re-adjust your contributions to your 401k plan.

            This technique can also work with items such as funding your children’s college savings plan. If you turn off contributions temporarily, make sure that you budget to double your contributions later in the year, she adds.

            You will pay interest if you don’t make your payments by April 15, so pay by credit card (an extra fee applies), as a last resort. “Do this particularly, if you can pay the card off soon, or if the rate on the card is lower than the IRS interest rate,” says Thomas Casey, a certified financial planner with Casey, Thomas & Associates.

             Evaluate your alternatives

             If you absolutely will not be able to pay your tax bill, contact the IRS. The agency sometimes gives leeway to taxpayers who contact them directly or pay a late bill voluntarily.

           The IRS might waive penalties for those who cannot pay because of a death in the family, serious illness, financial records lost in a natural disaster or another “reasonable cause,” says Staley.

           Another option, he adds, is tax debt resolution. Tax resolution specialists often can negotiate directly with the IRS on behalf of consumers who owe $10,000 or more. These specialists are usually attorneys, enrolled agents or certified public accountants with special training and experience. They can navigate the maze of IRS forms and calculations, helping you understand what the IRS wants and help you to resolve debt.

            Establish or Contribute to IRA accounts

             You have until the due date of your tax return to establish and contribute to an IRA account for 2009. The maximum that can be contributed is $5,000, or $6,000, if you were over 50 in 2009.

             If you want to contribute to a Roth IRA, you must be under the modified AGI (adjusted gross income) limits ($166,000 for married couples, $105,000 for singles), says Gene Crescente, a senior wealth planner with PNC Wealth Management.

           Be strategic

          In light of the struggling economy, some families are choosing to live in multigenerational households. If you are supporting one of the ever emerging multigenerational households, you may be eligible to claim tax exemptions for the additional household members.

           Exemptions reduce your taxable income, explains Roni Deutch, author of The Tax Lady’s guide To Beating the IRS.

           Run the numbers

          As part of last year’s stimulus package, many American’s received extra money in their paychecks. But approximately 15 million taxpayers will have to repay $250-$400 of the tax credit they received. To avoid getting a nasty surprise when you file, use the IRS Schedule M to determine whether or not you may have to repay Uncle Sam.

          “Although this credit is meant for good, it may cause some harm to unsuspecting taxpayers because the credit was applied automatically to all tax withholdings whether the taxpayer qualified for it or not,” says Deutch. After you determine whether you have to pay this credit back for tax year 2009, you should get a heard start and check your current withholdings as this credit extends to tax year 2010, she adds.

             Double check your deductions

            If you had self-employment income in 2009, you may be able to deduct health insurance premiums paid for yourself and your dependents as an “above the line” business expense (that is without itemizing) on your federal tax return. “Be aware, however, that you may not deduct premiums paid for any month in which you were eligible to participate in an employee-sponsored health insurance plan, and that the amount you deduct cannot be greater than your net self-employment income for the year,” says Carrie McLean, consumer health specialist with www.eHealthInsurance.com.

           Furthermore, says Ted Shalek, chief financial officer of Smart Online, Inc., www.smartonline.com.  ”Pay attention to all the tax changes that have taken place for 2009. There are new deductions and credits for housing, energy, deductions in 2009 for contributions made to Haiti relief in 2010, and more. Do not miss all of the benefits legally available to you under current tax laws.”

           Much as you don’t want to even think about taxes, get going, get it over with and just maybe you’ll do yourself a financial favor by fighting off procrastination.