Five Big Tax Mistakes

Five Big Tax Mistakes Don't let them happen to you Category: Planning

Every year taxpayers are hit with tax surprises that could be avoided if they just knew the rules. Here are five big ones that are easy to avoid with some simple planning. Mistake #1. Withholding too little. This results in a tax surprise when filing your income tax. Don’t be too hard on yourself if this happens to you. Social Security withholdings have changed each year and new tax laws in 2013 make it very difficult to withhold the proper amount from each paycheck. The plan: Check your withholdings after filing each year’s taxes. Make adjustments as necessary by filing a new W-4 with your employer. Mistake #2. Inadvertently withdrawing funds from retirement plans. Amounts taken out of pre-tax retirement plans like 401(k)s and IRA’s can create taxable income. The most common inadvertent withdrawal occurs when you roll over funds from one retirement plan to another. If done incorrectly all the rollover could be deemed taxable income. The plan: Do not touch your retirement accounts if at all possible (Exception: when you reach age 70 ½ you may be subject to Required Minimum Distribution rules). If you do withdraw funds, ensure you have the proper withholdings taken out at time of withdrawal. Direct rollovers into your new plan are always a better alternative than receiving the withdrawal from the plan administrator and then conducting the transfer yourself. Mistake #3. Not taking advantage of tax-deferred retirement programs. There are numerous opportunities to shelter income from tax through tax preferred retirement programs. The plan: Review your retirement savings options and plan to contribute as much as possible to your plans. Pay special attention to plans that include an employee match component. This attention can reduce your taxable income each year. Mistake #4. Direct Deposit Mix-ups. You may now have tax refunds directly deposited in up to three bank accounts. The problem: what if one of the account numbers is entered incorrectly? Unfortunately, unlike replacing a lost check, the IRS does not have a good means of correcting this type of error. There have been instances where taxpayers have lost their refund when this occurs. The plan: Many taxpayers do not feel comfortable giving the IRS direct access to their bank account. If you are in this camp, the digital deposit problem is solved. If you use direct deposit, avoid depositing your refund into more than one account. Ideally have a second person double check the account number on your tax form prior to submitting the return. Mistake #5. Not keeping correct documentation.You know you drove the miles, donated the items to charity, had the medical expense, and paid the daycare. How can the IRS be disallowing your valid deductions? Remember without correct documentation the IRS is quick to disallow them. The plan: Set up good record keeping habits at the beginning of each year. Create both a digital and paper folder separated by income, and expense type. Keep a mileage log and properly document your charitable contributions.

Does Your Mileage Log Travel the Distance?

The tax code allows deductions for qualified miles driven for business, medical, moving and charitable  purposes. But to claim this deduction you must keep adequate records of actual miles driven. During  an audit this is an often disallowed deduction, despite the fact that you actually drove the distance  claimed. How to make sure this doesn't happen to you? Here are some tips. Keep a log. The tax code is clear on this point. You may not estimate your miles driven. You               must support your claimed deduction, ideally with a detailed mileage log. Create good habits. Your odometer reading and miles driven should be noted as soon as possible after the event. Keep a log book in your car and note the miles each day. Logs created after the fact with estimated miles driven could be disallowed during an audit. Make thorough entries. Note the odometer readings, date, miles driven, the to/from locations, and the qualified purpose for the trip. Don't lose out on the extras. The deduction for miles driven is meant to provide a deduction for fuel, depreciation, and repairs. You can also deduct out-of-pocket expenses for tolls, parking and other transportation fees. Keep a running total of these fees in the back of your mileage log. Keep separate logs for each deduction. Remember you may deduct mileage for business, charitable purposes, qualified moving and medical miles. It is best to keep track of each in a separate mileage log. Alternative business transportation deduction. When it comes to deducting business transportation expense, remember the miles driven method is not the only one available to you. You may also deduct your actual expenses, but how and when you make this determination is important. In the initial year of placing your auto into service for your business, it is best to keep track and record all your actual auto expenses. An analysis can then be conducted to see which method is best for you to maximize your deduction.

Often Overlooked Medical Expense Deductions

Avoid taking the easy way out To take your medical expense deduction in 2012 your allowable expenses must exceed 7.5%  of your Adjusted Gross Income (AGI). In 2013 and beyond, unless you are 65 or older, this  amount goes up to 10% of AGI. So why bother? You might be surprised at how much this expense  might be. Here are some tips: 1.   Don’t take the easy way out. So many think itemizing deductions is such a pain, that they forgo the work of collecting valid receipts. Don’t let this happen to you. Collect the receipts and determine if you may be giving away money to Uncle Sam by not itemizing your deductions. 2.   Insurance Premiums. Many insurance premium payments are deductible, including long-term care insurance. Many seniors omit their Medicare Part B premiums because they are automatically deducted from their Social Security benefit check. 3.   Look to your face. Eye care and Dental care are allowable deductions. This includes overlooked expenses for: o    Eye care: exams, glasses, contact lenses, laser eye corrections, and insurance premiums o    Dental care: exams, fillings, fluoride treatments, crowns, dentures, orthodontics, and related premiums 4.   Travel expenses. Parking fees, tolls, and mileage to and from appointments also count. So keep a travel log. 5.   Get a prescription. While over the counter purchases are not deductible, if the doctor prescribes the medicine or service it is. So get a prescription for your acid reflux versus buying over the counter meds. Get a prescription for a weight loss program and that could be deductible as well. 6.   Other missed opportunities. Some other commonly overlooked items include; smoking cessation programs, alcohol and drug treatment programs, home remodeling for handicap access, and visits to other health providers (acupuncture, chiropractor, and podiatrist to name a few). Medical care is very expensive these days, and it won’t be getting any cheaper. It does not take much to make your expenses meaningful tax deductions, but only if you keep track of them.