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Money March 2015

Dollar Sense

Tax Information that Could Save You Money or Help You Avoid IRS-Stress, Plus Some Nice-Try-But-No-Deduction Stories

By Teresa Ambord

If you did not pay at least 90% of the amount you owed in 2013, and you end up owing more than $1,000 when you file your tax return for 2014, you may be hit with a penalty for underpayment of taxes, of 3% of the amount you didn’t pay. If you retired in 2014 you may be able to request a waiver of the penalty, using Form 2210. Be sure to ask your tax preparer if you qualify.

A Few of the Most Often Overlooked Tax Deductions That Could Save You $$$

Kiplinger, the highly respected personal finance magazine, has posted its annual list of breaks that are most likely to be overlooked, causing Americans as a whole to overpay taxes by millions of dollars every year. Here are some highlights that could affect your income tax for 2014.

  • Out-of-pocket charitable contributions. Of course you expect to get a donation acknowledgment for those contributions you make by check or through payroll deductions. But what about those you won’t get receipts for? Like the postage you paid for your granddaughter’s PTA fund raiser? Or the cost of the casseroles you made for the not-for-profit soup kitchen? And don’t forget the miles you drove to schlep that casserole to the charity (deductible at 14 cents per mile). If the expense you paid to help one organization was more than $250, you’ll need to get a written acknowledgment from the charity.
  • State sales tax. You may have heard that this tax break expired. It did, but Congress renewed it in the final days of the year, as is their collective annual habit. So, on your 2014 tax return, you have the option to claim the sales tax you paid as an itemized deduction, instead of the state and local tax you paid. If you live in a state which has no personal income tax, this can be a valuable deduction. Even if you live in a state that does charge personal income tax, if you made major purchases – like a vehicle, boat, or home building materials – on which you paid a hefty amount of sales tax, it’s worth looking into.
  • Reinvested dividends. This can save you a bundle, even though it is not an actual deduction. Former IRS commissioner Fred Goldberg told a Kiplinger reporter, missing this tax break costs taxpayers millions. If you have mutual fund dividends automatically reinvested, that reinvestment increases your basis in the mutual fund. The increased basis will reduce your taxable capital gain when you redeem your shares. If you overlook this, you’ll actually be taxed twice on the dividends in the long run. If you need help figuring out your basis, ask your mutual fund.
  • Student loan interest. For this to be deductible on your tax return, you have to be the one legally responsible for repaying the loan. So if the student loan was your own, or you are on the hook to repay your child or grandchild’s student loan, you should be able to deduct the loan interest. If you paid for the loan but were not legally obligated to do so, you cannot deduct the interest.
  • Job hunting costs. If you looked for work in the same line of work as your current or most recent job, you should be able to deduct certain expenses. That includes transportation costs, employment agency fees, resume printing, postage, advertising, and more.
  • Medicare premiums. If you are self-employed and you qualify for Medicare, you should be able to deduct the premiums you paid for Medicare Part B and Medicare Part D, and the cost of supplemental (medigap) policies. The deduction is limited, so let your tax preparer know the total. If you are also employed, or your spouse is employed and you were eligible to be covered by an employer-sponsored medical plan but didn’t choose that coverage, you cannot claim this deduction.
  • Energy saving home improvements. Some energy-saving credits have disappeared, but there are still credits available for taxpayers who had certain equipment installed, such as solar water heaters, geothermal heat pumps, and wind turbines. Through 2016 this credit can be 30% of the total cost, including labor.
  • Waiver of penalty for newly retired. This is not a deduction, but it can protect you from incurring a penalty, in case retirement caused you to underpay your tax liability. If you did not pay at least 90% of the amount you owed in 2013, and you end up owing more than $1,000 when you file your tax return for 2014, you may be hit with a penalty for underpayment of taxes, of 3% of the amount you didn’t pay. If you retired in 2014 you may be able to request a waiver of the penalty, using Form 2210. Be sure to ask your tax preparer if you qualify.

There are more possible overlooked deductions, which you can learn by logging onto this site, or go to your browser and type in: http://www.newsmax.com/Finance/tax-deductions-sales- charitable/2015/01/23/id/620377/ .

 

A Few Facts You Should Know About the IRS

It probably won’t surprise you to know that the IRS plays its cards close to the vest. Whatever your opinion of the tax agency, you are probably aware that their ability to collect so much of our income is greatly enhanced by our fear of what they can and will do to us. We’ve all heard horror stories, some of which are true and some are probably exaggerated. Here are some points to remember.

  • Got a letter from the IRS? If you get a notice from the IRS, don’t let it make you weak in the knees. Often the problem is a piece of missing information, and it is something which can be cleared up by mail. Ignoring it will only enhance the problem, so just tackle it head on. There’s a chance it may turn out to be quite simple.
  • Taxes due? If you do owe a large amount of taxes, or you end up in a full-blown audit, your chances of a good resolution really are much improved if you don’t try to represent yourself. You may be the smartest person you know, but you are likely to come out better if you pay a seasoned professional with tax resolution experience to lead the response for you.
  • Criminal case? Chances are you will never be faced with a criminal charge by the IRS. But if you do, you should know that once the Justice Department accepts a criminal case involving taxes, the conviction rate is at least 80%, according to the tax law offices of Frederick W. Daily III (taxattorney.com ). And more than half of those convicted go to prison, even if they had no prior criminal record. With the IRS there are sometimes cases where they freeze your accounts first and ask questions later… and they can get away with it. In other words, forget the bravado and hire the best professional you can.
  • Bankruptcy? If you have filed or are thinking of filing bankruptcy, this may not affect the federal or state taxes you owe. Unpaid taxes is one of those areas that do not go away so easily.
  • Garnishment? If you end up having your paycheck garnished for back taxes, there is no limit to how much the IRS can take. If you really do owe taxes, it will behoove you to be seen as cooperative so you can achieve a workable solution.
  • Worried about asset seizure? The IRS really does not want your assets, so do your best to demonstrate to the agents you deal with that you want to settle.
  • Asked to provide documentation? Whether you go alone or with a representative, do not volunteer any information that you are not asked for. You may innocently open a can of worms that will never otherwise be touched. Many times, the auditor is entry-level and not yet an eagle eye when it comes to finding problems.

Because of my accounting background a friend asked me once to accompany him to an audit, though I was not his tax preparer. As the auditor flipped through pages, I saw one thing that made my eyes pop. It was such an obvious error that I was sure it was the reason for the audit, but the agent missed it. If it had been caught, my friend wouldn’t have owed more taxes, but he’d have been buried in red tape. The moral of that story is, give them only what they ask for.

 

And the Tax Court Said… Not So Fast!

Everyone wants to legitimately minimize his or her taxes, and there is nothing wrong with that. Sometimes, people get a little too cute. Like the Washington D.C. woman who ran a staffing and consulting business of her own, as well as being a tax preparer. She hired her three kids, ages, 8 to 15. She said they did shredding, envelope stuffing, made copies, and did yard work around her home office.

She properly recorded their hours on time sheets, and filed W-2s in their names. Then she deducted their wages as business expenses. The problem? She paid them by… feeding them, and by hiring tutors when needed. So… by that definition, all parents who feed their kids and help them with homework are paying wages. The Tax Court frowned and denied the write-off in full.

Then there was the tax lawyer… another professional who should’ve known better. He deducted a medical expense of $65,000. Only, the payments were for prostitutes and pornography, which he claimed had positive health benefits on him, as sex therapy. The IRS said his behavior was illegal and not a legitimate treatment for a medical condition.

He’s lucky they didn’t tell his mama.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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