Tax mistakes you can avoid
It's the second week of March and April 15th will be here before you know it. Have you started preparing your 2012 income tax return yet?
On this week's Money Matters, financial commentator Greg Heberlein and KPLU's Dave Meyer help you avoid some common tax mistakes.
Here are five common reporting errors:
- Math errors rarely lead to audits, but many taxpayers foul up on this, generating corrections from the IRS. Double-check your work. When it comes to dividends and capital gains, remember they are taxed at lower rates.
- Erroneous or missing Social Security numbers and/or birthdates.
- Mixing up deductions and credits. Deductions lower your taxable income. A credit is a dollar-for-dollar reduction of your tax liability; in other words, the bottom line. Credits help you more than deductions.
- Failure to report all income. Perhaps you neglected to report interest paid you, or didn’t list income from a short-time job. Financial institutions and employers are required to report all of those numbers both to you and to the IRS, so it’s key to make sure you include them.
- The easiest thing to do is to take the standard deduction to lower your taxes. Those willing to keep track of charitable donations, and expenses for child care, medical, business, education and other categories might discover the amount is higher than the standard deduction. The higher the number, the more you save.
Here are five items that could ignite an IRS audit:
- Larger than average deductions. If your deductions significantly exceed the norm for your income level, they could alert the IRS to take a closer look. This is a good reminder to keep accurate records.
- Two key rules dictate home-office deductions. You must designate a space you use solely for business purposes. Your home office must be your main place of business. A complex, 43-line form is required to get this deduction. But something new is on the way. For 2013 taxes, the ones you pay in 2014, you will be allowed to skip a lot of details and simply take as much as a $1,500 deduction. That is based on $5 a square foot for up to 300 square feet. But don’t get too confused: that is not allowable for 2012 taxes.
- Don’t mix up a hobby with a business. Just because you sell a few items on eBay, you can’t start deducting expenses. If your hobby that you claim is a business loses money in three out of five years, the IRS will get after you.
- If you always round numbers say, to $100 or $125 or $150, that can alert the IRS to suspicious behavior. It’s fine to round up to the next dollar, but no further.
- Here’s an interesting one. If you feel you’ve hoodwinked the IRS, don’t spread it around. Postings on Facebook and other social networks can be monitored by the IRS. Bragging to others about how you scammed the government can prompt them to turn you in. Whistleblowers can receive rewards up to 30 percent of the amount the IRS recovers.
Other things to keep in mind:
Be sure to select the proper filing status. There are five, the two most common being “single” and “married filing jointly.”
Speaking of “married filing jointly”, while the state of Washington now recognizes same-sex marriage, the IRS does not. However, the IRS does recognize community property in same-sex marriages. See the IRS website for more details.
Make sure when you claim a dependent the dependent is yours to claim, and fits with specific rules regarding dependents.
Don’t forget to attach your W-2s, the statements of how much you earned.
Be careful not to mix up previous year’s numbers with the current ones.
Remember to sign your tax return.
Keep receipts for your charitable contributions. Items donated to charities must be in good or better condition. Time you spend helping a charity is not deductible.
If you buy an item from a sale or auction benefiting a non-profit, the deduction is ascertained by subtracting the fair-market value. For example, you pay $200 for sports tickets that have a face value of $150. That yields a $50 deduction.
Make sure you don’t mix up car expenses for a business with car expenses for personal use. Taking the mileage deduction requires records to back it up.
Child care, education and energy savers regarding cars and homes are good areas to look for tax benefits.
Above all, remember that if you file for an extension, you still have to send the IRS a check for the amount you think you'll owe by April 15. Extensions give you more time to file, but they don't let you postpone payment of taxes.
More tax tips are available at the IRS website.
In our conversation, Greg mentioned filing for a 4 month extension. The IRS typically grants a maximum 6 month extension. But you still have to pay the amount you owe by April 15. Taxpayers who are out of the country get an automatic 2 month extension. In addition, taxpayers abroad can also file for a 4 month extension, for a total of 6 months. Full details are in IRS Form 4868.