Once the tax forms appear in the mail, can April 15 be far behind?
Now's the time to start collecting records and receipts to make your tax preparation as painless as possible. Nothing says you have to wait until April to file your return - and if you are getting a refund, the sooner you file the better.Lucky for most taxpayers, there are not a lot of changes we have to contend with this year. Tax brackets have changed slightly. For joint returns, the 15 percent tax rate applies to the first $34,000 of taxable income. The 28 percent rate kicks in for taxable income from $34,000 to $82,000. For singles, the 15 percent bracket runs to $20,350. The 28 percent rate hits income from $20,350 to $49,300; the 31 percent rate applies to taxable incomes in excess of $49,300. Heads of households will pay 28 percent on taxable income up to $27,300 and 31 percent on taxable income up to $70,450.
If your adjusted gross income is more than $100,000, you lose some of your itemized deductions.
This return is the last time you can deduct interest on consumer debt (down to 10 percent this year). This may be good incentive to pay off what you can in 1991.
There may be a few other minor changes that could affect your return, so read instructions carefully or ask your accountant or tax preparer.
REDUCE THE RISK OF AN AUDIT
Just what we want to hear: The Internal Revenue Service is substantially enlarging its staff of auditors. The agency estimates that this increase in staff will result in an additional 100,000 tax returns being audited.
"The word is that the IRS has instructed its examiners to focus on several specific items," says Reed Pew, president of the Utah Association of CPAs.
Most of the returns selected for audits are chosen as a result of computer analysis. Information from your return is fed into an IRS computer that compares the deductions, exemptions and credits you claim with those claimed by other taxpayers in your income category. Those that show a wide discrepancy will receive a closer look.
What if your deductions are average and fall within IRS guidelines? Are you off the hook? Not necessarily, says Pew. Some returns are selected because the IRS feels a particular area is being abused. Others might be selected because they were filled out by preparers the IRS deems questionable. Or you may be picked simply because the IRS is auditing the return of a business associate. Then there are those occupations that make you more vulnerable to an IRS audit - waiters, cab drivers, beauticians and others who get paid mostly in cash. The higher your income, the greater changes of being audited. Finally, some returns are selected at random.
Specific areas that may come under scrutiny this year, says Pew, include:
- Use of schedule C. This is the form used by independent contractors, people who are self-employed or have free-lance income. The problem is that many taxpayers who file Schedule C are actually employees of the companies with which they work rather than independent contractors and are therefore not entitled to use this form.
- Mortgage interest. The IRS expects that the phasing out of the consumer-interest deduction will cause some taxpayers to misrepresent consumer interest as being fully deductible mortgage or home equity loan interest.
- Charitable contributions. The IRS has discovered that many charities have been handing out inflated receipts for donations and otherwise helping contributors to misrepresent their donations.
- Others. In addition, IRS auditors will continue to pay attention to perennial problem areas such as:
- Tax shelter partnerships with high write-offs.
- Home-office deductions.
- Travel and entertainment expenses that the IRS views as being unnecessary or unreasonable.
- Alimony deducted by one ex-spouse that is not claimed as income by the receiver.
The fear of an audit can cause some taxpayers to become overly cautious and ignore legitimate deductions because they feel they might wave a red flag on their return, says Pew. "This amounts to overpaying taxes - certainly not a wise thing to do."
If your deductions are legitimate, by all means take them, he advises. Just be sure to keep thorough records to substantiate your claims.
Q&A: FREQUENTLY ASKED QUESTIONS
Here, from the Utah Association of CPAs are answers to some of the most commonly asked tax questions:
QUESTION: What types of income do I have to report on my tax return?
ANSWER: The general rule is that all income is taxable unless otherwise noted in tax law. For example, you must report all wages, tips or bonuses, interest and dividend earnings, capital gains, certain scholarships and fellowships, unemployment compensation and alimony.
QUESTION: How do I know whether I should claim the standard deduction or itemize?
ANSWER: Add up your various deductions - such as mortgage interest, real estate taxes, charitable contributions and miscellaneous expenses - and see if they exceed your standard deduction. If they do, you should definitely itemize.
For 1990, the standard deduction is $3,250 for single taxpayers, $5,450 for joint filers and $4,750 for anyone filing as head of household.
QUESTION: I got married at the end of 1990. How does this affect my filing status.
ANSWER: If you were married at the end of the year, you must file as either "married filing jointly" or "married filing separately." In almost all cases, filing jointly will be to your advantage. In extreme cases where a deduction, such as the one for medical expenses, is available only if your expenses exceed a certain percentage of your adjusted gross income, you may do better to take the deduction against only one spouse's income. But remember, if one spouse itemizes on a separate return, the other must do so as well.
QUESTION: How much can I deduct for miscellaneous expenses?
ANSWER: For 1990, most miscellaneous expenses are deductible to the extent that they exceed 2 percent of your adjusted gross income. Once you exceed that floor, your miscellaneous expenses are 100 percent deductible.
QUESTION: Can I deduct travel, lodging, meal and entertainment expenses incurred on a business trip?
ANSWER: As a general rule, you may deduct 100 percent of your allowable travel and lodging expenses, and 80 percent of your expenses for business-related meals and entertainment - subject, of course, to the 2 percent floor on miscellaneous deductions.
QUESTION: What other miscellaneous expenses can I deduct?
ANSWER: Once you meet the 2 percent floor, you may be able to deduct your job-hunting costs, employment related education expenses, tax preparation fees, subscriptions to professional or trade publications, uniforms and work clothes, dues to union or professional organizations and safe-deposit box rental fees.
QUESTION: What deductions are available to me as a homeowner?
ANSWER: You can generally deduct interest on mortgages of up to $1 million as long as the funds are used to purchase or substantially improve a primary or secondary home. Interest on home equity loans of up to $100,000 is also deductible. And don't forget that you can deduct any property and real estate taxes your paid in 1990.
QUESTION: I sold my home in 1990. What types of records do I need to gather?
ANSWER: Make sure you set aside your closing statements, records of capital improvements or deducted depreciations and casualty losses, plus any receipts that prove how much you spent on fixing up the house within 90 days prior to its sale. These documents can help you trim the amount of capital gains you must report on the sale of your house.
QUESTION: My wife and I are retired and want to sell our home. How can we minimize taxes on the gain from selling our home?
ANSWER: If you or your spouse are at least 55 years old, you can exclude from taxable income up to $125,000 of the profit realized from selling your principal home. This exclusion is available only once in a lifetime, per individual or per couple.
QUESTION: We had a child last year and ran up some substantial medical bills. Are these deductible?
ANSWER: All unreimbursed medical expenses are deductible, but only to the extent that they exceed 7.5 percent of your adjusted gross income.
QUESTION: What types of medical expenses are deductible?
ANSWER: The obvious deductible expenses are doctor, dentist and hospital bills. But other expenses, such as the cost of transportation to and from medical facilities are also deductible. In addition, you may be able to deduct the costs of such items as hearing aids, dentures, contact lenses, prescription drugs, insulin, psychotherapy, and medicare and hospitalization insurance premiums.
QUESTION: My house was damaged during a severe storm. Can I deduct any of my losses?
ANSWER: Losses incurred as a result of unexpected disaster - including storms, fires, automobile accidents, earthquakes or bank failures - are deductible only to the extent that they exceed 10 percent of your adjusted gross income and have not been reimbursed by your insurance company. In addition, each loss is subject to a $100 deductible.
QUESTION: I charged a donation to the heart association late in 1990 and the credit card bill didn't come until this year. Can I deduct the contribution on this year's return.
ANSWER: Yes, if you itemize. Gifts to charitable organizations are deductible when paid or charged. However, pledges to organizations do not count.
QUESTION: For the past three years, I have come just a few hundred dollars short of being able to itemize my deductions. Is there anything I can do?
ANSWER: Try accelerating some of next year's itemized deductions into the current year or postponing some of this year's deductions until next year so that the total will exceed your standard deduction in one year or the other. Then you will be able to itemize once every two years and claim the standard deduction in the other year.
QUESTION: I'm a single parent. I pay my mother to care for my son while I work. Can I claim the dependent-care tax credit?
ANSWER: Yes, you can as long as you do not claim your mother as a dependent. But be aware that if your mother comes to your home to care for your children, you must pay Social Security and unemployment taxes based on her salary. You will also need to file payroll tax returns. On the other hand, if you take your children to your mother's home, she is not considered your household employee and you will not face these employer responsibilities.
QUESTION: How long should I keep my tax returns?
ANSWER: As long as possible. As a general rule, th IRS cannot assess additional taxes after three years starting from the due date of the return or when it was actually filed, whichever is later. If, however, you fail to report more than 25 percent of your income, the IRS has up to six years to audit you; and there is no time limit if the IRS thinks you committed fraud, or you failed to file a return. Just to be on the safe side, it's a good idea to hold onto your forms indefinitely.