We’ve taken the most common tax related questions we get, and answered them in this continually growing list tax answers.
1) What are the Benefits of filing early?
The two major benefits of filing your taxes early are:
- You get your refund sooner
- You can catch any mistakes
On the other hand, filing your taxes in April can cost you a little more money. Many CPA’s charge a “premuim” for filing so close to the due date.
Early Return Audit Speculation
Lastly, there are some who believe that the sooner you file your taxes, the more likely you are to be audited. The reason being that The IRS is expected to meet a certain quota of audits, or since there are less tax returns available for an audit your odds go up.
Neither of these theories have been proven and most in the industry would suggest filing as early as possible.
2) What receipts should I hold onto during the year?
The purpose of holding onto receipts is to “write-off” or deduct those costs from your annual taxable income.
How you take your deduction is up to you:
You should only save receipts for things like charitable donations if you’re itemizing. Otherwise, don’t worry about it.
Deductions Without Itemizing:
But there are some deductions you can take without itemizing. Those include:
- student loan interest
- supplies if you’re a teacher (though only up to $250)
- moving expenses
- tuition you’re currently paying
- IRA contributions
You should save receipts regardless of whether you’re itemizing.
If you freelance, you don’t need to itemize to write your business-related expenses off. All those things will be listed out on your Schedule C. You can deduct as little as $5 for coffee with a business contact.
So save your receipts for:
- taxi fare to meetings
- client dinners
- other business necessities
3) What if I can’t afford to pay taxes this year?
If you can’t afford to pay your taxes this year, you have some options:
- Take out a small loan from your bank
- Use your credit card
- Negotiate with the IRS (Yes, you can do this)
- Setup a payment plan with the IRS to pay in installments
4) What are the odds of being audited?
As of 2013, the odds for individuals who earn less than $200,000 a year have approximately a 1.2% chance of being audited.
Most of the time, the people who are audited, are those who claim suspiciously high deductions while earning little in taxable income.
However, if you are audited, stay calm. Most audits are relatively painless and take place through the mail. To be on the safe side, it’s recommended to hold onto all documentation supporting any deductions you take.
5) What can I deduct if I’m self-employed?
If you are self-employed there are several important deductions you should consider:
- Health Insurance Premiums. If you’re self-employed, you can deduct 100% of health insurance costs as an adjustment to your income. There are restrictions if you are able to get insurance through a spouse. So ask your CPA about your particular situation.
- Retirement Contributions. SEPand SIMPLEretirement funding plans.
- Tools and Equipment Used for Your Business. You are allowed to deduct the cost of necessary tools for your business. (Take note that items used longer than one year are deducted differently than items used for under one year.)
- Vehicle Expenses. If you use the standard mileage rate, you can only deduct the mileage at a standard rate. For 2013, the rate is 56.5 cents.
You can’t deduct:
- Actual vehicle expenses
- Lease payments
- Vehicle registration fees
If you use actual vehicle expenses, you can’t deduct mileage.
Instead, you can deduct:
- Lease payments
- Registration fees
- Garage rental
If you use your car for both business and personal use, you must prorate your expenses.
- Cell Phone Expenses. You can deduct cell phone expenses from business use only.
- Home Office. You can deduct the cost of your “office” at home as long as the office is used only for business purposes.
Courtesy of FirmFinder.com