The Top Tax Tips for 2013: Expert Tax Filing Advice

Susan Lyon for Nerd Wallet writes As we head into tax season, taxpayers nationwide are gearing up for Tax Day – April 15^th is the 2013 federal tax filing deadline.

There have been several major legal and regulatory changes over the past year, so to help ease the pain of tax season, NerdWallet surveyed a broad spectrum of tax experts to uncover their top tax filing tips for 2013 – and how to get started now to prepare your 2012 taxes by the deadline.

Here are the top seven recommendations from several top tax filing experts on how to get a head start now:

1.  Get Organized Early to Maximize Deductions

Even the experts agree: getting started early is the hardest, but most important, part.  Easier said than done?  Just taking the first step – as simple as putting all your tax related documents into one big box, envelope, or pile as you receive them in the mail – can make taking the next couple of steps after that far easier.

Josh Barger, VP of Tax Services at Foundation Financial Group, urges:

“All financial institutions have until January 31 to postmark and mail your W-2, 1099, and 1098 forms, so being ready to go with your deductions and expenses before they come will help to speed up your process when preparing the actual returns.”

Shauna Wekherlien, CPA and Tax Expert with Tax Goddess Business Services PC, advises:

“My #1 tip to prepare for tax day 2013 is organization; if you get your paperwork in order, you can find missed deductions.  If you keep track of all your receipts and bills too, this makes tax prep cheaper and faster in the end as well.”

2.  If You’re Already Running Behind, Prepare Accordingly

This tax tip for Tax Day 2013 is simple but critical: if you suspect you’re going to miss the deadline, file that extension now!

Eva Rosenberg, MBA, EA and owner of Your TaxMama, recommends:

“File an extension – Form 4868. If you’re not totally ready to file yet, you can file the extension to avoid the late filing penalties, which can be as much as 5% per month. The extension will give you six more months to get organized.”

3.  Be Thorough and Methodical At Every Step  

There are a few key steps you need to go through every year, no matter how much your tax paperwork varies from year to year.

Michael Raanan, MBA/EA and President of Landmark Tax Group and former IRS Revenue Officer, lays out the five steps every taxpayer should go through to be as thorough as possible:

“Due to the substantial increase in IRS audits, taxpayers should take these 5 steps when filing their taxes this year to help reduce their chance of an audit:

1. Beware of your deductions;
2. Claim proper exemptions;
3. Ensure all your tax filings reconcile;
4. Document any questionable information;
5. File on time.”

4.  Learn The Rules of the Game – Then Play The Game

There are a lot of obscure tax rules that can give you a leg up (and more cash back) if you capitalize on them.  Figuring out which laws can apply to you is the hard part.

Dan Flugrath, CPA and principal with the top 40 public accounting firm Morrison, Brown, Argiz & Farra (MBAF), provides some of these top tax secrets for 2013:

“1. Consider gifting shares of appreciated stock to children: particularly to children who are not subject to the “kiddie tax” and who are in the 10 percent and 15 percent tax brackets and are thus not subject to the capital gains tax. There will no tax on capital gains if the taxpayer beneficiary is not in a higher tax bracket than 10% or 15%. However, if the long-term capital gains on the stock cause the taxpayer’s taxable income to exceed the upper threshold of the 15 percent tax bracket, the capital gains will be taxed at 15 percent during 2012 and 20% in 2013.

2. Look out for special January 2013 distribution rules: There will be a special election for Jan. 2013 distributions from Individual Retirement accounts – for purposes of both (i) the tax-free qualified charitable distribution rules, and (ii) the RMD rules as they apply to IRAs.  Any qualified charitable distribution made after Dec. 31, 2012, and before Feb. 1, 2013 will be deemed to have been made on Dec. 31, 2012, if the IRA owner so elects at such time and in such manner as IRS will prescribes.  Future guidance will be issued by the IRS regarding how to make the election.

3. Look into the Section 529 Qualified Tuition Programs – federal income tax exemption: Earnings accumulate tax-free and withdrawals are tax free if used to fund qualified higher education expenses.  Withdrawals from Section 529 plans remain tax-free if made on the death or disability of the beneficiary.”

5.  Beware of The Most Common Tax Prep Mistakes

It may seem obvious to point out, but some of the worst mistakes made on tax forms are also some of the easiest to avoid.

Timothy Gagnon, CPA and Accounting Specialist at the D’Amore-McKim School of Business at Northeastern University, reminds us to watch out for these common mistakes that he sees the most:

1. “Failure to add correctly;
2. Failure to prepare Schedule A (Itemized Deductions) to see if your standard deduction or itemized is greater on the return, because this can vary each year;
3. Not obtaining receipts on non-cash charitable contributions so they can take the deduction on their tax return;
4. If itemizing: not taking car and boat taxes, prior year state tax payments made in the current year, and real estate taxes on vacant lots held into account.”

6. Entrepreneurs: Take Into Account Small Business Expenses

Have a home office or a small business?  You need to go the extra mile and think about how to most efficiently file tax paperwork that takes into account your work-related expenses. 

Gail Rosen, CPA offers home office and small business tax preparation strategies from her 30 years of experience working with entrepreneurs:

1. “Don’t Forget Start-Up Cost Deductions: Small businesses often “forget” that any expenses that are incurred before the first sale are called “start-up costs.”  These costs cannot be deducted until the first sale, but then they are deducted over 15 years and you can elect to deduct the first $5,000 in the first year of business.
2. Consider a home office deduction: this is a great tax deduction to consider, if you’re legally entitled.  Unlike many think, the home office deduction does not create a big future tax when you sell your home.  You cannot take the home office deduction if it creates a net tax loss for you. If you expect to have a profit in future years, then you should compute the deduction and carry forward the disallowed home office deduction to future years.
3. Don’t forget your cell phone: the Small Business Jobs Act of 2010 removed cell phones from the definition of listed property and the substantiation requirements that apply to listed property no longer apply to cell phones.  Therefore you no longer have to document each business purpose for each call, and you can deduct your cell phone based on the percentage you use it for business as long as more than half the time is business related.”

7.  Evaluate Whether You Need a Professional Tax Preparer

Don’t forget to look into the many free and inexpensive online tax filing packages to see if they’re up to snuff, as well as accessible enough so that you think you could complete the process on your own.

As tempting as DIY tax software can look, though, it isn’t for everyone.  It can sometimes lead you astray because there is no one dedicated to fact checking your work to make sure you’ve filed correctly; it offers limited customer support and can lead to filing mistakes for the inexperienced tax filer.

Many tax experts agree it’s definitely worth at least considering hiring a pro.  John-Paul Valdez, a personal finance expert with Pearl.com, says getting a tax professional is one of his most recommended investments in this uncertain fiscal climate:

“Over the past 3-5 years, tax laws have changed dramatically. By hiring a tax professional, you can save time, prevent headaches and confusion and be prepared in the event of an audit. Tax software you can buy at an office supply store is great, but it may not catch all of your deductions. Additionally, after you file your taxes, the software can’t help you file an extension or establish a payment plan for taxes you owe – but a tax professional would be able to.  Hiring someone to do your taxes is actually very affordable, often around $200-400 – I call it one of my most recommended investments.”

While it isn’t surprising that tax professionals would urge you to hire a tax professional, it makes sense on a case-by-case basis.  So don’t take their word for it; if you’re at all unsure of what you’re doing, figure out what you know and don’t know, then take the time to shop around and price out all your options.

The number one takeaway from experts?  Don’t let April 15^th sneak up from you.

Seven Reasons the IRS Will Audit You

Stephen Vanderpool for Nerd Wallet write:  Filing taxes is on par with going to the dentist or arguing with the DMV. It’s tedious, time-consuming and potentially expensive. As if fumbling with confusing numbers and complex forms weren’t “taxing enough, submitting your 1040 is even more stressful when you’re worried about an audit. Understand, there’s nothing inherently sinister about an audit. An audit is simply the Internal Revenue Service double-checking your numbers to make sure there aren’t any discrepancies. If you’re being a good little taxpayer and telling the truth, the whole truth and nothing but the truth, you need not worry. However, people who are consciously cheating the system do have reason to be concerned.

The IRS conducts audits to minimize the “tax gap,” or the difference between what the IRS is owed and what the IRS actually receives. Sometimes audits are random, but the IRS often selects taxpayers based on suspicious activity. As a general rule of thumb, we’d advise against subterfuge. But for those of you worried about an audit this tax season, here are seven of the biggest red flags likely to land you in the hot seat.

1. Making errors

When the IRS starts investigating, “oopsy” isn’t going to cut it. Don’t make mistakes. This applies to anyone and everyone who needs to file taxes. Don’t accidentally write a 3 instead of an 8. Don’t get distracted and forget to include that final zero. Mistakes happen, but make sure you double- and triple-check your numbers if you’re doing your own taxes. You’ll be hit with fines regardless of whether your mistake was intentional. If you’re math is a little shaky, using an automated program or tax professional can help you avoid unfortunate errors. Remember, the IRS has an eye for funny business. Supply the correct information, and you should have no complications.

2. Failing to include a 1099 or additional income

Easy way to score an audit? Don’t report part of your income. The IRS will be on you like buzzards on a gut wagon. Always include your 1099. Let’s say, for example, you’re employed part time herding cattle for Farmer Jeppe and pick up a little extra cash writing articles for a sheep-shearing publication on a freelance basis. You may be tempted to only submit the W-2 from your cattle work and keep the freelance writing wages on your 1099 under wraps. Well, guess what? The IRS already knows about wages listed on your 1099. It’s only a matter of time before they discover your omission. Report all of your income, including money from bonds, stocks, interest-yielding accounts and the like.

3. Claiming too many charitable donations

If you made significant contributions to charity in 2012, you’re eligible for some well-deserved deductions. Most taxpayers who itemize deductions claim charitable deductions at an average of 3% of their income. This bit of advice is common sense: don’t report false donations. If you don’t have the proper documentation to prove the validity of your contribution, don’t claim it. Pretty simple. Claiming $10,000 in charitable deductions on your $40,000 salary is likely to raise some eyebrows.

4. Reporting too many losses on a Schedule C

This one is for the self-employed. If you are your own boss, you might be tempted to hide income by filing personal expenses as business losses. But before you write off your new ski boots as a business expense, consider the suspicion too many reported losses can arouse. The IRS may begin wonder how your business is staying afloat.

5. Claiming too many business expenses

Along the same lines as reporting too many losses is reporting too many expenses. Anyone who needed to make a purchase to perform work duties in 2012 should know what can and cannot be deducted. To be eligible for a deduction, purchases must be 1) ordinary and 2) necessary to your line of work. A professional artist could claim paint and paintbrushes because such items meet both requirements. A lawyer who paints for fun and does not turn a profit couldn’t claim art supplies as a deduction. The question to ask is: was the purchase absolutely necessary to performing my work duties? Transportation to the office and computer hardware are great examples of typical deductions. Making too many business claims will definitely raise a red flag. As long your expenses are justified, you’re all right. But if you’re making claims you shouldn’t, watch out.

6. Claiming a home office deduction

Home office deductions are rife with fraud. It may be tempting to give yourself undeserved deductions for expenses that don’t technically qualify. The IRS narrowly defines the home office deduction as reserved for people who use part of their home “exclusively and regularly for your trade or business.” That means a home office can qualify if you use it for work and work only. Occasionally answering e-mails on your laptop in front of your 72″ flat screen TV doesn’t qualify your living room as a deductible office space. Only claim a home office deduction if you have set off a section of your home strictly for business purposes. Be honest when you report expenses and measurements.

7. Using nice, neat, round numbers

In all likelihood, the numbers on your 1040 and supporting documents will not be in simple, clean intervals of $100. When making your calculations, be precise and avoid making estimations. If you’re a photographer claiming a new lens as a business expense, it probably did not cost $500. If purchased new, it might have been $499.95 or even $495. An even $500 is somewhat unlikely, and the IRS may ask for proof.

IRS Tax-wise : Four Things You Should Know if You Barter

Small businesses sometimes barter to get products or services they need. Bartering is the trading of one product or service for another. Usually there is no exchange of cash. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services.

The IRS reminds all taxpayers that the fair market value of property or services received through a barter is taxable income. Both parties must report as income the value of the goods and services received in the exchange.

Here are four facts about bartering:

1. Barter exchanges.  A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually. The exchange must give a copy of the form to its members and file a copy with the IRS.

2. Bartering income.  Barter and trade dollars are the same as real dollars for tax reporting purposes. If you barter, you must report on your tax return the fair market value of the products or services you received.

3. Tax implications.  Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.

4. Reporting rules.  How you report bartering varies depending on which form of bartering takes place. Generally, if you are in a trade or business you report bartering income on Form 1040, Schedule C, Profit or Loss from Business. You may be able to deduct certain costs you incurred to perform the bartering.