What The IRS Doesn't Want You To Know This Tax Season

by Gerri Willis

The IRS is an agency of mystery – and power. The IRS has the power to garnish your wages, throw you in jail or generally make your life difficult, if you run afoul of tax law. So how do they operate and what are they not telling us? Here’s a list of the things the IRS generally would prefer you didn’t know about this tax filing season:

  • It’s all a matter of interpretation. You’d think tax law is hard and fast, but the truth is that things can get pretty grey when it gets down to the details. For example, there’s the case of the couple that the IRS allowed to deduct the cost of feeding wild cats on their property because the cats fended off snakes, rats and other vermin. Or, the man who was able to deduct money he gave his girlfriend to care for rental properties he owned. And, the stripper who was allowed to deduct her breast enhancements as a cost of doing business. Don’t assume your deduction will be rejected, but check with a tax professional before claiming it.


  • April 15 is not necessarily the deadline. You can get a no-questions-asked six month extension for filing your final tax form, if you pay any taxes you owe by April 15. Download Form 4868 from www.irs.gov to request an extension and include a check for whatever you estimate you owe – that’s the critical part! Even if you can’t afford the entire bill, the IRS allows you to structure a payment plan.


  • Getting audited isn’t the big deal you might think. Getting the letter in the mail from the IRS may cause anxiety, but, these days the agency is conducting correspondence audits, audits automated by computer reviews of your filings. These audits are done through the mail, and are seeking additional information. This is the lowest level of audit and if you can provide sufficient evidence to resolve the question, the audit is dropped. Oh, by the way, the audit rate is just about 1 percent.


  • If you’re planning to use the “I had a crook as an accountant,” as a defense, forget it. If you’re tax preparer is incompetent or simply a crook, you’ll still be on the hook for any fines or fees levied as a result of his or her mistakes. Read the final product – the most common way preparers boost refunds is by inventing fake children.


  • Don’t expect a returned phone call, if you have a question. The IRS has said it is only responding to “basic” questions this year, whatever that means. So if you’re trying to understand a nuance of tax law, you’re better off asking a tax pro.


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Taking Advantage of Tax Deductions

by Gerri Willis

If ever there was a year to look for deductions to your tax bill, this is it. The reason? Millions of Americans will be paying more because of higher tax levels imposed by Obamacare and the ironically named American Taxpayer Relief Act of 2012. But even if you aren't subject to the higher rates, it still pays to get all the breaks you can.

  • PRIVATE MORTGAGE INSURANCE. The home mortgage interest deduction is a perennial favorite of homeowners and while that deduction is now on a phase out schedule for high earners, others may benefit from the private mortgage interest deduction. PMI is an insurance policy that lenders require if you can't make a 20 percent downpayment on a home. And, 2013 is the last year you'll be able to claim the deduction unless Congress changes its mind.

You'll find the amount of PMI you paid on your bank's mortgage interest form 1098. The break is available to homeowners who took out their mortgage after Jan. 1, 2007.

And, like a lot of deductions, this one has income phase outs too. The sweet spot for this break is an adjusted gross income below $109,000.

  • CARING FOR A DEPENDENT PARENT. This is more complicated than it sounds, but if you can claim a parent as a dependent, you can save on taxes. Your parent must live with you and get more than half of his or her support from you. Keep in mind the parent's earnings must be less than the tax exemption level. The devil is in the details with this one, and you should consult a tax professional. But if you meet the requirements, you'll be able to claim an added personal exemption on your income tax return.

An added plus, any medical expenses you pay for that parent can contribute to the threshold for deducting medical costs. To meet that threshold, you have to spend 10 percent or more of your adjusted gross income on medical expenses. (That threshold increased from 7.5 percent last year.

  • COLLEGE LOAN INTEREST. Parents struggling with the high cost of education will find they can deduct up to $2,500 of annual interest on loans to pay for college. Income phase outs exist, naturally, so high earners might want to consider taking out a home-equity loan instead, which in most cases, will allow you to deduct interest.
  • HOME EQUITY LOAN INTEREST. You probably know that mortgage interest is deductible. Interest on mortgage debt up to $1 million is deductible, but phases out at higher income levels. Interest on home-equity loans totaling up to $100,000 also is deductible, no matter what you do with the money.
  • JOB SEARCH. If you were looking for a job last year as millions of Americans were, the costs of that job search is deductible. File them under miscellaneous expenses. You don't have to be successful to claim the deductions. If you do land a new gig, you can also claim relocation expenses for the new job. Consult a pro to determine exactly what you can deduct. 

There are more deductions -- many more -- but you should be aware that some of them are IRS audit bait. Here are a few of the deductions that might get you a second look, if not an audit:

  • Home office deductions. This one draws attention especially if you claim a salaried income.
  • Non-cash charitable donations, especially if you donate a car to a charity.
  • Earned income tax credit. This benefit for low-wage earners is often abused and the IRS will take a close look.

When it comes to deductions, one of the things IRS auditors keep in mind is just how you stack up with other taxpayers. CCH Inc. recently calculated average deductions, and while you shouldn't use these as a hard and fast guide to your own tax return, it makes sense to have a general idea of what people in your income bracket pay. For example, folks with an income range of $50,000 to $100,000, claim medical expenses of $7,312 interest of $9,320 and charitable contributions of $2,815. These households pay federal taxes of $6,111.

So the point, here, isn't to discourage you from the taking all the breaks that are due to you. In fact, I say take absolutely everything you are eligible for. The IRS expects nothing less. 


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Tax Returns: Do Them Yourself or Hire Help?

by Gerri Willis

Tonight on The Willis Report at 5pm ET we’ll be talking about the best tax software for filers. But that’s not the only way to get the work done. There are times it makes sense to actually hire a tax pro. Tax software is great and for millions of Americans, it’s a good solution, but there are times you need professional help.

It’s best to use a professional when you own your own business, you’ve gone through a major life change like marriage or divorce, you’ve bought or sold a home in the previous year, you own rental property or have a large investment portfolio. In other words, if your taxes are complicated for any reason, it pays to hire a professional. If you manage to pick an experienced accountant, you’ll find that he or she has probably prepared a return for someone in your exact situation. What’s more, if the IRS has issues with the filing, such as wanting more information, your professional will handle the exchange.

Picking a professional is a whole other kettle of fish. Certified public accountants are the gold standard having completed a four-part accounting exam. What’s more, they can represent you in front of the IRS (if it comes to that.) However, there are less expensive ways to get help. Enrolled agents who have passed a tax exam and/or actually worked at the IRS and are licensed to file taxes. You can find an enrolled agent at www.naea.org.   Some certified financial planners also offer tax services. At a minimum, you want your CFP to be talking to whoever prepares your taxes. There are also accredited tax accountants and tax planning services. (I did say it was a whole kettle of fish, right?) Getting a preparer who is recommended by someone you know and trust is a good idea, too. Keep in mind, though, if there is an accountant that everybody in the office uses because he gets incredible refunds, I’d stay away. When a pro gets in trouble, the feds typically audit everyone he did a return for.

Truth is, tax software isn’t nearly as scary as you might think. You don’t do math. The software makes calculations for you. And, the way the packages work is that they have you fill out the form by asking you questions and prompting you for a response. Better yet, if you make a mistake using a software program, like entering the wrong Social Security number, the IRS will ask you to fix the issue, instead of sending you a bill.

For some of us, it comes down to a comfort level – do you want to handle it on your own, or do you want a pro to do it for you. Just make sure that however you get it done that you file electronically. Filing online is the most secure way of filing your taxes, and guarantees the quickest processing.

What Changes to Expect on Your 2013 Tax Return

by Gerri Willis

The countdown is on with just five weeks to go to April 15! Tax season is upon us, and if you are wealthy or simply well-to-do, steel yourself, you are about to get soaked. Tax changes for the 2013 tax year are huge and the nation's top earners are likely to see their tax rates rise above a whopping 50 percent.

At risk for the biggest changes, are Americans earning over $200,000, says Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants.  To be sure, though, earners above $400,000 for single filers and $450,000 for married filers filing jointly will get the biggest bite. And, it’s not just wages that will get more heavily taxed; investment income taxes are rising, and tax benefits that you might have taken for granted like personal exemptions and itemized deductions are under assault too. These changes come thanks to Obamacare and the American Taxpayer Relief Act of 2012.

“I think high earners may be surprised that multiple increases are hitting them,” says Rich Coppa, of Wealth Health LLC. “If they didn't pay attention to these changes from last year they are going to find a bigger bill to Uncle Sam.”

Here’s what you can expect: You likely already know about the increase in the Medicare payroll tax. In 2012, the tax was 2.9 percent and employee’s share of the tax, 1.45 percent, was automatically deducted from your paycheck. Effective this calendar year, however, high-wage earners owed an additional 0.9 percent tax on earned income above $200,000 for single filers and $250,000 for those married and filing jointly. This year also starts a new income tax bracket for people earning $400,000 for single filers and $450,000 for joint filers – a top tax rate of 39.6 percent up from 35 percent last year. That’s the easy stuff to understand. Some of the other changes are more complicated.

Your personal exemption of $3,900 last year is phased out. The amount of the reduction is 2 percent for each $2,500 in excess of adjusted gross income amounts of $250,000 for single filers and $250,000 for those married, filing jointly. The result is a complete elimination of the exemption for single filers with an adjusted gross income above $372,501, and for couples filing jointly over $422,501. What’s more, itemized deductions, such as mortgage interest, state income and sales tax and home office deductions will be on phase-out schedules as well. (These are sometimes Pease deductions). This change will reduce the value of itemized deductions by 3 percent of adjusted gross income above $300,000 for couples and $250,000 for single filers to a maximum reduction of 80 percent of its value.

Even more pernicious are higher taxes on investment income. If your income is greater than $200,000 as a single filer or $250,000 married and filing jointly, a 3.8 percent Medicare surtax on investment income will be due. (The tax applies to the lesser of your net investment income for the year or the amount by which your modified adjusted gross income exceeds the income thresholds). Note that a taxpayer could be subject to both the additional 0.9 percent tax on earned income and the 3.8 percent tax.

In addition, Obamacare makes it more difficult to deduct unreimbursed medical expenses. Before the Affordable Care Act was passed, unreimbursed medical expenses could be deducted after they exceed 7.5 percent of adjusted gross income. The threshold is now 10 percent.

All this week, we will be discussing what you need to know about this year's tax bite and what you can do to reduce it.


Join us on The Willis Report at 5pm ET.


Check Your Charity Before Donating

by Gerri Willis

Americans are the most generous people in the world giving an eye popping 310 billion dollars to charities last year. But if you like to donate, it pays to be sure your money is being used wisely.

According to the New York Attorney General's office, of charities that used telemarketers to fundraise, 62 cents of every dollar donated were kept by those telemarketers. In half of the fundraising campaigns run by telemarketers, the charities retained less than 30 percent of the funds raised. That's not a good return on investment.

And, it's not just pricey fundraising that puts your dollars at risk. Bloated executive salaries, mushy missions and sound-alike charity names can all result in a waste of your charity dollars.

So, be sure to check out your charity before you donate. One great resource is CharityNavigator.org. This website does the heavy lifting for you, vetting many players. If your favorite charity is not on the site, ask basic questions. Is the organization a legitimate non for profit? If the entity doesn't have that designation, you can't deduct contributions on your taxes. Avoid any charity using telemarketers.

Read the mission statement. You should look for organizations that have concrete goals. Charities should also tell you how much of each dollar they receive is going to their cause. Watch for high operating expenses.

Finally, if you have a specific charity you want to give to, be sure to get the name exactly right before you stroke a check. Scammers try to take advantage of your goodwill by promoting ventures whose names sound legit or mimic those of established charities.

Use your charity dollars wisely. Remember, the more care you give in dispensing your money, the more causes you can help.


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Changes Could Be Coming to Your 401(k)

by Gerri Willis

Hold onto your hats: A proposal coming from the White House could impact your 401(k) and not in a good way. President Obama plans to ask Congress to reduce tax benefits for 401(k) investors, particularly higher earners.  And the proposal doesn’t stop there. The president also wants to limit the value of all tax deductions and IRA deductions to 28 percent of income. Catch-up investors for retirement would be hardest hit by these rules if they were to become law.

Experts say that households caught in the crosshairs would be singles earning $183,000 or more and couples earning $225,000 and more.


The proposal, which is sure to reduce savings if it becomes law, comes even as Americans are pitifully under saved for retirement. According to Boston College’s Center for Retirement Research, the average 401(k) and IRA balance for people over 55 years of age is just $42,000. What’s more, just five percent of the roughly 60 million 401(k) plan participants contribute the maximum amount to their 401(k) of $17,500 for people under 50 and $23,000 for people 50 and older. 


“You don’t strengthen the caboose by weakening the engine; it’s a bizarre point of view,” says Ric Edelman, a financial advisor and author of “The Truth about Retirement Plans and IRAs. “We need to be creating incentives for people to save for retirement, not putting ceilings on them to discourage them from saving.”


What’s surprising is that the administration would look to raise the tax hit on retirement savings rather than increase it. The administration says that wealthier Americans will save for retirement regardless of whether they get tax breaks for doing so, but in many parts of the country, the earnings levels that are targeted -- $225,000 for a couple, for example – aren’t high wage earners, but middle class earners.


What’s more, the President’s proposal has the possibility of reducing retirement options for people in all wage categories, if small business owners decide to drop company 401(k)s, rather than deal with the changes. “If you have rich people without incentives to save, they are going to kill their retirement plans at work which means the lower-paid workers won’t have a retirement plan to contribute to at all. So, that’s a real backwards concept,” Edelman says.



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Comcast, Time Warner Deal to Get Close Look From All Sides

by Gerri Willis

The proposed $45 billion marriage of Comcast and Time Warner Cable has caught the eye of regulators and Congress, but the real impacts will be felt in American living rooms. The two companies rate among the lowest with consumers in term of customer satisfaction. And, despite the fact that executives called the merger “pro-consumer,” Americans complain about wait times for cable service providers and rising prices already. Monthly cable bills have nearly tripled in the last decade to $128 a month for triple play – phone, interest and cable TV services.

Although many consumer experts are predicting the merger will raise cable prices, others say that changes may be slow to come because it will take at least nine months to a year to get the merger approved by federal regulators. Meanwhile, some in Congress say they plan to hold hearings to give the deal a closer look. The House Judiciary Committee and the Senate Commerce Antitrust subcommittee have both announced plans to examine the deal in detail.

But it may not just be prices that are an issue when and if the deal is approved. Service may also be an issue. Consumer Reports has said Comcast  dropped streaming speeds sharply for Netflix, a popular content provider with its “House of Cards” series which scored record downloads this past weekend.

Ultimately, regulators will decide if the deal goes through. The Obama administration recently blocked the merger of AT&T and T-mobile. Comcast and Time Warner appear to already be positioning themselves for scrutiny by the Justice department. They say that that the two companies currently don’t compete in any single zip code in the country, and that even post-merger, the company will be available to only 30 percent of American households, typically regarded as an acceptable level.


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The Unintended Consequences of Divorce

by Gerri Willis

Getting a divorce isn’t just an emotional roller coaster, it’s also an event likely to have unintended consequences that reverberate throughout you and your children’s lives.    

What’s more, it’s big business, according to Vikki Ziegler, a divorce attorney and host of Bravo’s new show, Untying the Knot. “It’s estimated to be a billion-dollar a year industry when you include experts, counseling, life insurance, real estate issues, lawyers and the like.  It’s an expensive proposition that can financially ruin litigants.” If you take it all the way to divorce court, couples can spend $20,000 to $2 to $3 million. You can keep the costs low by using a mediator to help you negotiate a fair settlement. Ziegler recommends using a retired judge or attorney both of you can trust to help settle all the issues.

And, so much hangs in the balance: All of a couples assets, custody of their children. Who gets the house? Divorce attorneys say huge legal battles have been waged over who gets the dog. For that reason, you’ll want to try to take the emotion out of the proceedings and carefully tally what the two of you own and what you spend. Cases turn on who has the best documentation of these details.

Raoul Felder, a celebrity attorney known for his aggressive style in the courtroom, says cool-headed analysis is the key to getting what you want. “The thing that always seems so odd is that both the husband and the wife do not recognize that a divorce may be the biggest business deal either of them ever makes in their lives. If a successful businessman is buying or selling a subsidiary, he will go into long consultations, look at the charts, have meetings with his colleagues, employees and financial people. In a divorce, frequently, he will act out of anger or passion, and will make a life-altering decision in the blink of an eye.”

The economy’s recovery has many experts predicting the country is in for a rise in divorces as couples conclude they can afford to call it quits. But the reality is this: You thought the divorce was expensive? Wait till you see what it costs to live apart! Maintaining two households, one for the husband and the other for the wife and kids, may not be twice as expensive as maintaining a single household, but very nearly so. The high cost of living apart will impact your ability to save for your child’s college education, even your own retirement. (And, I’m not even talking about the emotional costs that result.) The consequences of divorce are enormous for families and continue for decades to come.


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Money Mistakes to Avoid in Marriage

by Gerri Willis

The number one cause of divorce, according to experts and polls alike, is money. Even in good times, couples are likely to disagree on how to spend their earnings. But add in the stresses of a weak economy and job market or a lingering and expensive illness, and the atmosphere can become a pressure cooker. Under these kinds of stresses, your partner’s behavior may become unrecognizable to you. He or she may seem like a stranger. 


That makes it all that more important to talk about money in the early days of the relationship. It may sound crazy but actually exchanging financial records can help clarify expectations and set the stage for handling the inevitable financial issues that crop up later. If you know what your spouse makes, what they save for retirement, how they spend day to day, you are in a much better position to handle issues down the road. Develop financial goals together. How much money would you like to have saved by retirement? Are you saving for your kid’s college education together? How much? Planning together in such a way puts you in the same boat and makes you feel like a team – critical to overcoming financial problems down the road.


“It’s about perception,” says Dr. Jeff Gardere, a psychologist and professor. “If you view it as an impossible situation it will become one and may end up hurting the marriage. Instead, view it as an aspect of life that happens to almost everyone at some point and that the two of you must take it on together and resolve the problem.”


It’s essential to consider as a couple that financial emergencies will arise and to have savings that can see you through the normal problems every family faces. Facing job loss, for example, is a lot easier when you and your spouse have already had a conversation about the potential that it might happen, than considering the impacts for the first time when it does. Surprises aren’t fun. But if you can start the conversation by saying, “Well, we’ve already talked about this,” that can be calming.


Hitting a true rough patch like a serious illness requires that you reach out and tap all of your resources for help. Don’t suffer in silence. It’s worth telling your accountant, attorney and other family members if the medical bills are coming in hot and fast. There may be solutions that you personally aren’t aware of.

Gardere says, “Show faith and courage in your partner, yourself and your marriage as you go through the process. It will only prepare you and make you stronger for the next challenge you face in your marriage.”

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The High Cost of Having Kids

by Gerri Willis

It never ceases to amaze me what my friends spend to raise their children.  Between the child care, the private schools and clothing, it’s no wonder so many parents both work. The Department of Agriculture estimates the average cost of raising a child born in 2012 will be $241,080 or $301,970 if you adjust for expected inflation, And, this shockingly, does not even include the cost of a college education which currently is $22,826 for a public school or $44,750 for a private school – that’s before the 4 to 5 percent annual tuition inflation hikes kick in.

Of course, the real cost depends on where you live. In rural parts of the country, you might get away with spending just $143,600, but in the high-cost Northeast your costs might be $446,100, again according to the USDA. Trouble is some families spend even more, which raises the question: How can you cut your costs without sacrificing care for your child?

Let’s tackle child care – it’s one of the most expensive tabs parents face. According to the National Association of Child Care Resource and Referral Agencies, in 31 states and the District of Columbia, the average annual cost for infant care is MORE than a year’s tuition and fees at a four-year public college. In 2012, according to the same source, the average annual care cost for infants ranged from $4,863 in Mississippi to a high of $16,430 in Massachusetts. For a four year old, the average costs are similar ranging from $4,312 in Mississippi to $12,355 in New York.          

The best solution – getting a family member to care for your child, simply isn’t practical for many moms and dads. Given that, a good solution for some parents may be employer-provided child care which is typically run at a lower cost to employees. Peace of mind is higher when your child is down the hall or in the same building as mom or dad. If there is no onsite child care, your employer may provide you with referrals or even discounts to centers nearby. You may be able to pay for child care with pre-tax dollars through a flexible spending account, check your human resources office for details. Remember if you work in the public sector or for a company with more than 50 employees, you may be eligible for up to 12 weeks of leave to care for a sick child, under the Family and Medical Leave Act.

Another way to save is to share a nanny with other families and split up the costs of care. Other moms I know have set up a babysitting co-op, in which parents provide the care. You’ll need to work with families in which the parents have different schedules.

One word of caution for moms and dads: Don’t put your future at risk by putting every single penny into Junior’s education. Your son or daughter will be able to borrow for higher education, but you’ll have to foot your own tab for retirement.


Don’t miss The Willis Report starting 5pmET on FOX Business.


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