writes: USA TodayNobody expects you to know everything about income taxes. With the
Internal Revenue Code about five times longer than the Bible, that's not
practical, anyway. But there are some common-sense tips that tax experts have been preaching for awhile,
TAX HELP: Get the latest tax news and advice
These best-practices pointers can improve your financial situation and prevent unpleasant surprises:
• Aim for zero.
Although it's nice to receive a tax refund around April 15, it's not
the best strategy. A refund is just another way of saying you finally
got your money back on the interest-free loan you gave the government.
The other extreme — owing a big tax bill around April 15 — isn't smart,
either, especially if you struggle to pay it.
Ideally, you should
plan your withholding and other tax tactics so that you either get a
minimal refund or owe just a bit more in taxes after filing your return.
A big zero on the tax owed/due lines might not be interesting, but it's
a laudable goal.
•Make your refund count. Assuming you get
money back, it's important that you don't squander it. For
lower-income people, especially, a refund could be the biggest chunk of
cash they receive all year.
The American Institute of CPAs
suggests a simple decision hierarchy on how to use your refund. First,
spend it on food, shelter, health care or other basic needs, if
necessary. Otherwise, build up your emergency fund. If there's money
left, pay down debt. It's critical to have a plan to maximize the
benefits from a refund, said Ernie Almonte,
On the debt side, focus on credit cards charging the highest interest rate, the group suggests.
As
for emergency cash, three months used to be the suggested standard. But
because it's still hard to find well-paying jobs, it would be more
prudent to build up a reserve of at least six months.
•Add it all up, then check it twice. The IRS recently
reported that it spotted 2.7 million math errors on 2011 returns, more
than double the number from the prior year. If you don't want to get a
letter from the agency, emphasize accuracy when preparing your return.
The
biggest math mistakes involved inaccurate tax calculations, followed by
an incorrect number or dollar amount of exemptions. Then came errors
involving the Earned Income Tax Credit, followed by those for standard or itemized deductions, the Child Tax Credit and the First-Time Homebuyer Credit.
While
you're at it, make sure you spell your name and those of your spouse
and dependents correctly, and verify that everyone's Social Security
number is accurate.
•Know your audit odds. There is safety in numbers around tax time, with the IRS auditing 1.03% of individual returns in the most recent year. While that's a low proportion, certain activities and behaviors can put you at greater risk.
High
income is one factor. Only 0.9% of people with income of less than
$200,000 faced an audit in 2011, but 12.1% of those earning at least $1
million did. Certain business categories also face heightened IRS
scrutiny, including "flow-through entities" such as partnerships and
Subchapter-S corporations, as do self-employed individuals who file
Schedule C. In fact, Schedule-C filers earning between $100,000 and $200,000 face especially high odds, with 4.3% of these returns audited.
Researcher CCH cites several types of deduction attempts that raise
red flags for a good reason: They aren't allowed. These include a loss
on your home, excessive moving expenses and medical deductions for
unneeded cosmetic surgery.
Nobody draws scrutiny like parents
adopting a child. A staggering 69% of returns claiming the adoption
credit were audited last year, noted Nina Olson, the National Taxpayer
Advocate.
•Safeguard your identity. Although most people
fear audits, being victimized by tax fraud could be the bigger risk. The
IRS said it prevented fraudulent refund payments last year on about 3
million returns, or three times the number it audited.
Taxpayer ID thefts
mainly involve fraudulent requests for refunds using another person's
Social Security number.. Crooks typically file early, before the actual
taxpayer, and have the refund check diverted to them. When a crook gets
there first, that can delay a refund to the real taxpayer for six months
or more while the IRS investigates.
Such thefts also cost the
federal government, because a refund eventually will be paid to the
rightful taxpayer even after payment of a fraudulent refund.
All
this should serve as a reminder to safeguard personal information.. One
thing that many people probably don't secure as they should is a
smartphone. Adam Levin, chairman of Credit.com, discourages people from
storing Social Security numbers and those for credit or bank accounts on
phones. "Make sure to delete all documents and e-mails containing
sensitive information from your phone," he wrote in a report.
Levin also suggests restricting access to your phone by using a
password and not staying logged into banking or other sensitive apps for
long. He likened that to leaving a credit card on top of your desk.
•Don't neglect retirement. The
government is willing to subsidize retirement planning through
Individual Retirement Accounts, 401(k)-style workplace programs and
more, yet many people underutilize these benefits.
"Many
individuals are still missing out on the long-term savings benefits of
IRAs, simply because they don't understand what they are and how they
work," said Dan Keady, director of financial planning for investment
firm TIAA-CREF. In a recent poll, 80% of people surveyed by TIAA-CREF
said they aren't weren't contributing to an IRA, up from 76% last year.
Yes, the rules are complex, especially for the different types of
IRAs. And socking money into a retirement account means you have less
cash to spend now. Plus, the accounts impose restrictions for accessing
the money, especially if you're still working.
Yet, retirement
accounts remain one of the best ways to accumulate wealth, and there has
been some talk lately of restricting their tax benefits as the
government grapples with its own financial pressures. While it's
uncertain how endangered retirement tax benefits might be, it's best to
take advantage of them while you can.
Thursday, April 11, 2013
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