Your Financial Future
According to the IRS, many taxpayers spend about 13 hours preparing their tax return. More specifically, the IRS says that the average nonbusiness taxpayer spends nine hours preparing a tax return, which includes three hours of record keeping. For taxpayers who file a business return, expect around 24 hours, with about half of that spent keeping records.
No wonder it’s easy to make a mistake. Time-consuming or not, the IRS isn’t always in a forgiving mood when errors pop up. Even if you hand your records to your accountant or CPA, forgetting important documents can delay your refund, force an amended return, or worse, trigger an audit.
You’ve probably heard it before, but let’s start with the basics. One of the biggest mistakes folks make is filing a return before they have all their 1099s and W-2s.
By now, you’ve probably received any corrected 1099 forms. But in the future, be careful about filing by early February and getting a notice in late February that your brokerage firm has adjusted your original 1099.
You receive a W2 from your employer and 1099s for many other kinds of income such as Social Security income, investments, rents and other income. The Internal Revenue Service receives duplicate copies of these documents. Their data matching process will recognize this missing information and they will contact you about the difference and you may have to pay a penalty and interest. You must be careful to not misplace this information. Many tax preparers and some tax prep software look to see if you had different income from your last year’s return to try and eliminate this problem.
If you claim to operate a business that always reports a loss, it may raise an audit flag. . Most businesses lose money in the early stages. But if your business is losing money year after year, it could raise suspicions that it is simply a hobby. You may love golf. You may even teach beginners how to play. But if your golfing business can’t turn a profit, the IRS may decide it’s a hobby.
Or it may raise suspicions that you are misreporting income or expenses. This can be especially true for cash-based businesses. That doesn’t mean you shouldn’t report losses. Keep detailed records for at least seven years demonstrating legitimate expenses.
A couple of years ago it was an audit trigger to claim a home office deduction, but this is no longer true. The home office deduction is becoming increasingly popular, but you must be self-employed and conduct most of your business from home. If your company allows you to work from home and you are a W-2 employee, don’t even consider taking the home office deduction, because it will not be allowed.
Starting in tax year 2013, the IRS began allowing taxpayers to take what they call the simplified option. It is a standard deduction of $5 per square foot, a maximum of 300 square feet. It’s much simpler than the standard method, and there is no recapture of depreciation upon the home’s sale, but your deduction will probably be lower.
It is important to remember to take required minimum distributions (RMD) if required. Before 2000, these were required in the year you reach 70 ½. The Secure Act 1.0 moved the age back to 72 and this was again amended by Secure Act 2.0 which set the new threshold to 73. The required distribution is based on your age and the amount of assets in qualified accounts such as 401k, 403b, IRA and others. Failure to take out and pay taxes on the correct amount will result in a 25% penalty plus tax on the full amount of the RMD.