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by Fred C. Wilson III
January 16, 2013
Tax Tips for 2013
“Ever wonder why the IRS calls it Form 1040? Because for every $50 that you earn, you get 10 and they get 40.”
-Anon.-
This tax season will be one for the books. Tax laws change so frequently that the Internal Revenue Service seems slow in keeping up. Some tax pros suggest taxpayers delay filing until March, reason being, tax codes are still undergoing revision. As of this writing the IRS announced five changes for the 2012 tax year. They’ll impact every taxpayer. Personal/dependant exemptions will increase from $100.00 to $3,000.00. Standard deductions have increased in all categories. This includes a $300.00 increase for married couples filing jointly, an increase in all tax-bracket thresholds, an increase in the income phase out level for married couples that pay student loan interest, and the maximum earned income tax credit will increase from $5,751 to $5,891. Thanks to last minute passage of the New Year’s Day Tax Payer Relief Act massive tax increases we expected were narrowly averted. For complete listing of all tax changes including contribution limits for certain retirement accounts and inflation adjustments go to: www.irs.gov.
Few things are more feared than an IRS audit. Only 1% of taxpayers receive them but you never know when it’s your turn. Getting fingered by the IRS is akin to a Chicago construction project; never ending. My first tax audit came in high school. I was working at Wah-Hing Chop Suey part time making .50 cents an hour plus the rare quarter tip. The IRS found some irregularity on my return and hauled me in. Since then I’ve had a number of audits and ‘questions’ in the mail. Here are some ‘red flags’ that really tick them off; it’s a given that the U.S. government may want its citizens to live long and prosper but they don’t want us to get too fortunate. Case in point: if you make a lot of money your chances of being audited are quadruple compared to the average person. If you’re a member of that fortunate few (I don’t even come close.) make sure to include all your income. Careful with your deductions, list PNB and all other foreign accounts, stock dividends, casino wins/losses, other claimed losses, watch out for simple Math errors and sign your completed return before mailing.
When I was studying taxes working for H & R Block I learned that the IRS has technology the average person can hardly imagine. They hire only the crème de la crème as auditors. You work in a profession that keeps you fed, housed, and clothed though won’t make you rich. You and your significant other take a Caribbean cruise. The expenses coupled with your salary leave a significant paper trail. You’ve spent above your means. The IRS will match your trip with your pay check and estimated living expenses. They don’t add up-gottcha! The IRS tail suspected tax cheats. And don’t think high rollers can stash their assets in overseas accounts. Long time tax haven Switzerland meekly handed over a long list of American tax dodgers to the IRS few questions asked. Chicago’s very own Al Capone was right when he said he could get more accomplished with a gun and a kind word than with a kind word alone. This country has plenty of guns to back up polite diplomatic ‘requests.’
Even if you have or think you have a case against the IRS, beware. A person very close to me whose name I’m not mentioning had a legitimate beef against those people and challenged them through legal channels. The IRS spent months investing that person’s claim, ran a three year audit in which they found the person clean. In the end they still got the money they originally ‘asked for.’
Again report all income but be especially careful and accurate in reporting charitable deductions. The IRS doesn’t like people who tithe. Writing off 10% or more of your income automatically sends up a red flag. If you fail to file a Form 8283 for donations over $500.00; you’re theirs! SAVE ALL DOCUMENTATION or else you’ll be hearing from the only government agency except the military that works; for detailed information on charitable giving go to: www.kiplinger.com.
Back in the day when I published my own magazine I listed the enterprise as a home office. I learned the hard way that home businesses must make money or risk being declared a hobby. You claim a home office deduction that failed to generate cash the IRS will audit you pronto! Your home office must have separate utilities, books, rent, phone number and be your principal place of business to qualify for tax deductibility.
The government says you may list business meals, travel and client entertainment as tax deductible. Tax Schedule C is a gold mine of deductions for the self-employed. It’s also a mine field/rifle range for sharp shooting IRS agents. In tax school our instructor cautioned us to enter at your own risk when deducting business expenses. The documentation requirements will floor you. If you decide to brave it and include them on your return without proper detailed documentation visualize yourself as a merchant vessel sailing on an ocean surrounded by IRS wolf packs with you in their sights their fingers on the firing mechanism!
If you’re in the business of real estate whether renting or selling you may deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as adjusted gross income exceeds $100,000. It vanishes once your AGI reaches $150,000. Rental deductions are tricky. For additional information again go to: www.kiplinger.com.
Tax professionals don’t come cheap. While not expensive my former colleagues can put a minor dent in your budget but you will get the quality professional service you paid for. I prefer to do my own taxes but due to the complexity of this year’s tax season, I’ll still do my own but will hire my former tax teacher to do a ‘Second Look’ for a small fee. I recommend H & R Block (www.hrblock.com) and Turbo Tax (www.turbotax.com) both superb tax software programs.
Reader before you file, be careful in documenting medical expenses. You can only deduct medical/ dental expenses if they exceed 7.5% of your AGI. Take your time doing your taxes. If you need additional filing time beyond the April 15th deadline, file extension Form 4868 unless you want to pay a late filing penalty. Be careful when completing Medicare investment tax, health insurance, and retirement and investment plan forms. Reader you have been warned.
Next edition will be the Valentine’s Day Special. Drive carefully, stay sober, think and pray for the homeless as you snuggle in the quiet comfort of your nice warm bed and give generously to some of Chicago’s many help the homeless charities. God be with you and your loved ones. (vamaxwell@yahoo.com)