WomanScope NewsMagazine : Tax Tips

Angeline M. Huffman, MBA, CPA
April 8, 2012
Filed under Finance

As this issue reaches the streets many of you have already filed your 2011 tax returns, but many more are still gathering your information to take to your tax preparer. Here are some tips to help you out for the 2011 tax filing and getting a jump on 2012.

For Individuals, 2011

• Avoid the cost of rapid refund. You can avoid the cost of rapid refund services if you set up your refund for direct deposit to your checking account and e-file your return. The IRS generally will have the funds in your account in as little as 4 days.
• Make sure the preparer signs the form and includes their PTIN as required by law.? Although the preparer signs the return, you are responsible for the accuracy of every item on your return.? The preparer must also give you a copy of the return.
• Whatever your tax situation might be, make sure you don?t put it off to the last minute. This increases the likelihood of significant errors, either on your part or the part of your tax preparer. Keep in mind that you are not the only client your tax preparer has that is waiting until the last minute and most tax preparers are completing about 65% of their clients returns in the last 2 weeks before the filing deadline. Also, don?t delay filing your return because you know you owe the IRS. The filing deadline is just that?a filing deadline. The firm deadline for paying any tax due is April 17^th (for 2012) regardless of whether you have filed an extension for your return or not.
• Mortgage Interest is not as simple as it used to be. Recent IRS scrutiny of home mortgage interest deductions now require you to carefully track refinancing(s) and the use of loan proceeds. Only the interest on mortgage and home equity loans used to buy or improve your home plus $100,000 are deductible on Schedule A. Those who ?cashed out? several times may have already passed the $100,000 mark.
• ALL charitable deductions of any amount must have a receipt. Any individual contribution over $250 must also have an acknowledgement letter from the charity, and the letter must be dated by the date you file your return. The letter should show the date and amount of any individual contribution over $250, and should also state that no goods or services were received in return for the contribution. This includes non-cash donations; they too must have a receipt. Non-cash donations over $500 also require Form 8283 to be filed with your return.
• Before the W-2s arrive, talk to your kids, and tell them not to file yet. They may want their refund, but if they file and claim themselves, you could lose the College Educational Credit of $1,500 and the loss of the American Opportunity Credit of $1,000, if your student is in college. In addition, as your tax bracket is higher than your child?s, the loss of the $3,700 dependency exemption is worth more to you ? maybe $500.

You are allowed to claim a child as a dependent if they lived with you for more than half a year and were under age 19, or was a full time student for five full months and under age 24. Many kids worked part-time or during the summer and will now receive their W-2. Therefore, both you and your child should prepare your tax returns both ways and see what the difference would be. Then give your kids the difference in the tax refund they lose. Most often you will still come out ahead by claiming your child.

For Small Businesses and Property Owners

• Get professional help with the filing of business licenses or incorporation papers. This means an actual accountant, preferably a CPA (Certified Public Accountant who is licensed by your state), not just your spouse/bookkeeper. A CPA is most knowledgeable in determining if an S-Corp, LLCs, etc. is best for your situation from a tax perspective. Please still consult with a lawyer for the liability perspective. Different forms of businesses have different ?rules? and there are tax savings available for some.
• While an accountant seems relatively expensive in terms of tax preparation, they may be able to save you thousands by correctly applying tax laws to your specific situation to have the greatest financial outcome. It may cost you slightly more to have a professional fill out all the required forms, which many tax payers are not even aware of, but if you spend a hundred to save a thousand in taxes, clearly accountants can be well worth it. This is more likely the case if you are self-employed.
• Choose worker classifications carefully. Hiring a freelance web designer may be fine, but understanding which workers should be classified as employees rather than subcontractors can make or break your business. The IRS and most states have made it a top priority to ensure workers are properly classified. Their default classification is as an employee making it up to you to prove the worker is not an employee but a contractor. Maryland passed the Workplace Fraud Act in 2009 making it more difficult than the IRS rules for classifying workers as contractors. The government is making this issue a top priority in order to ensure it is receiving its fair share of payroll taxes. If the worker is an employee, the employer must pay payroll taxes (one half of Social Security and Medicare, and federal and state unemployment) and collect payroll and income taxes from the employee.
• You can still deduct the costs of a vacant rental property as long as it is still held with the intent to rent it. In Tax Court Summary Opinion 2011-122 a taxpayer was allowed to deduct rental property losses for two years when there were no tenants in the property, because the property was held for income-producing purposes and available for rent.

For 2012 and the future

• File a new W-4. If you received a large refund or owed taxes for 2011, you need to file a new W-4. Check what you believe your income will be for 2012 compared to what it was for 2011 to determine if you need to make additional adjustments to your income tax withholdings. You must adjust your W-4 to withhold more taxes if you owed for 2011 and believe you will owe again for 2012, otherwise you will pay underpayment penalties.

It?s just as important to adjust your income tax withholding downward if you received a big refund and expect to do so again next year. Why lend your money to the government all year? Some states actually delayed paying refunds in early 2010 due to budget crunches.? Many people treat their refunds as a forced savings account. However, this can cost you big time if you use your refund to pay off credit cards that charge large interest rates. Wouldn?t it be more cost effective to receive your refund in your paycheck all year and not use the credit cards?

• Get in the habit of setting up a record keeping filing system to stay organized. Make sure you have all your relevant tax documents on file and stored together. Having all your documents in order helps to ensure your records are accurate.
• The IRS 2012 mileage deduction rates are:
• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations
• 2012 IRA amounts remain at $5,000 per person, plus a $1,000 catch up for taxpayers over age 49 by 12/31/2012. The unchanged amounts apply to traditional IRAs, Roth IRAs and non-deductible IRAs.
• 2012 401(k) and similar deferrals increasing from $16,500 to $17,000 for 2012, but unchanged for SIMPLEs ($11,500) and the over age 49 catch-up ($2,500 for SIMPLEs and $5,550 for others).
• Never hesitate to consult with a CPA such as myself. Don?t be afraid of obtaining the knowledge you need. The fees for doing so generally pale in comparison to the tax savings you will gain and the mistakes you will avoid.

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