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The Last-Minute Tax Move That Could Be Worth $100,000

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The 2012 tax filing deadline is less than a month away and if you haven’t filed yet, don’t worry — you’re not alone. H&R Block (HRB) estimates that on average, Americans are about two weeks behind last year’s filing pace, with about 60 million yet to file as of the beginning of March.

A big part of the delay is driven by the last-minute tax law changes and new reporting requirements that were so complex that even the IRS was forced to delay its typical starting date for accepting returns.

If you’ve got all the paperwork and are just dreading the effort or the bill you might have to pay, here’s something that might motivate you to get moving: There’s a last-minute tax move you can make for 2012 that could potentially be worth over $100,000.

The move that can be worth so much? It’s simple: Fund your IRA for 2012.

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And exactly how do we come up with the tasty $100,000 carrot to get you to act? Like this: The money you contribute to an IRA (traditional or Roth) grows tax deferred. And if the IRA you fund is a Roth IRA, that growth may even end up being completely tax free.

People under age 50 can contribute up to $5,000 for 2012. If that $5,000 contribution compounds at 8 percent annually for the next 40 years, your savvy tax move you make in the next month winds up being worth $108,623.

That’s not a bad haul for a one-time investment, but you’ve got to get moving.

While the IRS will automatically let you extend the deadline to file your 2012 taxes , the window slams shut on 2012 IRA contributions after April 15. In short, filing extensions do not apply to IRA contributions.

What If You Don’t?

Of course, there’s nothing forcing you to contribute to your IRA. If you can’t come up with the cash or otherwise choose to not contribute, that’s fine. But understand what you miss out on:

  • Tax-deferred compounding: You can still invest money outside of your IRA, but you’ll likely owe taxes on dividends and capital gains on the returns that money makes, even years before you need to spend it.
  • Creditor protection: Many states shield some or all of your IRA assets from creditors, protecting that money from being seized to satisfy most common debts. Money in an ordinary brokerage account does not enjoy that kind of protection.
  • College financial aid: Money held in an IRA is not counted as an asset for calculating a family’s expected financial contribution when calculating federal financial aid for college. Investments in ordinary brokerage accounts reduce the amount of aid a student can receive, whether those investments are held by the student or that student’s parents.
  • Penalty enforced retirement focus: With few exceptions, tapping your IRA prior to retirement is a very expensive proposition. Most early withdrawals are subject to being taxed at your marginal income tax rate plus a 10 percent penalty for taking the money out early. If you’ve ever been tempted to spend a chunk of money just because it’s there, that penalty can help you avoid that temptation, giving your cash the opportunity to truly compound for decades on your behalf.

There’s Always Next Year (or Is There?)

If you don’t fund your 2012 IRA now, of course you can always “wait until next year.” Of course, then you’ll miss out on the benefits of starting the all-powerful compounding clock right now. Plus, unless you make the commitment to yourself to fund your plan, you may well wind up in the same situation next year, too.

If you wait long enough, the opportunity to invest a little now and let compounding turn it into a comfortable retirement will pass you by. And that would truly be a tragedy.

Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically under-saving for retirement it’s clear not enough is being done. Don’t make the same mistakes as the masses. Learn about The Shocking Can’t-Miss Truth about Your Retirement in this free report.

 

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The IRS Wants to Tax Your Illegal Income

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Tax illegal incomeBy By STEVE HARGREAVES

Dealt some drugs? Stole some cash? There’s a line on your income tax form to declare it.

As ridiculous as it sounds, the federal government requires that money acquired through illegal means be reported and taxed just like legitimate income. It’s right there on the official IRS tax instructions: “Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.”

Not surprisingly, tax experts say few criminals declare their loot.

But some do, often when they’ve either been caught during that tax year or think they are about to be caught, says San Francisco tax attorney Stephen Moskowitz, who has helped several clients document their illegal gains. Their goal is to avoid getting charged twice: once for their initial crime, and again for evading the taxes on their windfall. After all, it was tax charges that ultimately put away Al Capone.

Many of today’s criminals who choose to declare their illegal income are facing embezzlement charges, according to Moskowitz.

Like Tom Hughes, a New England accountant who was caught — multiple times — stealing money from his clients.

“I knew the money was taxable, there was no doubt about that,” says Hughes, who now runs an anti-fraud consultancy called Hire-a-thief. “I had already been caught, and I didn’t want to face federal tax charges.”

He paid taxes on his illegal gains in 1999 and 2001, and again in 2004, after he stole from another client. After a nine-month prison stint, Hughes swears he’s now reformed.

So how many self-confessed crooks does the Internal Revenue Service deal with each year? The agency isn’t saying. A spokesman declined to discuss the issue, saying only that declaring illegal income “is what the law requires.”

Documenting illegal income is tricky, Moskowitz says.

The IRS doesn’t require any details on the return beyond an approximation of how much you made. The hard part comes if you get audited. There’s usually no paper trail, so IRS agents will typically ask for the names and contact information for people that may have been part of the illegal transaction, Moskowitz says. The agency will then try to verify your numbers with them.

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If you tell the IRS you made $1 million from stealing money or dealing drugs, does the agency tip off the cops?

Legally, it can’t, unless a law-enforcement agency gets a court order granting it access to a specific taxpayer’s return. The IRS isn’t supposed to proactively alert other agencies about misdeeds unless terrorism is involved. In that case, it still needs a court order to disclose anything, but the IRS can initiate the legal process on its own.

The rules are all spelled out in an IRS guide to “section 6103,” the law that covers tax-return confidentiality. Like many legal statutes, it’s complex and filled with loopholes. For example, the IRS might not be allowed to share the contents of actual tax returns on its own initiative, but it can divulge supplemental information obtained from outside sources — like witnesses interviewed in an audit investigation — “to apprise federal criminal law enforcement agencies of possible crimes,” according to the agency’s guide.

In practice, Moskowitz says he thinks information about illegal activities gets shared.

“Do they report you to other agencies?” he asks. “Absolutely.”

Other experts agree.

“The IRS would most certainly immediately report it to law enforcement,” says Joseph Henchman, vice president of legal and state projects at the Tax Foundation, a think tank.

The IRS’ spokesman declined to comment on the issue.

Here’s one upshot to declaring ill-gotten gains: If taxes are paid on it initially, and restitution is part of any settlement or judgment, that restitution is then tax-deductible, says Moskowitz.

If you decide to disclose your illegal loot, make sure to do it with the assistance of a tax attorney, not any old accountant.

“If there’s anything we suspect is criminal, the first thing we do is tell people to get legal advice,” says Gil Charney, principal tax researcher at H&R Block’s (HRB) Tax Institute. “We don’t have attorney-client privilege. If The IRS or any law enforcement agency contacts us, we have to provide that information.”

More from CNNMoney:

Marijuana Dealers Get Slammed by Taxes
Most Dangerous U.S. Cities
$375,000 in Gold Bars? Unusual Unclaimed Property

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Tax Filing: Tips for Picking the Right Tax Preparer (Hint: It’s Probably Not Uncle Ed)

Filed under: Taxes, Income Tax, Tax Changes, Tax DeductionsSure, your Uncle Ed might be happy to prepare your tax return for you, but think twice before accepting his help. The price might be right, but he might cost you more than you know in the long …

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Market Minute: Walmart Blames Taxes for February Sales ‘Disaster’

Filed under: Earnings, Retail, Wal-Mart, Tax Refunds

Walmart (WMT) acknowledged its sluggish February sales in its fourth-quarter earnings release this morning, but blamed its woes largely on tax issues.

The fourth quarter itself — which ended Janu…

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Doing Your Taxes: How to Decide Your Filing Status

Filed under: TaxesBy Alden Wicker

If there is one thing to make sure you get right on your taxes, it’s your filing status. It can determine how much you pay (or save) in taxes. Plus, it’s one of the things that, if you get it wrong, will definitely la…

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