Ahh, it’s tax time…Some love it, some dread it. Does anyone really understand what income tax
is all about? Hopefully this little
guest blog will give you some much needed tools to complete your taxes or
possibly decide it’s just too much and seek out the help you need to minimize
the amount you pay Uncle Sam and keep more of your hard earned dollars.
I keep seeing the H&R Block ad about Americans leaving
$1 billion behind last year and I don’t doubt it! This is your money that you work hard to
accumulate! Why not do yourself a favor
and become educated on this topic? At least, just understanding a few of the
basics and could literally save you a ton of money!
I recently tried to
help a high school friend who had figured her taxes on 2 different websites
(TaxAct and Turbo Tax). She had
calculated 2 different amounts and was thrilled that one had given her a $1,100
HIGHER refund. I urged her to check and
double check her figures and guess what?
She was incorrectly figuring her itemized deductions and had entered a
dependent twice! While she almost ‘hit
the trigger’ and filed the one calculating the higher refund, with my advice,
she found her error and saved herself a lot of money & headaches by not
filing an incorrect return.
When you prepare your taxes, you are essentially summarizing
many the documents that the IRS has already received. You get your W-2 if you work a job as an
employee. You may get your 1099’s if you
are self-employed and have been paid for your services. You also must report your investment earnings
and deductions such as your mortgage interest, charitable contributions and property
taxes. If you report something
incorrectly and the IRS audits you, the burden of proof is on you to back up
the deductions you have taken. It is up
to you to review these items and make sure they are correct and supplement the
info with your own calculations to offset your income.
The deduction area is where people get scared and typically
short themselves. How many of you knew
you could deduct non-cash charitable items on your taxes? This could be anything from old clothing or
household goods you give to the Goodwill or even groceries given to a food bank
or drive. This is nothing new, this
deduction has been around for years, but many people are just not aware of the
potential savings. And many people are frightened to declare what these items
are worth.
My high school friend who incorrectly computed her tax
return on TaxAct chose NOT to calculate her itemized deductions because to
utilize that part of the program there was an additional charge. When I mentioned that combining these
non-cash deductions would save her nearly $300 she was happy to pay the
additional $50 or so the software was asking.
So, that detail prompted me to think about how many deductions we are
leaving behind as taxpayers, simply because we don’t know about them, or they
aren’t standard in the free versions of filing software. I would venture to guess that there are several.
This blog should not, by any means be considered all
inclusive but I am a CPA with many years of tax preparation experience and it
should at least prompt you to consider some commonly missed items:
If you have a business or have started a business….
First and foremost, save or scan all your receipts for items
you purchase for the business. Keep
track of all the money you make. It’s
probably a good idea to open a separate bank account but it is not
required. Some deductions may be
obvious, take for example, the cost of items you sell. However, here is a list of other deductions
you may not have considered:
- Cell phones, computer equipment or tablets used for business
- Business use of your vehicle
- Meals and outings related to doing business (partially)
- Insurance you carry to protect you
- Advertising and website fees
- Tax preparation and/or bookkeeping fees or software
- Rent or home office expenses
- Office supplies and postage or printing fees
- Cleaning and laundering services while traveling for business
- Depreciation of computers
- Payments to subcontractors or helpers with the business
- Continuing education related to your business
- Travel that is business related, including airline or train fare, hotels, meals, per diem, etc.
- Dues to labor unions or civic organizations
- Employee contributions to a state disability fund
- Employee’s moving expenses
- Fifty percent of self-employment tax
- Protective clothing or uniforms required at work
- Subscriptions to professional journals and newspapers
- Trade or business tools with life of 1 year or less
- Expenses for job seeking in your current field, including fees for resume preparation and employment agency fees
- Reservist and National Guard overnight travel expenses
Again, not an all-inclusive list, but just to generate some
thoughts, perhaps make you question some items that you typically didn’t know
you could deduct.
What if the business didn’t make any money? Can I still deduct these? The answer is MAYBE. If you are engaging in a business with the
intent of making a profit, your deductions are legit, meaning its ok to go
ahead and deduct them. Now, if you
constantly lose money every year, never showing a profit and have other means
of income, the IRS could disallow these expenses and consider your business a
hobby. It’s a fine line and this is an
area where a professional should be consulted.
If you have had a change in your life such as….
Marriage, divorce, birth of child, child moving out, an
employment related move, etc. you may need to reevaluate your tax situation and
adjust your W-4 withholdings with your employer. The W-4 is the form that tells your employer
how much to withhold on every paycheck.
The W-4 helps you calculate the number of exemptions that affect your
taxable income. Essentially the fewer
exemptions you claim, the more the employer will withhold. This withholding is for federal and state
income tax. The employer will withhold
6.2% social security and 1.45% medicare tax regardless, as those are the fixed
taxes you must pay.
But there is quite a difference in claiming zero as opposed
to claiming four exemptions.
Also,
different amounts will be withheld for single versus married taxpayers, so each
January, think about these changes and adjust accordingly. I know most people enjoy getting a big tax
refund but all that a big refund means is that you have let the government have
use of your money all year long and during filing season, you are finally
getting it back. Would it not be better
to get a little more each pay period and put that money in a savings account or
invest it and let it earn on your behalf?
I know many people don’t agree with me on this topic and use the big refund on a big purchase, but
if you can be disciplined enough to take home more pay and accumulated it, you
don’t have to rush out and file to get that big refund in January.
This brings me to another topic which is ‘rapid refund’ or
whatever the big filing agencies are calling it nowadays. This is when you go in to have your taxes
prepared at say H&R Block or Jackson Hewitt and you leave with your money
that day. The money you leave with is
not your tax refund but a loan in anticipation of what refund you will
receive. And, you are paying dearly for
it! Last I checked the interest rate
they charge you on that money was nearing 28%! Of course you can e-file yourself or use a CPA and you
should still have your refund in about 10 days to 2 weeks and receive the
entire amount. Those companies are
banking on you ‘wanting it now’. These
companies, while preparing technically accurate returns, make their money on
the loans, not the tax preparation.
Often, these people have only been through a short training course and
are not necessarily providing any tax planning or advice, but rather, putting
the numbers on the returns and having you sign and get that loan. Do yourself a favor and take a look at the
fees you paid if you used a service such as this in a prior year. Often, from my experience, taxpayers are
unaware of these exorbitant rates.
A few new tax laws to note….
Listed below are some highlights of tax law changes during
2013 that may affect your tax situation:
- Same Sex Marriages. Married same-sex couples may now use the filing status of married filing joint. Please note that you must have been married in a state that recognizes same-sex marriages (rather than civil unions). You don’t need to reside in that state in order to file jointly.
- New Medicare Taxes. Effective Jan. 1, 2013, the Affordable Care Act imposed two new Medicare taxes on qualified taxpayers: a 3.8% net investment income tax and 0.9% Additional Medicare tax. Generally, these taxes will affect you if your income exceeds $200,000 (single) or $250,000 (married filing joint), $125,000 (married filing separately).
- Health Savings Accounts (HSA). If you have a high-deductible health insurance plan and an HSA, you may contribute $3,250 (individual plan) or $6,450 (family coverage plan) for 2013. The contribution limits increase to $3,300 or $6,550 respectively for 2014.
- Broker Reporting. The IRS issued final regulations on the requirement that brokers report the basis of debt instruments and options that they sell on behalf of customers. If you deal in these types of investments, your 1099 should now include basis of any sell transactions.
- Casualty/Theft Losses. In a court ruling last year, the IRS allowed a theft loss resulting from home repair fraud. If you found yourself the victim of this type of fraud or any other bad investments resulting from fraud (say for example, a Ponzi scheme), you may be able to write it off.
- IRA Contribution and other Retirement Plan Limits. For both 2013 and 2014, IRA contributions are allowed up $5,500. If you are entitled to make catch-up contributions, you may add an additional $1,000. For defined contribution plans, the limit is $51,000 for 2013 and $52,000 for 2014. Check with your employer as other restrictions may apply.
- Standard Mileage Rates. For 2013, the standard mileage rate is 56.5 cents, medical and moving is 24 cents, charitable is 14 cents. The rates for 2014 decrease to 56 cents, and 23.5 cents respectively. The charitable rate remains the same as it is set by statute.
- Per Diem Rates. Prior to Sept. 30, 2013 the per diem rates for travel and meals were set at $242 for high-cost areas and $163 for low-cost areas. These rates increase after September 30, 2013 to $251 and $170 respectively.
- Home Office Deduction. The IRS announced a new optional method to determine your home office deduction which will no longer require tracking actual expenses. The maximum deduction allowed under this safe harbor method is $1,500 based on 300 square feet. For most of you, tracking actual expenses will result in a higher deduction.
In summary, taxes are an ever changing, often perplexing
area for many. Keep your wits about you
and know that the answers are there. A
very helpful site is www.irs.gov where you can search and read about all of the
above and even download publications, forms and instructions with clear
examples on how to account for income and deductions.
If you are still baffled and want a little hand holding,
please consider a CPA or other tax professional. Keep in mind, anyone that takes a fee for
preparing your return SHOULD be signing on the bottom as preparer.
I would be glad to
answer simple questions and steer you in the right direction or even prepare
those returns for you for a reasonable fee.
Email is the best way to reach me and I do promise to respond,
timely. I can be reached at
cpagirl41@yahoo.com or you can facebook message me as well. Happy filing !!!
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