Mistakes on Taxes? Avoid These

It’s tax season again, yee haw! Sure as the sun comes up in the morning, the IRS has its hand out from January to April 15th (and beyond) waiting for somewhere in the area of 150 million tax returns. In spite of ever more complicated tax laws, approximately one-third of those returns will be self-prepared. Based on their own research, my competitor (ha!), H&R Blockhead says that one of every five self-preparers forgo almost $500 in taxes (e.g. lower refunds or higher balances due) because of mistakes they’ve made on their own returns. These mistakes can lead to letters from IRS, possibly with penalties or other harsher actions resulting. As a licensed tax professional, my recommendation to all taxpayers is to avoid all preparers whose names start with either “H&R” or “Turbo”, and instead engage a qualified tax professional (preferably a CPA whose name starts with “Jay the”) who understands the tax laws, and stands a way better chance than you of preparing an error free return. But…I’m not naïve enough to think that people will actually listen to me (or read this), so for those of you who still insist on going it alone, and preparing your own tax returns, pay attention now, and don’t make these mistakes.

Claiming the wrong number of dependents-IRS has publications and pages and pages of information on who can and who can’t be claimed as a dependent on your tax return. Don’t think that just because somebody lives with you or is your kid that they can be claimed as a dependent.

Failing to itemize deductions-taxpayers automatically get a standard deduction, but don’t be so fast to leave it at that. Add up how much you paid in state/local tax, personal property tax, mortgage interest, charity, and other various items, and if that total exceeds the standard deduction, you can shave a few bucks off your tax bill by itemizing.

Overstating charitable contributions-yeah yeah, you put ten bucks in the Salvation Army kettle at Christmas time, or you put money in the basket when it’s passed around in church, but can you prove it? Like dependents, IRS has all sorts of information to read, that discusses the required substantiation for deducting charitable contributions. And they’ve been increasing their audits in this area, so make sure you’ve got the correct documentation, before you claim that deduction. Another mistake to avoid is forgetting about the United Way or CFC contributions that were deducted from your paycheck.

Deducting points on a refinance-while points paid on an original first mortgage are deductible when paid, you generally cannot do the same with points paid on a refinance. Instead, you must amortize that deduction over the life of that loan.

I could go on and on about mistakes you should avoid, but I think that’s enough free advice for one article. Remember rule number 1, which is to go to a qualified tax professional to have your tax return prepared. Rule number 1(a) is that the qualified tax professional should be me. Finally, rule number 2, if you’re gonna go it alone, make sure you review everything twice before you send the return out, and if you’re not sure about something, research and read!

Have you made any good (or bad) mistakes on tax returns, and are willing to tell about it? Leave a comment, and share it with others, so that they may learn.

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Summertime Child Care

No more pencils, no more books, no more teacher’s dirty looks…school’s out for summer. If you’re old enough to remember the Alice Cooper song, you can blame me when you’re still humming it six hours from now!

Now that another school year is coming to a close, how are you going to keep the kiddies occupied and out of trouble for the next few months? Chances are, you and your spouse will both be working during the lazy hazy crazy days of summer, and you’ll have to pay for child care, so why not have Uncle Sam pay for part of the cost? The federal Child and Dependent Care Tax Credit is applicable for summertime child care too, so take advantage of it, but first you need to know how it works. Here are some important points:

1-you have to pay for care so you (and your spouse if filing jointly) can work or actively look for work. The spouse can meet this test for any month that he/she is a full-time student or physically or mentally incapable of self-care.

2-you must have earned income, and if you’re filing jointly, your spouse must have earned income too. Earned income is generally wage and self-employment income.

3-the care must be for one or more qualifying people. In the case of this article, since I’m writing about children, they must be under age 13 and be claimed as a dependent.

4-the care can be provided at home, at a daycare facility, or even at a day camp. If it’s inside your home, then you also have to think about the household employer requirements.

5-the credit is a percentage of the qualified expenses that you for the qualifying person. This percentage starts at 35% and drops to a minimum of 20%, depending on income.

6-up to $3,000 of expenses for one person or $6,000 for two or more qualifying people can be used to compute the credit.

7-the cost of overnight camps or summer school tutoring doesn’t qualify, nor does anything paid to a spouse or other dependent. If either spouse receives dependent care benefits from an employer, special rules apply.

8-the credit is claimed on Form 2441, and basic information on the provider will need to be entered on this form, so make sure you have the provider’s name, address, and identifying number (social security or employer i.d. number). Keep good records to substantiate the credit claimed.

I’ve had many clients over the years who had unrealistic expectations of how much money they were going to save by claiming this credit. Realistically, if you have two or more eligible kids, $6,000 is the maximum amount of child care expenses you can use to compute the credit, and if your income is over $43,000, the percentage for the credit will be 20%, so the maximum credit you can get is $1,200, which isn’t a lot. Obviously it’s better than nothing, and it’s a credit so it will reduce your tax dollar for dollar, as opposed to a deduction which will only reduce your tax by whatever marginal tax rate you’re at. But with good record keeping you’ll save a few bucks, and will be able to afford to give each of your kids (and your spouse) their very own copy of Alice Cooper’s “School’s Out”.

Please forward this article to all parents who incur child care expenses, and have a good summer.

No more pencils, no more books…

Oh S#$%, I Screwed Up My Tax Return!

No…not me, my return is perfect! But if you’re one those people who got in over your head, trying to do a return on TurboTax when you had no idea what you were doing, or you had an incompetent tax preparer omit things from your return, it’s not the end of the world, and you won’t go to jail for it either! So take a deep breath, and read on.

It’s a fact of life that people make mistakes, even when it comes to tax returns. After filing your returns, you may discover that you forgot to claim all those charitable contributions you made, or you realized that you forgot to include the W-2 income (and withholdings) from that job you left at the beginning of last year, or the broker sent you a corrected 1099 package. These are just a few examples, but the point is, there are many things that you may remember (or come to your attention) after you already filed your tax returns. The vehicle for making the corrections is filing Form 1040X (Amended U.S. Individual Income Tax Return) with IRS. Don’t forget to amend your state tax return too. Not all states have a separate form for amending the original return, so check with the tax department of the state you live in, to find out how to do it (or have your favorite tax professional help you out!). Note that an amended return doesn’t have to be filed for reasons such as mathematical errors (IRS will probably catch those, and send a notice), or if you forgot to attach a form that you should’ve attached (they’ll let you know about this, too).

Form 1040X can be used to amend whatever original federal return you filed, meaning that if you filed Form 1040, 1040A, 1040EZ, or even 1040NR, you can use the 1040X to make corrections. The 1040X isn’t ‘year specific’ like the 1040 is, meaning there isn’t a 2011 Form 1040X, rather, there are boxes at the top of the form for you to check which year you’re amending. If you have multiple years to amend, you must submit a separate 1040X for each year, and check the year that you’re amending. IRS recommends (and I personally concur) that if you’re amending more than one year, put each year in a separate envelope. That way, if one year gets lost in the mail, they won’t all get lost.

The structure of Form 1040X is fairly simple. There are three columns; the first one is for entering amounts from various lines on your original return, the second one shows the changes you’re making, and the third shows the corrected amounts. In addition to the form itself, you must attach any schedules that have changed from your original submission. Using one of the examples above, if you omitted charitable contributions on your original return, you must attach Schedule A (Itemized Deductions) to your amended return, to show the change. In addition to any attachments, there’s a section on page 2 of the return where you need to put an explanation of why you’re amending the return. And continuing the above example, you would write something like “original return omitted charitable contributions of $100,000” (yes, you were very charitable!)

Depending on whether you’re amending the return to include income or deductions that were missed on your original return will determine whether you owe additional tax or you will receive a refund. It’s all determined as part of the computations on page 1. If you have a balance due, pay it with the amended return, and IRS will send you a bill for any interest or penalties you owe. If you’re due a refund, it’ll be mailed at some point, after the return is processed. IRS indicates an 8 to 12 week processing time for amended returns. The other thing to remember is that if you’re amending a return to claim a refund, you must file it within three years of the date you filed the original return, or within two years of the date you paid the tax, whichever is later.

The moral of the story is, if you screwed up your return, don’t fret; it can be fixed. And next time, think about having a competent, trained professional (like Jay the CPA) prepare your taxes.

Please share this article with others who may benefit from the wisdom contained herein(!) And if you’ve had any interesting personal experiences with amending tax returns, please leave a comment.

Uncle Sam Owes You!

The other day, IRS announced that it has $153.3 million in undelivered tax refund checks.  There are 99,123 taxpayers who are due refund checks that couldn’t be delivered because of mailing address errors.  These undelivered checks average out to $1,547 per check, which (in my mind) isn’t chump change!

How the heck does this happen, you ask?  The usual culprit is IRS having an old expired address on record, and no address to forward to.  They will always deliver to the last known address that they have on record, and if you’re no longer there (and any post office forwarding order has expired), that refund check will be sent back.   If you believe that Uncle Sam owes you a tax refund that you haven’t received, go to IRS’s home page (IRS.gov) and click on the “Where’s My Refund” link.  You’ll need to enter information about the return that you believe you’re due a refund on (don’t worry, it’s a secure web page), and you’ll be informed of the status of that refund.

IRS suggests a couple of ways to make sure you always get the refund due you.  The first is to notify them when you move, by updating your address on Form 8822 (Change of Address), which can be found at http://www.irs.gov/pub/irs-pdf/f8822.pdf .  Alternatively (and preferred by IRS) you should file your tax return electronically, and choose to have your refund directly deposited into the bank.  You can speak with your favorite CPA about all of this.

In the same announcement, IRS also reminded taxpayers that they do not contact taxpayers by e-mail about pending refunds, and do not ask about personal or financial information through e-mail.  If you ever receive an e-mail from a sender professing to be the Internal Revenue Service, do not reply, do not open any attachments, and do not click on any links; it’s a phishing scam.  So be careful!

Please pass this article along to everybody who’s a taxpayer (probably everybody you know), because you never know who could use an extra $1,547 (average) in their pocket, or bank account.  Do you have any good stories about undeliverable or misplaced IRS refunds or correspondence?  Please leave a comment, and also let me know if you have any topic you’d like to see me write about in the future.

 

I Thought I Was Getting A Refund!

I had a real life experience recently, which I’d like to share with you, as it’s a perfect example of why you should file your income tax returns timely, and NOT ignore notices from the IRS.

A new client was referred to me last year, who hadn’t filed any tax returns since 2003, so she needed my help with 2004 through 2009. It’s been almost a year since I wrapped up all those returns, but the problems that were lurking a year ago have not gone away, and in fact, have gotten worse.

As I was in the process of getting the information from the client that I needed to prepare all those returns, I found out that the client had received numerous notices from IRS for the 2004 through 2006 tax years, in particular. The notices requested tax returns for each of the years, but my client didn’t reply to the notices. IRS then sent notices saying that since she didn’t reply to the original notices or submit returns, they were computing the returns themselves, based on information received from payors (i.e. W-2s, 1099s etc), and gave her a deadline to reply and/or submit returns. She didn’t do either. IRS then assessed and billed her for the balances on the ‘returns’ that they computed, and she didn’t pay them. The next step was liens that showed up on her credit report, and then collections. The problem now (and why this has gotten more complicated) is that as far as IRS is concerned, 2004-2006 are closed cases/years, meaning, they computed the returns, the client’s lack of reply was taken to mean that she agreed with their computations, and they just want their money. As of today, IRS is saying that the client owes them about $142,000!

I spent about three hours on the phone with four different IRS representatives, trying to get a handle on what was going on, and what needs to be done, to straighten this all out. What we have to do now is re-submit 2004-2006 and ask IRS to re-open those cases/years and reconsider the returns, which show a total balance due of only about $4,000 for the three years, not $142,000! I was told it could take months to hear back about the reconsideration of these returns, and there’s no guarantee that IRS will agree, and adjust the balances down to what they’re supposed to be.

After the call with IRS, I called my client, and in the course of the conversation, I asked her why she never filed all those returns, and her answer was that she was expecting refunds for those years, and had never previously owed tax to IRS. I told her that if she was expecting a refund, then that’s even more incentive to file on time, so she could get her money back, and not give an interest free loan to IRS (see my Apr 25 article).

It’s taken hours of my time to date, and will take a lot more time to get to the end of this. All of it could’ve been avoided if the client had just filed her tax returns on time. So the moral of the story is, even if you’re expecting a refund, get your taxes done timely, so you can get your refund back. You might even get an unpleasant surprise, and find out that you have a balance due, when you thought you were getting a refund. Either way, it’s way better to find out before IRS gets involved!

Tax Refunds

Everybody who wants an interest free loan, raise your hand. While that hand is raised, those of you who got a big tax refund, use that hand to smack yourself over the head! Why, you ask? It’s because you just gave the government an interest free loan. Let me ask you this; would you give a complete stranger a loan, and not expect to get at least some sort of market rate interest on that money? I didn’t think so, but why are you so quick to give the government your money for free? Even having that money in a savings account earning .25% (you know how low rates are these days) is better than earning zero.

For years I’ve heard clients tell me that they look forward to that big check at tax time, and how they have too much tax withheld on purpose, and it’s ‘forced savings’, blah blah blah. My reply has always been “if you want to force yourself into saving money, why not just cut a check (or set up an automatic debit) every month to invest in a mutual fund, or fund an IRA”? It’s such a no brainer that can only help people, which is why it’s confounded me for years. Obviously my job is to advise my clients, and of course they’ll do whatever the heck they want anyway (much the same way as I ignore advice!).

With proper tax planning/projecting, it’s possible to get to the end of the tax year at close to a breakeven (i.e. either very small refund or very small balance due), without incurring penalties, and having more money saved (and no interest free loans to Uncle Sam or Uncle Governor-of-your-state). By changing your withholding exemptions, you’ll have more money in your pocket each paycheck, and won’t have to wait until tax time to get your loan money back from the government.

I have a challenge; allow me to bug you on a monthly basis, to send me a check, payable to the mutual fund/investment of your choice, and I’ll make sure that check gets deposited to your account, so you can earn something on your money…more than the zero percent the government’s giving you. Better yet, you can loan me the money interest free, I’ll invest it, keep the income, and then pay back your loan at the end of the year! Just kidding, but you understand my point.

With that raised hand, give yourself one more smack over head. O.K., you can put your hand down now! Now that your hand is down, please leave a comment. I’m interested in hearing your thoughts on this.