Beware of the IRS Audit

by Gerri Willis

The IRS has scaled back. It’s not answering most taxpayer’s questions. It’s even printing fewer of its instructional booklets and it’s operating with a smaller budget. Does that mean this is the year to cheat on your taxes? The simple answer is no. The IRS may decide to look back at returns filed in the last three years when it audits a taxpayer and for what it deems a substantial error, the IRS may go back six years. So, even if you shade the truth or outright lie on this year’s return and you get away with it, the IRS can still come back years later and penalize you.

Let’s be clear. Most of us aren’t plotting how to get one over on the IRS. Instead, we’re trying to make sure we don’t get audited. The good news is you can control most of the things that will get your return a second look but not all of them. High income earners, for example, are more likely to get a second look because the IRS focuses on where the money is. Audit rates for $1 million plus earners is 10.7 percent, while the audit rate for those earning $200,000 or less is 0.78 percent. Likewise if your deductions are higher than the average taken by people in your tax bracket or if you are self-employed or own your own business, chances are your return will fall into the pile for further scrutiny. Things you can control that can result in an audit include: failing to report all your income, writing off losses for a hobby or business expenses.

Even the most careful filer can find themselves on the other side of an audit. If you do get a letter from the IRS, you should have a professional handle the inquiry. Don’t be surprised that you’ll have to back up your claims. It’s really all about the documentation. If you claim unreimbursed business expenses, for example, you have to prove each and every restaurant tab and plane ticket expense was paid for by you. That means you will need to have receipts in hand. Dominick Tavella, Diversified Private Wealth Advisors president advises taxpayers to answer only the questions that are asked and no more. Don’t get emotionally involved, says Tavella, the agent is only doing his or her job. Bottom line, if you’re audited, don’t panic.

To hear more from Tavella about what you need to know about the audit, join The Willis Report on the Fox Business Network tonight at 5p.m. ET.

User's Guide to Tax Deductions

by Gerri Willis

Still haven’t filed your taxes? You’re part of the 28 million Americans still scrambling to do so. The good news is that there are still ways to save money. Deductions reduce your taxable income and allow you to pay less. And, while you may be familiar with commonly used deductions, like the home mortgage and charitable giving tax breaks, there are literally hundreds more breaks you may not be familiar with. In 2012, the most recent year for which information is available, the 45 million filers of the long form reduced their gross income by $129 billion. Now do I have your attention?

While a deduction doesn’t pack the wallop of a tax credit, which reduces your taxes dollar for dollar, deductions can still bring your tax bill down. Here are a few you might think about using this year:

  • Deduct student loan interest up to $2,500. It’s good news for newly minted grads facing a mountain of college debt. They can deduct the interest thy paid unless their parents are still claiming them as dependents. The devil is in the details here. Be sure to check income limitations for using the deduction.
  • Help for the sandwich generation. Truth be told, this isn’t a deduction, but I get so many questions about breaks for boomers, I decided to include it. If you are supporting a parent and pay half of their support, you may claim your mom or dad or both as dependents and take the exemption amount on your taxes. Mom and Dad can’t be earning more than $3,950.
  • Teacher bonus. Classroom expenses of up to $250 can be deducted by teachers. Additional classroom expenses must be filed as miscellaneous itemized deductions.
  • Bad investments. You can do more than just prank call your financial advisor if you own worthless securities. You can actually write off stocks, bonds and other investments that have lost all their value. The law allows you to go back as far as seven years to find these beauties.

Finally, don’t be afraid to take the deductions you are due. The IRS expects you to utilize every tool at your disposal to reduce your taxes. And, good luck making the deadline!

Join us at 5 p.m. Eastern time on The Willis Report as Barbara Weltman, a contributing editor at J.K. Lasser’s Tax Guides, joins us to reveal even more little-known deductions.

Tax Season Solutions

by Gerri Willis

What if the worst happens this tax season? Like you miss the April 15 deadline for filing, or you can’t afford the taxes you owe to the Federal Government? The good news, is that there are solutions to even the thorniest tax problems.

Even the most organized among us sometimes find it difficult to meet the April 15 federal tax deadline. And, while it’s true you can file an extension that will allow you to put off the inevitable until Oct. 15, you’ll still have to estimate what you owe and stroke a check. Form 4868 is the form to use if you are applying for an extension. Estimate what you owe and pay the balance on time by tax day.

If your problem is that you simply owe more than you can afford, there’s a solution for that too. The IRS allows you to create your own installment plan at a cost of $52 for set-up. Plus, you’ll pay  interest and a monthly 0.25 percent late fee. File the request by April 15 and ask for an extension at the same time. Not filing at all is not an option. Fines and penalties escalate when you file nothing at all by the deadline.

Late filers can get help last minute by using tax software and filing online. The IRS allows you to use their free file option if your annual income is under $60,000. Go to www.irs.gov for details.

One word of warning: If you’ve filed and have been waiting for a refund with no luck, contact the IRS right away. One of the popular new scams is refund filching. Crooks file tax returns in advance of the actual person whose social security number they are using. They score a tax refund and you get nothing. Getting that money back is possible, but will take weeks, if not months.

Watch The Willis Report all this week at 5pm ET on the Fox Business Network for the latest on this year's tax filing season as we interview experts and answer your questions. 

User's Guide to Filing Your Taxes

by Gerri Willis

When Nina Olson, the nation's taxpayer advocate, predicted earlier this year that this tax season could be the worst for taxpayers and the IRS in 30 years, accounting pros were skeptical. But she's certainly looking prescient now. New estimates of the proportion of taxpayer phone calls to IRS help lines that are ignored have soared to 60 percent from 40 percent just weeks ago. What's more, the IRS itself is warning that refunds may be delayed for weeks. So much for the tax agency's mandate to assist taxpayers.

These days, the IRS is preoccupied with other problems. The stain of scandal from its campaign of harassment of politically conservative groups applying for non-profit status remains. And, Congress still hasn't forgotten the agency's lavish spending on conferences from a few years ago or its awarding of bonuses to IRS employees who failed to pay their taxes. IRS Commissioner John Koskinen complains that the tax agency's budget has been set back to 2012 levels by Congress, constraining its abilities to find tax cheats. But Olson says a better strategy is to focus on is the 98 percent of taxpayers who intend to comply with tax law. Answering their questions, she says, is a more efficient way to raise federal revenue. 

Despite these problems, there is no federal agency that strikes more fear into the hearts of Americans than the Internal Revenue Service, and for good reason. The IRS has the power to garnish your wages or seize your property for nonpayment and, unlike other creditors, they don't have to go to court to obtain a judgement against you to do so. Understanding tax law is virtually impossible unless you are a highly trained professional. There are four million words in the tax code, about five times longer than the Bible or 4.5 times longer than the complete works of Shakespeare. The language is arcane and obtuse. And for that reason, we spend more time and money every year complying with these complicated rules. Americans will spend an average of 16 hours completing their tax filings this year, of which eight hours will be record keeping, two is tax planning and five is form completion and submission (another hour is miscellaneous). The average cost is $260. 

A simpler tax code could go a long way toward helping Americans file taxes. In fact, the code has gotten more complicated rather than less with the White House's decision to give the IRS the job of enforcing Obamacare rules. The law generated 47 major changes to the tax code, the most sweeping changes to tax law in 20 years. The agency decides who gets insurance subsidies and who does not. It's their call whether the coverage offered by private companies meets the rigorous standards of the healthcare law. In short, the tax agency's mandate has expanded beyond tax collection into social policy implementation. Much of that is happening this year for the first time. New tax forms for Obamacare recipients are confusing. What's more, about 800,000 of the recipients received the wrong tax information from the federal government. One H&R Block study showed that 52 percent of Obamacare enrollees received too much in tax subsidies and now owe the federal government an average of $530 per filer. 

Bottom line, this year it is on you because the IRS is offering less and less help even as the laws are growing ever more complex.

Watch The Willis Report all this week at 5pm ET on the Fox Business Network for the latest on this year's tax filing season as we interview experts and answer your questions. 

 

Five Smart Year-End Tax Moves

by Gerri Willis

Right now is the best time to lower your tax bill for your 2014 filing next April. In fact, after today, you only have 17 days to reduce your tax liability.

"Once you pop the champagne bottle, scream happy new year and give your significant other a kiss at midnight, almost all of your tax planning strategies are lost, if you haven't already implemented them," says John Vento, president of Comprehensive Wealth Management and author of "Financial Independence, Getting to Point X."

The best way to plan is to consider ways to reduce your 2014 taxable income. Here are five ideas for doing just that:

1.)    Sell your losers. If you invest in individual stocks outside a retirement plan and have enjoyed widespread gains, analyze your portfolio to identify any losers you have. If you sell those losers you can use the capital losses to offset your capital gains, plus you can take an additional $3,000 in losses against your other income. You can buy back those losers next year if you plan to hold them for the long term. Avoid tripping IRS wash sales rules by buying the same securities 30 days after when you sold them.

2.)    Delay taking your bonus. One easy way to reduce your 2014 income is to get your boss to delay giving you your bonus until 2015. That way your bonus won't show up as 2014 income. If you are self-employed, don't send out invoices until after the first of the year.

3.)    Set aside more for retirement. Most people don't contribute the maximum they are eligible for to their workplace retirement fund. According to the IRS, contribution limits are $17,500 for 2014 and $18,000 for 2015. Catch up limits for workers 50 and older are $5,500 for 2014 and $6,000 for 2015. Check the rules for contributing to your 401(k) to make sure you can modify contributions at any time. Remember, money to your 401(k) or an IRA comes out before you pay taxes (as long as you are within contribution limits). Why not pay yourself before paying Uncle Sam?

4.)    Give to charity. If you are already planning to give money to your favorite charity, now is the time to do it. In addition to cash, you can also give household goods, clothing, even a car. But before you send that old junker off, talk to a tax professional to  make sure you are doing it the right way. Vehicle contributions are often scrutinized by the IRS.

5.)    Pay your tuition bill early. If you've got a child in college, your spring semester bill isn't likely due until January, but it may be worthwhile to pay it now. Early payers can claim the American Tax Credit on their 2014 return. The credit is worth up to $2,500 and up to 40 percent of it is refundable, which means you could get back as much as $1,000 as a tax refund if you don't owe taxes. You can claim tuition, fees and course materials.

6.)    Finally, don't leave any money on the table. Be sure to use any money you've set aside in your flexible spending account at work. Like a 401(K), FSA money goes into the account before taxes, but if you fail to use the money in the same year as it is contributed, you could lose it. Plan ahead and make April 15 the best it can be!

Things to Do Right Now to Save on Taxes Next Year

by Gerri Willis

By Gerri Willis

If you're smart about your money, you've probably already started thinking about what you can do before the year ends to reduce your tax bill. There are lots of changes awaiting taxpayers April 15 thanks to the Affordable Care Act and the American Taxpayer Relief Act of 2012, not much of it good.

First things, first. If you have a large portfolio or earnings above $200,000, now is the time to run a simulation of what your taxes may look like for next year. That way, you can at least get a sense of what you'll be on the hook for come April 15, 2014.

Next, if you're expecting a bonus or year-end income that will push you into a higher bracket, consider deferring that money into next year. Hold off selling assets that will produce a capital gain. If you're self employed, don't send out invoices for year-end jobs until early next year. Keep in mind, high earners are facing a new top tax bracket of 39.6 percent on taxable income of $400,000 for single earners and $450,000 for married couples.

Even if you aren't in the top tax bracket, it makes sense to salt more money into your 401(k). That will reduce your income reported to the IRS since most plan contributions are made before taxes are taken out. Remember if you are 50 or older, you can put in an extra $5,500 over the $17,500 limit.

Now is also a good time to review the limits on your flexible spending accounts. Under Obamacare, the limit on the amount you can set aside pretax was set at $2,500. (Before the ACA, there was no statutory limit on contributions.) Some companies allow a grace period to use untouched FSA funds, but not all. Plus, the Treasury recently announced changes to the use-it-or-lose-it rule. Now, account holders can carry over up to $500 in excess money into the next benefit year, as long as your company adopts that plan.

Also important to consider: The chances of mutual funds passing on long-term capital gains distributions are high. Fund companies release estimates of distributions this month. If you're planning on selling a fund do it before distributions.

Now is also the time of year to consider charitable contributions. Make sure your contributions go to an eligible 501(c)(3) organization so that you can take the deduction.

Don’t miss a special User's Guide to Taxes on The Wills Report starting 6 PM ET tonight on FOX Business!

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