One deduction that can add up for small business owners is the home office. However, take this deduction carefully as it can trigger an IRS audit. You can qualify for this deduction if the area is used exclusively and regularly for business purposes. This area must be used as the principal location for the business, or it is a place where you regularly meet with customers.
Qualified, unreimbursed medical expenses that exceed 10% of your adjusted gross income for the calendar year can be deducted from your taxes. These deductions include preventative care, treatment, surgeries, dental and vision care. Prescription medications also fall into this deduction.
Married couples filing their taxes jointly can take advantage of a number of tax credits that aren’t available to couples filing separately including the Earned Income Tax Credit, Child and Dependent Care Credit, Student Loan Interest Deduction and Tuition and Fees Deduction. The assumption may be that filing separately will put you in a lower tax bracket, however the tax brackets have a lower income threshold when filing separately.
Estimated taxes must be paid quarterly to the IRS by anyone that is receiving an income without paying taxes. This money can come from a job, investments, alimony or contest winnings. To send in your estimated taxes, you must complete the form 1040-ES and mail this to the IRS along with your payment. The taxes for each quarter’s income must be sent by the fifteenth of the month following the close of the quarter.
If you wind up owing $1,000 or more in taxes, you may incur an IRS underpayment penalty. For the last tax season, those who paid in at least 80% of their tax bill did not incur the penalty, in the future that number will be 85%. If you wind up a significant amount in taxes, it is important to adjust your tax withholdings for the current year. This may mean having your employer take more out of your paycheck or increasing estimated payments for those that are self-employed.
Certain activity, even when legitimate can increase your risk for an IRS tax audit. Some deductions can make an audit more likely including home office, business meals and travel, unreimbursed business expenses and alimony. Errors in math on your return and not reporting taxable income, in the form of 1099s and W2s, are also all red flags.
A resident in Goffstown, NH was concerned about running the risk of an IRS audit. He contacted Merrimack Tax Associates looking for suggestions to reduce that risk.
According to the IRS, federal tax returns should be kept a minimum of three years. The IRS only has three years to assess additional taxes, and taxpayers have three years to make additional claims. Investment forms, such as retirement documents, should be kept at least seven years. Bank statements and pay stubs should be kept for two years or more.
The amount of taxes withheld from your paycheck is a science, withhold too little and you get hit with a big tax bill. Too much and you miss out on extra cash throughout the year. For employees, the W-4 is what largely determines how much tax is held. Factors that may make you want to revisit your tax withholding include a change in marriage status, dependents, home ownership, or a change in your spouse’s employment.
For non-cash donations that are worth less than $250, a receipt from the charity will suffice for record keeping, allowing you to deduct this on your taxes. The receipt should contain a list of all items being donated, their condition and an estimated value for each. For donations exceeding the $250 value you will need a written acknowledgement from the charity in addition to the receipt.
By itemizing deductions on your tax return, you are choosing from the many individual tax deductions, instead of taking a flat-rate deduction. In some cases, itemizing deductions can save you money on your taxes. Deductions that can be itemized include medical expenses, property taxes, charitable contributions, mortgage interest and many more.