Tax Refunds

Many people file a 1040 that establishes their right to a refund - and about a month later begin looking in the mailbox for a check from Internal Revenue. Tip: Wait a while before you write to IRS about it. The point is that it takes a good six to eight weeks for a refund to appear in the mail, and lately IRS has been warning that you should wait 10 weeks before making an inquiry. This means no sooner than about June 25, if you filed on April 15.

The trouble is, if you write too soon, you'll clutter the paperwork process and may cause even more delay. It's like dropping a pencil down into the gears of a Xerox machine.

Or, suppose that you have already received the refund check. You may not be scot-free. The fact that you have the Treasury's check in hand doesn't in the least rule out a later audit of your return. Each year IRS does a certain number of post-refund audits - and the moral here is: Keep your records within arm's reach. An estimate is that as many as 250,000 taxpayers on the refund list will have their 1040s audited in 2004. The stress, as usual, will be on people in higher income brackets who have complex tax returns.

Estimating this year's tax: a puzzler

Of all the paperwork detail a man must attend to if his 1040 affairs are to be in order, the declaration of estimated tax probably causes the most confusion. It's as bad as the tax portfolio of an oil well lease-back - to some people. Also, the estimated-tax foul-ups of businessmen and professionals shake up more pound penalties than can be traced to any single section of the tax law, save late filing. Here are some pointers.

With your 2004 estimate, for example, you could pay the tax in full by April 15, of course; or you could choose the usual four instalments - due April 15, June 15, September 15, and January 15 (2005). A point often overlooked: On any of these dates, you can change your estimate simply by filing a new declaration. Anyway, don't forget the penalties for filing incorrectly. If any quarterly payment of estimated tax (plus withholding) comes out to less than 80% of the tax due that quarter - computed from your final tax return - you can be assessed 6% on the difference.

If you follow one simple rule - that for some reason, many people tend to botch - you will avoid the 6% penalty: Just compute your new estimate on the basis of the tax paid for the previous year. If this usual method isn't practical to use, it's still possible to protect against the penalty. You can base the estimate on last year's income, using the current tax rates and your current personal exemptions. Or you can base any quarterly instalment on at least 80% of the tax that would be due if income continued at the year's current rate. For example, suppose that your income is £8,000 for the first quarter of 2004 (January-March). That would mean £32,000 of projected income for the year. Say that exemptions and deductions cut this to £28,000. On this amount, the joint-return rate is £7,100. If you paid 'A of 80% of £7,100, or £1,420, by April 15 - via withholding plus cash - you would be safe.

Another technique is to base the instalment on 90% of the tax due on income earned to date. Say the taxable income is £8,000 up to March 31. You treat this as if it were an entire year's income and figure the joint-return rate - in this case, £1,380. Paying 90% of this by April 15 would safeguard you from penalty.

With both the 80% and 90% methods - which may be practical if you have relatively high non-withheld income - you repeat the formulas for computing each quarterly installment. There's one other out if you find, toward year-end, that you have been underestimating. Arrange with your company to withhold a large amount before December 31 to offset the low payments. (If it suits your purpose, you are always free to have your company hold out a bigger bite than is owed for the month.)

A special warning might be directed to the junior executive or the young professional just starting out. Even with a modest income, he may have to estimate. The rule: You should file a declaration (form 1040-ES) for 2004 if your estimated tax is £40 or more for the year, and (1) your estimated gross income for 2004 includes more than £200 not subject to withholding, or (2) one of the following applies:

You are single and your estimated gross income exceeds £5,000.

You are married and file a joint return and your (combined) income exceeds £10,000.

Note: In no case need you file if your tax due upon non-withheld income (dividends, interest, etc.) is less than £40.

Incidentally, a husband and wife may file a joint declaration of estimated tax, and still file separate tax returns for the year. If separate 1040s are filed, then estimated tax payments can be split between them as they see fit.


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Getting A Filing Date Extension

Suppose that the April 15 filing deadline looms just ahead, and you discover that the task of dropping your 1040 in the mail by deadline is impossible. You're not alone, of course - but what you do about it makes a difference. What you may need is a filing-date extension. Today they are automatic.

Promptly - before April 15 - send a registered return-receipt letter to your District Director of Internal Revenue; you can get an extension ranging up to 90 days. In some cases, this can go even as high as six months. (If travelling abroad, a man automatically gets two months.)

Even with an extension, the late filer doesn't get off scot-free. You'll have to pay interest at 6% on the... see: Getting A Filing Date Extension