Saturday, February 8, 2014
10 Tax Tips so April 15th won’t be so scary.
Here are some general tips to help you get started so it won’t hurt too much in the month of April showers. We should note that we are not CPA’s (nor do we play them on TV) and this is just general information, not professional advice. Consult with your preparer because the rules and laws change to the tune of hundreds of pages of updates every year!
1. File Early.
Why wait? Maybe you’re hesitant to file because you may have a big tax bill to pay, but the worst thing you can do is dodge the big deadline. Even if you file and send in only $1 or request a payment plan, by filing early you’ll avoid the big rush, not to mention late fees. Roughly 25% of taxpayers owe money but no matter how early you file that money still isn’t due until April 18th. Conversely, about 75% of filers receive a refund, with the average check about $3,000, so if you file early (and electronically) your check will be in the mail while others are still stressing.
2. Think long and hard about E-Filing. Then just do it.
Too many people still opt to file manually, whether with their CPA or by themselves, but e-filing is a far more convenient and error proofed process. You’ll save trees, get your return much faster – EF returns are accepted by the IRS with next day service once submitted - and here’s another secret we’ll cover in detail: they’re rarely ever reviewed by a live IRS agent for audit!
3. Think “E” to avoid the “A” word.
Not many people know that manual (or paper) returns have an average 20% error rate, while e-file returns only have about 1% incorrections! The biggest problem the IRS has is basic math that doesn’t add up on returns, a problem that occurs 99% on manual returns because e-filing software has automatic checks and balances.
The other biggest reason for audits is mistakes made by…the IRS! That’s right, each year Uncle Sam’s tax squad receives about 100 million returns. To handle the workload they hire legions of inexperienced, minimum wage workers who literally file and organize paper returns manually with a system of tables, slots, and stamps. From there your return gets entered manually by a heavy-lidded, unmotivated temporary worker, so you could image how many errors occur in the archaic process.
4. Got big life changes?
If you’ve recently had a baby, gotten married, lost a job, are caring for elder parents, gone through a divorce, or bought or sold a house, there probably are significant tax implications. Don’t forget to you’re your CPA about these big moves proactively, as they will strategize your tax picture accordingly and you’ll probably be eligible for new deductions. Whether it’s the $1,000 Child Care Credit, Head of Household status, or Mortgage Interest Deduction, big life events almost always have tax implications.
Too often, people leave legitimate business expenses off of their returns. If you spend money on just about anything that’s critical to your job, it could qualify as a business expense. Recently, an exotic dancer even won a case against the IRS allowing her to write off her breast implants! So think of that as the barometer for business expenses and I bet you’ll add a few things to the list.
6. Find a quality tax preparer, not a cheap one.
In my humble opinion, there are things you want to skimp and save money on, and things you don’t. Brain surgery, parachutes, and a good tax preparer are three things I can think of off the top of my head where quality matters more than price. I recommend avoiding the seasonal shops that hire temporary workers and then close after tax time. You know the ones with the big name and fancy television commercials? What happens if you have a question after they close up…or you get audited? You’ll be on your own. Find a great tax professional who hopefully is a CPA and form a long-term relationship with them – the results will save you far more than the few bucks you might (you probably won’t) save with a cut-rate tax shop.
7. Business expenses and your Schedule C.
A word of caution about those who file a Schedule C form for business expenses; the IRS carefully reviews these. If your itemized deductions are larger than average for most people at your income level, you could trigger a second look…or audit. For that reason, be extra careful with home office and rental property deductions.
8. Charity is about giving back - but you may get, too.
Giving back is a wonderful thing to do, but don’t forget that you may see a benefit once tax time rolls around. However, to take advantage of the charitable donations you’ve made, you’ll have to carefully track your noncash contributions. Whenever you give or drop off a bag at Goodwill, for example, make sure to get a receipt and carefully fill it out with exactly what goods or monetary value was transferred. Don’t forget about the donations you made online or through PayPal, etc. Save your receipts and print out confirmations or written records and keep them in one folder. However, remember that you only charities qualified with the IRS are eligible for tax deductions, so check the IRS.gov website or ask your professional.
9. Contribute to retirement accounts.
If you want to gain a tax deduction on this year’s taxes for funding your qualified retirement account, like a 401K or similar plan, you’ll have to do it before December 31st. But you still have until April 15th to set up a new IRA or add money to your established IRA.
10. Maximize your Home Office Deduction.
Definitely take advantage of every legitimate expense from your home office when it comes time to file your taxes, but also be careful. According to tax law, your home office is only eligible only if it is “exclusively and regularly” used for business purposes. That means square footage from your dining room table or the computer workstation in your bedroom won’t count. Consult with your tax professional to see what you need to make the most out of this deduction but don’t get too aggressive.