AVOID THESE TAX MISTAKES
Every year taxpayers are hit with tax surprises that could be avoided if they just knew the rules. Here are five that are easy to avoid with a little bit of planning:
Not paying enough estimated taxes.
This results in a tax surprise when you underpay taxes you owe each quarter. A surprise could also occur if you forget to make a payment.
The plan: Conduct a calculation each quarter to estimate the taxes you owe. Performing this calculation will also prevent you from any last minute surprises if your estimated tax ends up being higher than you expect. Also put estimated tax payment due dates on all your calendars. They are April 15, June 15, Sept. 15 and
Jan. 15.
The plan: Be on the lookout for updated tax forms throughout the year so you can ensure accurate information is included on your tax return. When in doubt, call the brokerage firm or company that issues your tax documents to clarify whether or not a superseding version of a document has been issued.
Inadvertently withdrawing funds from retirement plans.
Amounts taken out of pre-tax retirement plans like 401(k)s and IRAs can create taxable income. The most common inadvertent withdrawal occurs when you roll over funds from one retirement plan to another. If done incorrectly, the entire rollover could be deemed taxable income.
The plan: Do not touch your retirement accounts if at all possible. (Exception: When you reach age 72, you may be subject to required minimum distribution rules.) If you withdraw funds, ensure you have the proper withholdings taken out at the time of withdrawal. Direct rollovers into your new plan are always a better alternative than receiving the withdrawal from the plan adminis trator and then conducting the transfer yourself.
Not taking advantage of tax-deferred retirement programs.
There are numerous opportunities to reduce your taxable income through tax-deferred retirement programs.
The plan: Review your retirement savings options and plan to con tribute as much as possible to your plans. Pay special attention to plans that include an employee match component.
Not keeping documentation.
You know you drove the miles, donated the items to charity, had the medical expense and paid the daycare. How can the IRS be disallowing your valid deductions? Remember that without correct documentation the IRS is quick to disallow them.
The plan: Set up good record keeping habits. Create both a digital and paper folder separated by income and expense type. Keep a contemporaneous mileage log and properly document your charitable contributions.
Turn losses into Tax $avings
Capital loss, casualty loss or net operating loss -a loss by any name causes a financial setback. It's something no one likes to think about, much less experience. But if you do suffer a loss, tax laws may provide a measure of relief in the form of a refund or lower taxable income.
Here are examples of common losses you may experience, along with possible tax savings:
Capital loss:
Selling assets such as stocks, bonds, limited partnership interests, and collectibles for less than you paid for them can result in a capital loss. The loss can be applied to offset capital gains and then used to reduce ordinary income, up to an annual limit of $3,000 ($1,500 if you're married and file separately). Any remaining balance can generally be carried forward to future years.
Keep in mind that capital losses caused by the sale of investments within your retirement accounts are not deductible. Losses on the sale of personal assets, including your home, are also not deductible.
There are special rules for deducting losses if you invest in publicly traded partnerships (PTPs), so ask for help if you find yourself with potential losses from these partnerships.
Casualty loss:
A tax deduction may be available to you when a sudden,unexpectedcalamitylike a wildfire or hurricane causes physical damage to your vehicle, home, furnishings or other property, as long as it's in a federally declared disaster area.
For insured items, you'll have to file a claim in order to deduct the loss, even if you know you won't receive money from your insurance com pany. The loss has to exceed $100. In a Presidentially-declared disaster area, this loss has to exceed $500. In addition, deductibility limits involving insurance proceeds, basis, and adjusted gross income apply. Remember, you maynotreceive a deduction for a loss that is reimbursed by your insurance. You may be able to amend your prior-year return to reflect the current-year loss and claim an early refund. This may result in a lower tax for that year which could produce a refund, but it may also change the tax you pay in the current year.
Net operating loss:
When a business's tax deductions exceed taxable income, the result is a net operating loss (NOL). Tax changes now allow a company to carry back an NOL incurred from 2018 through 2020 for up to five years to offset taxable income. Beware, however, that the ability to carry back an NOL does not apply to 2021 and future tax years.
Gambling loss:
You may be able to deduct the amount of gambling losses on your tax return. This is assuming you have gains from any type of gambling activity, but only if you itemize, and only to the extent of your gains. For example, if you have $5,000 in winnings and $7,000 in losses, you will be able to deduct $5,000. The $2,000 in excess losses is neither deductible nor eligible for carryover to future years.
Hints to Audit-proof Your Tax Return:
Sweat the details now:
Conduct a self-audit where you examine previous tax returns. Obtain transcripts from the IRS and compare them with your return to ensure they match.
Back up your deductions:
Have proof to back up all expenses reported on your tax return, also collect and keep all your receipts for all charitable deductions.
Assemble documents beforehand:
Gather all required documentation before filing your tax return to avoid last-minute scrambling if you are selected for an audit.
Obtain independent appraisals:
The IRS requires and independent appraisal by qualified professionals for donated property valued above $5,000. Using a reputable appraiser for the type of property donated will help substantiate your deduction during an audit.
State Taxing Authorities are Coming After Your Money
State Laws Snag Taxpayers Everywhere
New state tax laws are turning some tax-payers into law breakers without them realizing it is happening. Think it can't happen to you? Here are some examples:
Your small business registers for sales tax in Texas and you receive a letter from some obscure Texas town that says you need to send them a registration fee. Where did this come from?
A Florida widower with income marries a retired woman who lived in Utah for nine months. The woman has no income. He has never been to Utah, even to visit. Per Utah tax law he must now pay income tax to Utah on his Florida income if he files a joint federal tax return.
A Delaware resident owes Minnesota income tax for consulting work even though she never steps foot in Minnesota. This is because the company who the Delaware resident did work for has a phys ical presence in Minnesota. The same situation is true in California and other states.
You decide to retire in Nevada to enjoy the sun shine. You then receive an audit letter from New York that says you need to pay them income tax, even though you no longer live there. They demand credit card statements, your driver's license and more. You provide the information, yet their demands do not go away.
California routinely sends out notices to small businesses throughout the country demanding detailed sales transactions for multiple years for any of theirCalifornia customer transactions. If you do not reply, you could be in for an audit from this state.
States are creating business fees to capture taxes from out-of-state small businesses. This is to get around national laws that protect interstate commerce. This new category of tax is in addition to income taxes and sales/use taxes. Until national leadership provides unified interstate guidance, states will continue to get more aggressive with the creation of new tax laws. This is more prevalent as states continue to deal with lost revenue due to the pandemic. There are even situations where two states can claim tax on the same income and you are stuck in the middle facing double taxation and tax penalties.
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