Accounting News and Notes

Duluth CPA Presents www.HisCPA.com   Taxes by the Book: A Biblical Guide to Tax & Business Management…Avoiding the Top 10 Mistakes Taxpayers Make & Personal Income Taxes

 www.HisCPA.com   Taxes by the Book: A Biblical Guide to Tax & Business Management is now available on line at http://www.hiscpa.com/blog/ It will be published here in full and is a must read for all seeking to take God’s Principles to Tax & Business Management. 

Avoiding the Top 10 Taxpayer Mistakes

Being able to avoid the most common pitfalls taxpayers make is critical to your personal financial success.  Careful discernment and wise application of tax law is an essential and critical part of avoiding otherwise avoidable IRS notices, penalties, responsibilities, IRS audits and amendment of prepared returns.  As a Body of Believers, we are commanded to give unto Caesar what is Caesar’s.  As such and based on the premise of the U.S. tax system, we as taxpayers are solely responsible for the initial filing of our returns and the fair and just filing of our lowest legal possible tax.  Avoiding these top pitfalls that many fall prey to will be an integral step in the proper preparation of your return.

Phase-outs of Itemized Expenses

Many taxpayers fail to consider in both tax planning and preparation of their returns, that itemized expenses/Schedule A can be phased out/limited based upon a taxpayers Adjusted Gross Income (AGI) and their tax filing status.

Phase-out/Limitations of Total Exemptions

Tax law allows taxpayers to take exemptions for themselves, their dependents, their spouse if filing jointly and additional exemptions if disabled or over a certain age.  There total exemptions are then multiplied by the indexes for inflation annually and then this total is deducted in determining taxpayer’s AGI.  Like a taxpayer’s itemized expenses, these too are limited based upon a taxpayer’s AGI and filing status.

Alternative Minimum Tax

Certain items on a taxpayer’s individual return can trigger an additional tax assessment.  This amount is over and above what otherwise would have been assessed if a taxpayer solely referenced their taxable income to the appropriate tax table.  Tax law mandates that taxpayers then pay the higher of the two amounts generated either from regular tax tables or the Alternative Minimum Tax, which is calculated on Form 6251.

Misunderstanding Extensions

Taxpayers frequently fail to understand that an extension to file a return is not an extension of time to also pay the taxes due.  The IRS has a rigid schedule for payment of all taxes and in some cases, there is no room for flexibility whatsoever.  Taxpayers should accordingly take care to pay all of their taxes as they become due without regard to whether an extension to file has been filed/granted.  Always keep in mind an extension to file is not an extension to pay.

Determining Deductible Expenses

Taxpayers frequently fail to understand what they may and may not take as itemized expenses on their Schedule A.  Similarly, individuals often fail to stay abreast of tax law changes and the limitations, documentation and phase-outs thereof in determining their just expense.  Also, many taxpayers who have an unincorporated business/a proprietorship fail to have a good understanding of what qualifies as a business expense, the assessment of self-employment taxes and the attendant responsibility of making estimated payments.

Un-reimbursed Employee Expenses

Tax law allows those who are employees to deduct un-reimbursed business expenses, which are reported on Form 2106.  The total of these are then rolled forward to a taxpayer’s schedule of itemized expenses where they are also subject to additional phase-outs.  Often taxpayers fail to have a good understanding of what qualifies as an un-reimbursed employee expense and fail to correctly document and calculate business mileage.  They frequently fail to consider reimbursements received from their employer and inadvertently include in their mileage/travel expense amounts, their daily commute to and from the office, and these are not deductible.

Retirement Plans

This error is most frequently an error of omission as taxpayers fail to avail themselves of the many and varied options open to reduce their personal taxes and to plan for retirement.  If a taxpayer also has an incorporated or unincorporated business whether a C or S Corporation, LLC, LLP, or partnership, there are even more options for a taxpayer to implement that will allow for a dramatic reduction in both their federal and state tax liabilities.  

Going It Alone

Most taxpayers would never consider performing their own surgery and so it should be for the preparation of one’s personal taxes.  At a minimum, I suggest that you have a CPA prepare your taxes at least every three years but I would limit this exception to only very simple returns with no itemizations.  For all taxpayers who would be classified/considered as part of America’s middle class or any taxpayer who owns a business, should have their return prepared by a CPA each and every year.  Tax law changes, nuances, limitations, tax and retirement planning, investing and strategic financial issues are too critical to be satisfactorily addressed alone.

Premature IRA/Pension Distributions

All too often taxpayers will make or receive a premature distribution from their IRA/401K/Pension Plan.  This is perhaps the largest single financial mistake a taxpayer can make for several reasons.  First, these premature withdrawals are not only subject to regular federal and state taxes but most always a 10% federal penalty as well.  This serves as a double negative as not only are you paying additional taxes and penalties but you are also “diving into” your “nest egg” threatening not only your age of potential retirement but also the quality of it.  Furthermore, most all taxpayers who receive a premature distribution fall into a false sense of security wrongly believing the statutory withholding done to be adequate to meet their year-end obligation on these monies, only to find out they have woefully underpaid their taxes and are now subject to further penalties and interest.

Tax Planning

Perhaps the most common error is the failure of taxpayers to anticipate their current year’s taxable income and to plan ahead by paying the IRS and state taxes as the income is earned.  Failure of taxpayers in any of the above areas will also negatively impact their ability to plan for and pay their taxes on a timely basis.  Also the U.S. tax system is a graduated system in which the marginal tax rates increase as does a taxpayers income.  Taxpayers fail to see their return as the dynamic calculation that it is, as income and lifestyle changes and tax law continually impact a taxpayer’s final calculation of tax liability.

Personal Income Taxes

Filing Status

When you get ready to file your personal tax return, perhaps one of the biggest issues you will want to initially determine is your filing status.  This one issue will affect not only the way you compile and file your return but the actual amount of your tax obligation as well.  Tax law mandates that your filing status is determined by your marital status on the last day of the tax year, December 31st.  Frequently, taxpayers will file their returns incorrectly, believing their filing status is determined by their marital status for the predominant portion of the year.  However, this would be incorrect as it is solely one’s marital status on the last day of the year that is the determining factor.

Filing Status/Dependent/Exemptions

Determining your filing status, exemptions and dependents will be three critical aspects of determining your lowest legal possible tax.  If you are a single taxpayer and have a child who is also your dependent who lives with you full time, you may file as Head of Household, which will allow your income to be taxed at a lower rate.  In a situation with a child having two parents who do not live together, typically a parent with primary legal custody will be the one allowed to claim Head of Household.

Taxpayers who are married may also file returns, Married Filing Separately.  These tax rates/brackets are the highest of the four brackets and are generally the least advantageous.  However, if a taxpayer is married and either of them have a tax obligation that either occurred while they were single or married filing separately, then it would be prudent to consider filing Married Filing Separately to avoid having either the IRS or state merging their files, collection efforts and obligations.

Dependents

All taxpayers (who are not claimed as dependents by others) are allowed dependents, which reduces taxable income.  If married and filing a joint return, you are allowed to claim your spouse as a dependent.  Taxpayers generally can claim as dependents family members and children, provided they provide over half of their support and they live with the taxpayer full time.  Generally children can be claimed until they become of legal age (18) and then be claimed for several years beyond that provided they are a full time student for more than five months a year.  If a child files their own return and claims themselves, then a parent, who otherwise would have qualified to claim the child, are precluded from also claiming the child.  Each dependant qualifies the taxpayer to take an exemption which is a statutory amount indexed annually for inflation. This total reduces a taxpayer’s gross income in determining the taxable amount.

Exemptions

The number of dependents a taxpayer has is one of the key factors used in calculating the total number of exemptions.  To this total taxpayers who are disabled, blind, or elderly are allowed to take an additional exemption when determining their taxable income.  One’s total dependents and additional exemptions are then multiplied by that year’s amount to determine the total reduction in taxable income.  Exemptions, like itemized deductions, are by law phased out/reduced based upon the taxpayer’s filing status and adjusted gross income.

Tax law and its correct application and the correct determination of your lowest legal possible tax bill are as important to us as they are to you.

His CPA PC (A Metro Atlanta Christian CPA Firm)    www.HisCPA.com