May 2013 Client Newsletter

After every April 15th we kind of shake our heads and wonder why.  How can really smart people, our clients, do such stupid things to their taxes.  Each year we compile of list of mistakes our clients made with one purpose in mind.  Don’t make the same mistake. Learn from their lessons.

Here is our current list of things to avoid this year.

1.    Take money out of their IRA or pension plan and don’t have any money withheld for taxes. Still the number one offender and the cause of more heartache is early distributions from sheltered plans. If you have to take money out of your tax sheltered plan don’t forget that there is a 10 percent penalty in addition to Federal tax owed on the distribution if you are under age 59 1/2.  Don’t ever take money out of these plans without having the most Federal tax withheld from the distribution.  Call our office. We can help.

2.    Take money out of their IRA or pension plan or 401 K and not roll it over to another tax deferred plan.  Back on this subject again. Leaving your job usually means cashing in a pension plan or 401 K.  We understand that sometimes the money is needed to pay for day to day activities until you can find a new job.  But if you don’t need the money don’t spend it, roll it over. We can help you if you don’t know what to do.  We can refer you to very competent people that can help with the rollover.  Taking the money if you don’t need it means additional tax liability.

3.    Don’t keep any records. Records are very important in our imaginary tax world.  Especially for business tax deductions like car expenses. Jotting down on a daily basis in a daily planner or pocket calendar is all you need.  Keep a file nearby for tax deductible receipts.  Better yet get a credit card that you use only business tax deductions.  That way you all the receipts organized for you.  Your credit card along with your milage calendar is all you need to make April 15th very less taxing.

4.    Not taking advantage of certain tax strategies for medical expenses.  Paying for medical care becomes harder every year.  The recent healthcare reform act improves coverage and extends it to more Americans, but actually makes it harder to deduct unreimbursed expenses.  (Formerly, you could deduct medical expenses exceeding 7.5% of your Adjusted Gross Income.  Under the new law, starting in 2013, that floor has risen to 10%.)  It also limits contributions to employer-sponsored flexible spending plans to $2,500/year.   

If you're free to select your own coverage, consider choosing a "high-deductible health plan"  and opening a Health Savings Account.  These arrangements bring down premium costs and use pre-tax dollars for out-of-pocket costs, bypassing the floor on AGI.  If you're self-employed, consider establishing a Medical Expense Reimbursement Plan, or MERP.  These plans let you pay family medical expenses with pre-tax business dollars.  They may even help you avoid self-employment tax.

5.    Give charitable deductions, especially non cash and don’t make an attempt to value the donation.  A note about the date and time of your deduction and a short list of the description of the deduction in your tax deduction file is all you need.

6.    Not filing your taxes because you don’t have the money to pay. Always file, even if you do not have the money to pay the taxes you owe. The IRS considers not paying on time and not filing as two separate issues, and a penalty is involved for each. When you file your tax return, you have several options. You can apply for an "offer in compromise," make monthly payments through an IRS installment agreement, or temporarily delay paying. Whichever is best for you, we will help you contact the IRS right away to let them know you cannot pay. You should pay as much as you can when you file because the IRS assesses penalties and interest on the amount not paid.

7.    Ignore those letters from the IRS. Do not ignore mail from the IRS. If you owe taxes, the IRS will collect. Persons who do not communicate with the IRS about inability to pay can expect a "Notice of Federal Tax Lien" to be filed against their property. In lien terms, this is a lien about the size of Alaska. Few carry more weight. The lien attaches all your property, including your house, car and any future property you might obtain. A levy, which is a legal seizure of property to satisfy a tax debt, is another legal means the IRS can use to collect taxes. This means the IRS can seize your car, boat or home and sell it to satisfy your tax debt or it can place a levy on your wages. More good news is that these liens often stay on your records long after the issue has been resolved or until the IRS gets around to removing it. So it's also the gift that keeps on giving!

8.  Home office expenses are often an overlooked source of valuable business deductions. Many business owners don't claim them because they fear (incorrectly) that home offices are an audit "red flag," or because the recordkeeping is a pain. (Form 8829, which helps calculate the deduction, includes 43 lines and asks you to "see instructions" 17 times.) But now the IRS has released a "safe harbor" method that may make home office deductions more accessible.

The new procedure, outlined in Revenue Procedure 2013-13, lets you deduct a flat rate of $5 per square foot, for up to 300 feet of qualifying office space. You'll still deduct your mortgage interest and property tax attributable to the space on Schedule A as usual. But you won't have to calculate any actual expense or depreciation deduction for the space. On the downside, if your simplified home office deduction reduces your income below zero, you can't carry if forward to future years, as you can with the regular deduction.

You can determine year-by-year which home office deduction method to use. You don't have to elect one and lock yourself into it for the future.

Do you have a space in your home that you use "regularly and exclusively" for business, but don't specifically deduct it as such? To see if the new safe harbor makes sense for you, call us.

9.    Big refunds.  Isn’t that the point of filing? Big refunds. In fact some clients rate the expertise of their tax preparer with the size of their refund.  The bigger the refund the better the tax preparer.  Nothing can be farther from the truth.  Refunds are nothing more than interest free loans of your money, even earned income credit which can be advanced to you from your employer throughout the year, to the government.  Then you have to go through the expense and the wait of getting your refund when you file your taxes. Extra withholding doesn’t benefit you, only the government. Don’t stand for big refunds.  Stand for bigger paychecks.  Your goal should be break even on April 15th.

10.    Assuming the wrong filing status.  Single taxpayers should be singled out for assuming that they should file as single taxpayers when in fact they qualify for the much-more-favorable head-of-household (HOH) filing status. Say you're single and your non-adult child lives with you and pays for less than half of his or her own support. If you pay more than half the household's costs, you qualify. You may also qualify if you are still married and lived with your child but apart from your spouse for at least the last half of the year. Finally, if you are single and can claim your parent as a dependent, you can probably file as HOH. This is true even if your parent has his or her own place. You are the HOH if you pay more than half the cost of your dependent parent's home.  This year we also had a number of clients for whatever reason decided to file separately from their spouse.  Married filing separately is the highest tax rate, period.  You lose certain deductions and credits when you file separately.  All too often one spouse will itemize deductions, taking all the mortgage interest and real estate taxes, leaving the other spouse who is forced to itemize with no deductions.