Benjamin Franklin said “...In this world, nothing can be certain, except death and taxes.” If you make death preparations with the advice from an attorney, why not plan for the other by working with a CPA or Tax Advisor? With advice and planning, the tax filing process is not only less morbid than death, but can be financially gratifying as well.
The current federal tax rates can exceed 43 percent, which doesn’t include any state or local obligations. Taking advantage of ways to lower your income, or increase your deductions can reduce your tax liability. In the simplest terms, with careful planning you may owe less, and often get back more, than you expect.
Tax planning is so important in trying to reduce your tax liability, and planning happens all year long. Many of life’s events have tax implications—getting married, having a baby, buying a home, and going to college. They all impact your taxes for better or for worse. For example, most taxpayers buying a new home pay mortgage interest and real estate taxes. For your federal taxes, both of those payments may be deductible to limit your tax liability.
If you’re employed, you may want to have your employer adjust your payroll tax withholdings. Doing so will account for the additional tax benefits you’ll get when you file your taxes. While this reduces the tax refund you might get in April, it will increase the total dollar amount of your take-home pay.
If your child is working and providing for more than half of his or her living expenses, you are no longer able to claim the child as a dependent. Again, you’ll want to adjust your payroll tax withholdings (reducing the number of exemptions). Do this and you won’t find yourself owing taxes when you file your return.
Will Rogers updated Franklin’s famous quote, adding “…but death doesn’t get worse every time Congress meets.” The IRS code and regulations are constantly changing and it can be difficult to keep track of all the latest developments.
For taxpayers with more complex issues, a CPA’s help with tax preparation is a great investment. State regulations require CPAs to take continuing education courses to stay on top of changes in the tax code. Whether you own your business, have rental properties, or sold assets during the year—consult with a CPA. They can help you with potential tax savings and what pitfalls there could be. But the key is to get your CPA on board before December 31st.
If you don’t take certain actions before the end of the year, it may be too late for a tax expert to benefit you in April. Seek the services of a CPA or other tax professional early in the year. He or she can tell you the appropriate steps to take before year’s end. Doing so may allow you to keep more money in your pocket in April.
If you are like many people, each March and early April you’re frantically trying to gather information to get your taxes done. W-2s, 1099s, Social Security statements, charitable contribution statements—the list goes on. One good tip is to keep a folder of important tax documents, and as you get items throughout the year, stick them in the folder. That way, everything will be in one central place when you need them. Record-keeping is critical. You should be able to support every line item on your tax return. However, don’t let the IRS refuse a tax deduction to your favorite charity if you couldn’t find the receipt the charity gave you. Keep a copy of the prior year’s return in the folder for comparison purposes.
Keep records for at least three years. In general, the IRS can assess taxes within three years after you file a return, or if later, three years after the return was due. For a 2013 individual return by April 15, 2014, the IRS would have until April 15, 2017 to assess a tax deficiency. However, under certain circumstances, the IRS can extend the three year rule. This is why you should keep tax and property documents for seven years. Your CPA should help you on record retention practices that are best for you.
There are some tax deductions that are commonly overlooked by clients. Taxpayers assume many expenses are just "personal" and wouldn't be helpful for taxes.
The most common overlooked deductions are:
• Fees for having your taxes prepared
• Job search expenses
• Moving expenses
• Home-office deduction
• Gambling losses
• Unreimbursed job expenses such as uniforms, work shoes, work tools, etc.
• Saver’s credit
• Adoption credit
• Credit for child- and dependent-care expenses
The IRS can reject any tax deduction that you cannot support and increase your liability. Keep your records in a safe, secure place to prevent loss, or keep them in an electronic format. If you store your information on your computer’s hard drive, you should back it up to an external device or to cloud storage. Shred all physical bank, tax, pay stub, and other documents only after you have kept them for the required amount of time.
Can you imagine getting this little note in the mail?
Dear Taxpayer: Some of the information that you provided to us does not agree with the information we received from other sources. – The Internal Revenue Service
The IRS is good at catching tax cheats, even unintentional ones. Report all your income on your return, regardless of how small it is. Employers and other entities that have paid your income during the year must report that amount of income you earned. Chances are the IRS has a transcript of all the sources of income, which should report on your return.
That job you worked for only two weeks sent the IRS your W-2. The IRS will look for those wages on your return. If you forgot to include some income on a return, file an amended return right away to correct the omission.
Likewise, do not overstate expenses or deductions. Charitable contributions are a common source of fraud and tax abuse. Abuse and fraud in the area of charitable contributions had the IRS ratcheting up its audits in this area. The IRS hits taxpayers with significant interest and penalties if they confirm such abuse. If you cannot find support for a deduction, consider either not deducting it at all, or be conservative in your estimate.
Just as you wouldn’t ask your dry cleaner for medical advice, don’t rely on your mechanic for tax advice. Too often, client stories start with: “My friend told me…” as they slide their “Dear Taxpayer” letter from the IRS across my desk.
The tax code and regulations are so involved and voluminous. This is why there are tax experts specifically trained to read and interpret them. It would be nearly impossible for anyone else to understand and apply them correctly to the right tax situation. So if your tax situation is getting complex, it’s time to make the investment and have a professional prepare your taxes.
This is IRS’ list of the most common mistakes. These will either delay processing your return, or trigger an unnecessary audit:
• Incorrect or missing social security numbers
• Incorrect tax entered based on taxable income and filing status
• Computation errors in figuring
- the taxable income
- withholding and estimated tax payments
- earned income credit
- standard deduction for age 65 or over or blind
- the taxable amount of social security benefits
- child and dependent care credit
• Missing or incorrect identification numbers for child care providers
• Withholding and estimated tax payments entered on the wrong line
• Math errors, both addition and subtraction
This information should help you maximize your tax deductions, while not getting in trouble with the IRS. No one wants to pay more taxes than what's required—particularly those individuals in the higher tax brackets. Take some of these steps throughout the year and as life events happen. You can be on your way to having your taxes done on time, whether you do them yourself or have them prepared by a CPA or other tax expert.
With careful planning, a thoughtful strategy, and the advice of a professional, you could do a lot to benefit your tax return. It could be the difference between paying more than necessary to the IRS, or a Disney World vacation!
More expert advice about Taxes
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