Acura World banner

1 - 1 of 1 Posts

·
Registered
Joined
·
6,392 Posts
Discussion Starter #1
I feel like I'm doing something against the IRS today, haha.

Unlucky 7: The top taxpayer mistakes
Here's the lineup of the biggest mistakes taxpayers make. You can learn how to avoid them.
By Jeff Schnepper

1. Bad math
According to the Internal Revenue Service, errors in addition and subtraction are the No. 1 mistake taxpayers make. All returns are examined for mathematical errors. Mistakes in arithmetic or in transferring figures from one schedule to another result in an immediate correction notice. If the error leads to a tax deficiency, you automatically receive a bill for that amount. If you overpaid, the excess is applied to future taxes, credited or refunded at your request. You can’t appeal such corrections, but you can ask in writing that they be reviewed if you think the IRS made a mistake.

Check the figures on the IRS correction notice. They have been known to make their own mistakes. Arithmetic mistakes alone rarely lead to a full audit.

2. Forgetting about interest and dividends
Interest and dividend payments are reported to the IRS by banks, brokerage houses and other financial institutions, and are cross-checked in about 96% of the cases. The IRS attempts to match almost 100% of the returns that they receive on computer tape and more than 50% of those that are on paper. As a result of this cross-checking, the IRS sends out notices for taxes and interest on overdue taxes for income and other payments that were not reported. Unfortunately, according to the General Accounting Office, the government agency that audits the IRS, about half the 10 million correction notices the IRS issues each year are "incorrect, unresponsive, unclear, or incomplete."

If you get an incorrect notice, follow the appropriate procedures to contest it, or contact your local problem resolution office.

3. Not properly tracking investment 'basis'
A basis is the original value of your investments. If you have mutual funds, for example, each year those funds will report to you the dividends and capital gains you earned. These dividends and gains will be taxable to you in the year reported.

When you sell these funds, your gain will be the difference between what you receive on the sale and your "basis" (technically your amount realized less your initial investment basis). The basis actually increases once any initial financial gains you reinvested are taxed. If you reinvested taxable gains from these funds, those gains (all of the dividends and capital gains reported) are added to your basis to reduce your gain (or increase your loss). For example, if I bought a fund for $1,000 and reinvested $200 in dividends and $50 in capital gains, my basis is now $1,250. If I sell the fund for $1,500, I only have to recognize $250 in gain on that sale. That’s much better than reporting a $500 profit for tax purposes. To make sure you have the right basis, check with your fund company or broker. If you can’t get the data by the April 15 filing deadline, you can either file for an extension or file an amended return later.

4. Getting married
I’m not saying don’t get married. What I am suggesting is that you postpone a Christmas wedding until after the first of the year. The tax savings could pay for the honeymoon.

There is a marriage penalty if both married partners work. For example, in 2001, two individuals who each earned $24,000 in taxable income would pay $3,600 each in taxes for a total outlay of $7,200, according to the 2001 IRS tax tables. As a married couple, their taxable income would be $48,000. They would have to file either a joint return or a return as married filing separately. Either way, they would be required to pay $7,550 in taxes -- $350 more than what they would have paid had they remained single. This is because we have a progressive tax system where incremental dollars are taxed at higher marginal rates. The second $24,000 therefore would be taxed at a higher marginal rate than the first $24,000.

This tax penalty on marriage is compounded by the standard deduction. A married couple is allowed $7,600 in nontaxable income in 2000. Two single workers get $4,550 each for a total of $9,100. By getting married, an additional $1,500 becomes taxable -- and at the highest rate. There were efforts to try to fix this problem in last summer’s tax bill, but the changes don’t take effect until 2005.

Moreover, high-income earners who marry will lose write-offs for personal exemptions faster than their single counterparts. Marriage may also wipe out potential IRA deductions. Of course, if only one partner is employed, marriage would provide a tax savings. They could file jointly, at rates lower than for single taxpayers.

5. Losing track of receipts
In the real world, you either have proof of your deductions or you lose them. Always keep your receipts and checks if you want to deduct them. Deductible receipts and checks should always be kept for at least three years from the due date of the year filed, or the actual date filed, if later. Unless the IRS can prove fraud, the statute of limitations to disallow deductions is three years. Once this three-year period has elapsed, the IRS is prohibited from even questioning these deductions. Receipts for expenses that may be deducted in later years, such as improvements to your house, should be kept for three years after the return on which they are claimed.

Remember, the IRS is a paper-based bureaucracy. Separate your receipts and checks by deductible category and make any audit easier for the auditor. The easier you make it for them, the more they believe and accept that you know what you are doing, and the easier they will make it on you.

6. Failing to bunch deductions
There are a number of deductions that are allowed only after you exceed a minimum amount. For example, only those medical expenses that exceed 7.5% of your adjusted gross income are allowed. Alternatively, miscellaneous deductions are allowed only to the extent that they exceed 2% of your adjusted gross income.

Your best planning strategy here is to bunch your deductions into a single year to exceed these minimum requirements. For example, if you have an adjusted gross income of $100,000, only those medical expenses in excess of $7,500 can be deducted. In order to exceed this "floor" amount, you might prepay your orthodontia bill or pay your Jan. 1 medical insurance on Dec. 31. With miscellaneous itemized deductions, and the same adjusted gross income, you need to exceed $2,000 in expenses. Prepay your tax preparer on Dec. 31 for that year’s taxes or bunch order your investment subscriptions and expenses to exceed that amount.

7. Forgetting to donate unwanted items to charity before Dec. 31
Give your old clothes, furniture, appliances and other items away to your favorite charity. The wholesale value of those contributions is allowable as a charitable deduction. Make sure that you get a receipt. No receipt, no deduction. The receipt doesn’t have to list what you gave or what the items were worth, but it must be dated. You can fill in the details yourself. Remember, too, that you can deduct 14 cents a mile for any charitable work, including the trips to bring the old clothes to the charity.
 
1 - 1 of 1 Posts
Top