Your 2005 individual taxes are due by April 17, 2006. You can now use Form 4868 to obtain a single, automatic six-month extension (which used to be four months until last year). Form 2688, which was meant for getting a second extension, has been eliminated. By filing for an extension you will avoid the late filing penalty (5 percent per month with a maximum of 25 percent), but you will still be subject to interest and late payment penalty if you owe any taxes.
BUSINESS EXTENSIONS: Starting Jan. 1, 2006, all eligible business taxpayers can use Form 7004 to request an automatic six-month extension to file returns. In prior years, non-corporate business taxpayers had to request an initial three-month extension, and then another three-month extension, if needed.
ROTH-DESIGNATED 401(K) ACCOUNT: Starting Jan. 1, 2006, employers can offer this option to their employees but are not required to do so. A Roth-designated 401(k) allows employees to elect to treat all or part of their 401(k) contributions either as tax-exempt contributions or post-tax “Roth” contributions. The Roth contributions are included in the employee’s taxable income when contributed, but the earnings grow tax-free. This option may be attractive to individuals who exceed the Roth IRA limit. Distributions from Roth 401(k) accounts will be tax-free if withdrawals occur after the age of 59½, death, or disability, and the contributions have been in the account for at least five years. The Roth portion of your 401(k) plan can only be rolled into another Roth 401(k) or a Roth IRA.
REPORTING A GIFT FROM A FOREIGNER: U.S. individuals are required to report any gift or inheritance worth $100,000 or more from a foreign individual or $12,375 (for 2005, indexed for inflation) from a foreign business. Gifts from foreigners are tax free but the amount above the thresholds must be reported on Form 3520. Failure to report might cause IRS to re-characterize it as income. One can also be penalized for not reporting it.
FREQUENTLY ASKED TAX QUESTIONS
Q: How can I reduce my taxes?
A: It depends on your tax situation. Perhaps you can reduce or defer taxable income and increase tax deductions or credits. Go over your 1040 line-by-line to see if you can reduce your tax liability. Say you have only W-2 income and you are only contributing 6 percent to your 401(k) because of employer matching which comes to $6,000. If your cash flow permits, increasing 401(k) contributions can reduce your tax bill.
Q: I am in alternative minimum tax (AMT). What can I do to avoid it?
A: A larger percentage of taxpayers are paying AMT. Personal exemptions and taxes are not deductible for AMT purpose. If you have a large family, pay high real-estate taxes and state taxes, and that pushes you to pay AMT, you cannot do much about it. However, review Form 6251 and see if any action can reduce it. Say you are in AMT but getting a large state-tax refund also. You may want to adjust your state income withholdings to reduce or eliminate your AMT tax.
Additional online tax information: www.irs.gov
Parveen Maheshwari, C.P.A., has an office in Burlingame. (650) 340-1400. parveen@cpamax.com