More Easily Missed Tax Breaks

The good news is that I found so many examples of often overlooked deductions that this turned into a 3 part post.  The bad news is those at the bottom of the list are less compelling.  Still, they may come in handy for a game of Trivial Pursuit.  Or you could answer a question on Quora.

If you are one of the lucky folks who did a refi in the past few years and you paid points, you are eligible for more than just a lower mortgage payment.  You can take the points divided by the term of the loan.  So if it’s a 15 year loan, that’s 1/15^th of the points each year.  Not much, but not nothing either.  Also if you pay off the loan, you get to take the remainder.

Most employers continue to pay your salary if you go on jury duty, but many of them also take the “pay” you get from going.  If you fall into that particular pool, you can take the jury compensation you didn’t get as a deduction.  This is another “above the line” chance to reduce adjusted gross income. One reason this gets overlooked is there’s no line on your 1040 marked jury duty pay.  You take it at the end of the section for deductions before you calculate adjusted gross income.

My next tip isn’t actually a deduction, but in the year where enhanced brokerage reporting starts to kick in it’s worth noting.  You pay taxes on reinvested dividend income, but many people forget to add this to their basis cost when stock is sold.  Adding that little bit extra either reduces taxes owed for gains or increases the loss you can put towards gains on your tax return.

Finally, don’t overlook that Uncle Sam is giving you a little extra time this year.  Individual and partnership returns aren’t due until April 17^th.  Corporations don’t get a break  -- they’re still due on the ides of March.  Remember if you file an extension it gives you more time to finish the return, but you still have to pay taxes you owe by the initial deadline. 

Taxidermy for Performing Artists?

This week I’m scheduled to speak at Point Park University on the subject of tax issues for artists.  Teachers there asked the PICPA to find someone to talk about the topic.  Let’s face it, artists have an uphill climb economically to start with, and yes it turns out their typical tax situation is more complex than most of us will face.

There are three areas where artists stand out from the crowd from a tax perspective.  Artists are more likely than not to:

• ·         have multiple income streams,
• ·         be both an employee and an independent contractor, and
• ·         be taxed in multiple jurisdictions.

 And you thought the threat of chronic poverty was enough to keep someone from wanting to be the next American Idol.

The discussion at the University will focus on income taxes.  Performers get income like most of us from employers or contracts, but they also can be compensated through barter arrangements (I’ll play at your wedding if you’ll cater my party) or get free products for appearances or endorsements.  All of that counts as compensation, and the IRS knows this better than most performers.

Then there’s the issue of what is deductible.  If an artist works as an independent contractor they can deduct the costs associated with the “business”.  Typically this will focus on supplies, research, travel and entertainment and rehearsal / work space in the home.  All of these are favorite topics for IRS auditors, who unlike the artists are doing tax stuff for a living.  So guess who usually knows more.

Another potential trap for artists is related to income fluctuations and paying enough taxes in the current year.  You’re supposed to pay taxes as you go.  For an employee that means your employer holds the taxes from your paycheck and for contractors you pay estimates of your taxes every quarter.  While this seems straightforward notice I used the word estimate as to what you pay.  Our Federal tax system is progressive, which means the more money you make, the higher tax rate you pay.  (This is not a time to get into Warren Buffet’s and Mitt Romney’s tax returns!)  If your employer withholds at the wrong rate because you have multiple jobs, you pay the penalties and interest for underpayment.  Same goes for calculating your estimates.  Changing income levels is a problem for may people, so the IRS does allow the “safe harbor” of essentially paying the same amount in taxes as you did last year until you file your return.  At that point you need to make sure you have enough money to pay Uncle Sam what you owe. 

One person who had particular problems with doing just that was Mark Twain. While there are more contemporary examples of artists with tax troubles, I couldn't resist Twain's take on the situation -- which unfortunately is still relevant. Hopefully some of the students I see this week will enjoy a version of Mark Twain's artistic success, but not his tax problems. 

Don't Miss These Deductions

More overlooked deductions on the menu this week.  For fun we’ll focus on what those of us inside public accounting call “above the line deductions”.   There are a number of reasons these are better than other kinds of deductions.  You can follow the link on above the line if you want more details -- the net impact is that they are hard to qualify for, but easy to take.  That’s because you don’t need to itemize to use them. While lots of people itemize, many people are better off with the standard deduction.  In particular young taxpayers often fall into the category of an easier return to file, but with fewer tax breaks.

One example of how starting out is a tougher time for taxpaying is your first job search.  Once you have a chosen profession, expenses for your job search can be deducted.  That’s not true for your first job hunt.  However -  moving to take your first job is not only deductible, but you can take it even if you don’t itemize.  The key qualification is that your new job is more than 50 miles away from your old home.  (You may need to read that a few times to get clear on what that means.)  Mileage deductions for moving have been changed.  If you moved in 2011 before July it’s 19 cents.  It went up to 23.5 cents for the remainder of the year.

If you own your own business and qualify for Medicare you get another deduction that doesn’t require you itemize.  (Accountants love these!) You can take the full premiums for Medicare Part B, Part D and any Medigap policy you use.  Unlike the typical medical expense deduction on Schedule A,  these premiums are deductible from the first dollar,  with no threshold to meet.  One important thing to check before you take this is, if you are covered under a spouse’s health insurance through an employer, then you can’t use this.  It’s only if you get your insurance through your business.

Members of the National Guard or military reserve who travel more than 100 miles and overnight to attend drills or meetings get to deduct the travel.  One again no itemizing required. (Yipee!) That said, I’m sure one reason this deduction gets overlooked is that it’s a little tricky to calculate.  You get to deduct your travel costs subject to federal maximums.  Follow the instructions carefully or better yet, call your accountant.  :-)

Often Overlooked Tax Deductions

The good news is that this tax season is getting off to a busy start.  The bad news is I got off schedule and missed posting last week.  Back on track now and starting to focus on the fun part of tax – deductions.  First off, most apply only if you itemize, so the initially look at  whether you’re better off with the standard deduction .

High on the overlooked list of deductions is the option to deduct sales tax paid for the year rather than income tax.  The rough rule of thumb is that if you live in a state with income tax, you’re probably better off taking the income tax.  Still it’s worth checking particularly if you’ve purchased big items or done some home remodeling.  The IRS has a calculator that lets you set what you would get from sales tax for the year, so you can be sure that you’re making the right choice before you hit the send button on e-file.  On a related note, if you paid state income tax in the spring, for last year’s return, it’s deductible this year.  Make sure you don’t lose track of that.

Charitable deductions are common enough, but it’s often forgotten that out of pocket expenses associated with charitable work and driving for a charitable purpose are deductible.  If your total giving for the charity exceeds $250 you’ll need an acknowledgement from them.  Also remember non-cash donations require a special form.

Here’s one I picked up from kilplinger.com that’s easy to miss.  If parents pay back a non-dependent child’s student loan, the IRS treats the money as if it was given to the child, who then paid the debt.  Because the child is the debtor, it’s his deduction still, even though mom and dad paid the money.  If the loan is made to mom and dad, the deduction is theirs alone.

If you pay for child care you should check the child care tax credit.  People with an employer sponsored depend care account should consider if the savings from that is more than what they’d get from the credit.  I won’t go into the full details, but if you have more than $5,000 in child care expenses you consider the credit over the spending account. 

More next time…

Last Call on Avoiding an Audit

Risk of a tax audit generally goes up when you operate in an environment where cash is king.  The connection between an all cash business and opportunity for tax evasion is pretty obvious.  Another factor that keeps the IRS focused on these types of businesses is the potential for record keeping snafus that make it likely they’ll be able to find a way to make it worth the auditor’s time to spend time with you.  Even if you are pretty diligent about record keeping, the rules do keep changing, making it more difficult to make your case that you’re being honest.

This year if you have a cash intensive business that also takes credit cards you have more recordkeeping  worries to keep track of when you get a form 1099 K from your payments processor.  This form will show all the funds that were sent you business based on credit card transactions.  The IRS will start from the position that this is all taxable income to you.  If it includes non taxable funds such as sales tax, you have to deduct that on your return.  If you give discounts or cash back that isn’t reflected in the credit card total – it’s up to you to do the reconciliation.  Once again good record keeping is the essential ingredient for success here.  

Another third party reporting item that can trigger additional IRS attention is cash transactions of $10,000 or more involving banks, casinos, car dealers and other businesses.  Recent IRS research indicates these large cash transactions tend to be associated with productive audit leads, so if you’ve had this type of transaction in the last year, make sure you’ve got everything buttoned up in terms of your record keeping.  Also make sure that you disclose money held in foreign bank accounts.  If this is the first year you are volunteering that information,  locate the documents verifying that you opened the account in tax year 2011. 

Speaking of double checking things, do take a second look at your return before you sign and send.  Math errors are the leading cause of IRS communication with taxpayers.  Even though miscalculations don’t necessarily lead to a full blown audit, when they’re in your favor, it does increase the risk the entire return will be pulled for an audit.

Once again, let me emphasize, it’s important and correct to take advantage of every opportunity for tax avoidance available to you.  The flip side of that equation is that is the more options you have to not pay taxes, the more you have to focus on maintaining records that show your deductions are legitimate.  You don’t have to hold on to this information forever.  The regular statute of limitations for revisiting a tax return is 3 years.  If you have an underpayment of 25% or more it jumps to 6 years.  If the IRS believes fraud is involved, there’s no limitation.