Income Tax Tips
By Diane Tait
|Image courtesy Pixabay|
I owe, I owe, it’s off to work I go is the lament of many a taxpayer at this time of year. That’s because no sooner does the new year arrive when so do W-2 Forms for all employees and 1099’s for independent contractors. Whether you work for a business or own a business, the next few months are certain to add to your workload, not to mention your blood pressure, as you prepare your tax forms to send to the IRS. The secret to paying the least in taxes, interest and penalties is to have a familiarity with the tax laws. That isn’t so easy when the laws change from year to year. To help you get a handle on what is and isn’t allowable, I thought I’d take the time to give you a few time-tested tips.
How early should you file? – Even though the filing date for your income taxes is April 15, that doesn’t mean you should necessarily wait until the last minute to file. Especially if you’re owed a refund. In fact, the longer you wait to file a return, the longer it will take to process your refund. While filling out tax forms for independent contractors usually requires a CPA to maximize the available deductions, both indies and employees can file their returns electronically. This speeds up the process and with it any refund you are owed. On the other hand, if you owe Uncle Sam taxes over and above what you paid during the year, then holding out to the last minute is permitted. (If that’s the case, you really should take the time to stand in line at the post office to send your return via certified mail. This will provide proof of the date the forms were mailed and when they are received by the IRS.)
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What if you can’t pay? – You know the old saying, “There’s nothing certain in life except death and taxes?” Well, unless you die before April 15, there’s no excuse for failing to file. In fact, if you fail to file you could wind up in jail. Even if you’re late, you will automatically accrue penalties and interest on the amount you do owe. That being said, what if you know that you can’t afford to pay up by April 15? By filling out a Form 4868, you can file for a 6-month extension. That’s the good news. The bad news is that interest and penalties will accrue on any taxes owed, so filing for an extension by no means gets you off the hook. It’s kind of like a stay of execution designed to allow you to work out a payment plan to keep the IRS off your back to help you pay your back taxes. (Before doing this, I highly advise you contact a tax accountant to see what the penalties and interest are going to be.)
If you owe less than $50,000, the IRS even allows you to apply online for a payment plan.
What do I do if a parent dies before their income taxes are filed? – Remember that death and taxes ditty I just quoted? Unfortunately, dying does not relieve the deceased from paying his or her taxes. In fact, failure to file taxes for a decedent is one way to wind up having the resolution of an estate hung up in the courts for some time to come. It is far better to have the executor of the estate file the appropriate IRS forms for the deceased. Additionally, estate taxes also need to be computed and paid before any inheritance is passed along to the heirs. (Again, this is going to require a CPA to resolve.) If the decedent lived in Florida, the estate tax requirement was abolished in 2005. However, you may still be required to file IRS Form 706 and Florida forms DR-312 & DR-313.
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How can I legally reduce my tax burden? – That depends on your employment status. Being an independent contractor offers a number of ways to legally reduce taxation by deducting expenses related to the performance of the business. Indies get to deduct fifty-eight cents per mile for business travel in their personal vehicle in 2019. They are also allowed to deduct office expenses, legal and accounting services, business insurance, business licenses, meals, entertainment, advertising, contract labor, interest paid on business lines of credit and more. These deductions will all have to be itemized on Form 1040, Schedule C.
If you are an employee, the only two ways to legally reduce your tax burden is to either contribute money to an individual retirement account, and/or to donate to charity. Before you make a charitable contribution, you should familiarize yourself with the IRS Rules forCharitable Contribution Deductions.
Protecting your financial data is just as important as filing on time. – As loathsome as it is to have to pay taxes, there is one financial burden that far outweighs it: Identity theft. While dealing with filing your taxes is time consuming, what’s far worse is the black hole for time that can occur if your financial data is stolen. Tax forms are chock full of sensitive information that any cyber-criminal would give his or her eyeteeth to possess. As a result, cybercrime spikes during tax time. That means you have to choose with care any individual you rely on to prepare your tax filing. You also need to beware of email and text messages that purportedly come from the IRS. Rule #1: The IRS never sends out notices via phone, text or email. If you receive a message that purportedly comes from an IRS agent, it’s a scam. All correspondence from the IRS is delivered via the US Postal Service. The only time you may receive a phone call from the IRS is after you have received a notice via mail. But most IRS correspondence can be handled by you and your accountant without the assistance of an agent.