Each year after tax season we stop, take a deep breath, and wonder why our very smart clients sometimes do very stupid stuff with their taxes. Each year we make a list, compiling the knuckle headed stuff that some clients did causing a painful April 15th, with a hope that this list will help you avoid their mistakes. Please note that references to links at our web site 1taxes.com on all found on the resources page.
Here is our 2017 edition.
Making too much money and not paying in their taxes. We call it putting your big boy pants on. Taxes are a real life part of your families’ budget. Experts tell us that the combined federal and state tax liabilities are in fact the largest single part of your budget. Yet some clients seem to be in denial. In fact some clients have told us that despite their six figure income, they are barely making ends meet, let alone have the money to pay their taxes. All the deductions and credits in the world still can’t change the fact that paying some taxes are going to be part of your life. The IRS is the worst creditor in the world. The largest collection agency in the world, the IRS, can make your life miserable. We live to figure the correct amount of withholding to avoid that very unpleasant scene on April 15th. Call us we can help.
A lot of jobs with little or no withholding. Or spouses income pushes clients into a higher tax bracket yet they are not recognizing this fact that by not withholding enough you are not paying the correct tax liability. There is no other way to describe it: The IRS does a lousy job helping us figure out the correct amount of withholding from our paycheck. The assumption that the amount of withholding is based upon our dependents has gone the way of the dinosaur. In fact form W-4 is a fairly complicated calculation requiring you to take in account your marital status, whether you itemize deductions, and whether you have more than one job or if you have two spouses working. By our calculation the form requires answering 17 questions, and a good number of calculations. Five in fact. Two solutions to the problem. Call us. Our computer program can make the calculation fairly simply, or check out the link on web site 1taxes.com to the IRS interactive W4 calculator.
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 an early distributions from tax 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.
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 bills 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.
Don’t keep any records. Records are very important in our imaginary tax world, a place nobody really lives in, yet we all step in it come April 15th. Recordkeeping is very important. Especially for business tax deductions like car expenses. Jotting down on a daily basis in a daily planner, online, or a 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.
Give charitable deductions, especially non cash and don’t make any attempt to value the donation. Each year clients drop off blank receipts from the charitable organization you donated your items to. The receipt is incomplete unless you write 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. The million dollar question is how much should I value that deduction I just made. The internet has made it simpler. We have linked on our website, 1taxes.com, several websites maintained by various charitable organizations to help you value that deduction. It is good stuff and helps you increase your refund.
Not filing your taxes because you don’t have the money to pay. This is a very fatal mistake. 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. Those penalties are rather steep It can be as high as 25% of your unpaid tax liability. 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.
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! We have spent significant time and energy in our tax resolution service. If you are in trouble, it really pays to hire us to help.
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. It is a simpler per diem rate. We used it for many taxes we prepared this year. It works and saves your money. Do you have a space, not just a room, just 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.
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 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.
Assuming the wrong filing status. Single taxpayers are probably the most guilty 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. Don’t settle for separate. File with your spouse. Or if you are in the middle of a divorce you may in fact qualify for the single filing status, even though you are not officially divorced. IRS rules concerning whether you are in fact single are quite favorable. Much more than state law. Something that you should discuss with us when you file your taxes next year.
