TS15 Tax Tips
Updated: November 13, 2014
Reviewed by TTI: November 21, 2014
Finding the right tax pro
1. Ask about a tax preparer’s years of experience and ongoing education. Do they have the knowledge to accurately represent your interests? Up-to-date training is critical when selectinga tax professional.
2. When it comes to taxes, knowledge can translate into dollars saved. Tax rules are always changing, so it is critical taxpayers select a tax professional who receives ongoing training.
3. Know the tax preparer’s area of expertise before allowing them to do your taxes. A sick patient wouldn’t see an eye doctor for a head cold, and a small business owner shouldn’t consult a tax professional who can’t do small business returns.
4. Make sure your tax preparer protects your confidential data. Tax professionals see Social Security numbers, earnings statements and other private information. Make sure you trust your preparer to review and protect your data.
5. Look for a tax professional who guarantees their work. Understand what happens if an error is made on your return. Will they pay the resulting penalties and interest or will you be left footing the bill? Seek a reputable preparer who guarantees their work.
6. While taxes are typically prepared January through April, the IRS corresponds with taxpayers throughout the year. So, it’s important to select a preparer who’s available year-round.
7. Avoid tax preparers who say they can obtain larger-than-average refunds. Refund estimations should be based on deductions and credits taxpayers are legally permitted to claim.
8. Regardless of who prepares the taxes, the taxpayer is legally responsible for the information on the return. A little research into the best tax professional now can prevent significant financial and legal harm later.
Small Business
9. Small businesses with assets under $10 million continue to be a focus of IRS audits. Knowing what records you should keep to substantiate your business deductions can mean the difference between winning an audit and losing out on tax breaks you deserve.
10. If you own your business, 100 percent of the premiums you pay for a health insurance plan may be deductible as an adjustment on your individual return. Even if you don’t have any employees, you can set up a health insurance plan through your business that covers you, your spouse and your dependent children. For additional tax savings, you can also set up a health savings account.
11. If you own a small business and place property into service in 2014, you may be able to deduct part of the cost of those assets against your business income. You will also be able to depreciate the remaining cost as usual. Depreciation deductions reduce income tax as well as your selfemployment tax.
12. If your business owns its own building, you may qualify for valuable tax benefits if you make energy efficient improvements to your building. Adding solar, wind, or fuel cell equipment to heat and cool the building can reduce your energy costs while giving you a tax break of 30% of the cost of the new equipment.
13. If you use part of your home regularly and exclusively for business, you may be able to deduct a portion of your mortgage interest, real estate taxes, utilities, home insurance, and repairs against your business income.
Children/Dependents
14. If you provide day care services in your home, there are special rules for calculating your tax deductions that are different than other types of home business. For example, the businessâ€ÂÂuse portion of utilities, food and other expenses may apply as part of these beneficial deductions.
15. If you pay for daycare while you work, you can take a tax credit on a percentage of eligible daycare expenses up to $3,000 for one child and $6,000 for two or more children.
16. If you’re divorced, your divorce decree may not control who claims the child as a dependent. Under IRS rules, Form 8332 has to be signed to release the child to the other noncustodial parent for the tax exemption.
17. Child support isn’t deductible by the payer, and it’s not income to the payee. The parent claiming the child exemption depends on the parents’ custodial or noncustodial status. The custodial parent is usually the parent the child lives with for a greater number of nights during the tax year.
18. The dependent care credit isn’t just for expenses of caring for a child. If you are caring for a disabled parent and claim them as your dependent, you may be able to claim the dependent care credit for a percentage of expenses up to $3,000 if you pay a caregiver to look after your parent while you work.
19. If you adopt a child, you may be able to take a tax credit for qualifying expenses related to the adoption, including legal fees, airfare and other travel expenses, as well as notary costs. The credit could reduce your federal tax liability by as much as $13,190 for any type of adoption, and your state may allow a credit as well.
20. Is your parent your dependent? If you support an elderly parent, only the taxable portion of their Social Security counts toward the gross income test. But all of the Social Security benefits, whether taxable or not, count toward the support test if these funds are spent rather than saved.
Education
21. Are you gifting to your children or grandchildren’s 529 education savings plan? If so, there is a special gift-tax election to treat the contribution as given over a fiveâ€ÂÂyear period, which can reduce or eliminate gift tax. This is a great way to reduce your taxable estate while providing for a child’s education.
22. Are you planning on going back to school? The Lifetime Learning Credit lets you take a tax credit of up to $2,000 per year for college, graduate school, vocational school or even technical training programs. This may be better for some taxpayers than paying the expenses from a taxadvantaged section 529 plan.
23. A Qualified Tuition Program, also known as a 529 plan, provides a tax-efficient way to save for higher education expenses for your child or grandchild. Such a plan allows contributions well in excess of $100,000 to an established account and there is no income limitation on who can contribute.
24. Need to save for education? Although there’s no federal tax deduction for contributing to a section 529 qualified tuition plan, your state may offer a deduction or credit for contributions to one of its 529 savings or pre-paid tuition plans. Even better, distributions from a 529 plan used for qualified education expenses are tax-free to the plan beneficiary.
25. Student loans are a convenient way to pay for college expenses. If your income is too high to deduct the interest paid on a student loan, consider having your child take the college loans out in his or her name. Your child’s income may be low enough to deduct the interest, even if you give them the money to repay the loan.
Health Care
26. When you contribute to a Flexible Spending Account (FSA) or Health Savings Account (HSA), your tax savings equal the tax rate on that amount. For example, if a taxpayer in the 25 percent bracket contributes $2,000, he saves $500 in taxes. Earnings in an HSA also are taxâ€ÂÂfree and HSA funds can be rolled over year to year.
27. If you have health insurance through the ACA Marketplace and receive an Advance Premium Tax Credit throughout the year, you may have to repay some or all the credit on your 2014 tax return if your income was higher than anticipated or if you had other changes to your household. To help diminish the impact of any changes, taxpayers should notify the Marketplace to adjust their credit during the year.
28. To avoid paying a penalty, taxpayers without health insurance should check to see if they qualify for an exemption. If they do qualify, they should prepare to apply for an exemption. Some exemptions, such as having income below the minimum tax return filing requirement, can be claimed when you file your tax return. Other exemptions, such as hardships, must be applied for through the Marketplace and may require you to provide documentation.
Military
29. Combat pay is not taxed, but that money can be included as earned income to qualify for the Earned Income Tax Credit and the Child Tax Credit. Among the types of income not included in gross income when calculating taxes are allowances for living, family, death and moving.
30. Military personnel who move due to a permanent change of duty station may be eligible to deduct unreimbursed expenses necessary for the relocation of their household. The cost and upkeep of military uniforms also may be qualified itemized tax deductions and members of the armed forces can deduct unreimbursed travel expenses if they travel more than 100 miles away from home to report for reserve duties.
31. Unless on a tour of duty outside the United States or Puerto Rico, or serving in a combat zone, military personnel must submit their tax returns by the April deadline. They may apply for a sixmonth extension. Even with an extension, taxpayers must estimate their taxes owed and submit payment with the extension to avoid late fees and interest.
32. If you are on a tour of duty outside the United States or Puerto Rico, you have an automatictwo ÂÂmonth extension to file your tax return, making your deadline June 15. Applying for anextension to file gives you an additional four months.
33. Service members often retain residency status in their home states, despite frequent moves during active duty. The Military Spouse Residency Relief Act allows spouses to also retain residency status in their home state if they move with their military spouse. Under these rules, the spouse’s pay earned where they are stationed is not taxed there, but instead in the home state.
Homeowner
34. Homeowners can deduct the mortgage interest – and possibly some points and fees – paid on their primary home and a second home if they don’t rent it out. Even if a homeowner faces prepayment penalties for doing so, those penalties are deductible as interest too. The mortgage interest deduction requires filers to itemize.
35. When you sell your house, the capital gain may be subject to tax. The exclusions are up to $250,000 or $500,000 for married taxpayers filing jointly. But upgrades to the house – like renovations or improvements – add to your basis in the house and lowers your gain. This is especially helpful for taxpayers who do not qualify for the exclusion or whose gain on the sale is over the exclusion amount.
36. Special rules apply to renting your vacation home. Your rental income is taxable and your deductions may be limited to your income, depending on the number of days you personally used the vacation home.
Saving/Investing/Retirement
37. Taxpayers may consider increasing or maxing out their 401(k) retirement contributions. Contributions are pre-tax, which reduces taxable income and potentially the tax bill. Taxpayers eligible to deduct IRA contributions can deduct contributions made through April 15, 2015 on 2014 tax returns.
38. A “stretch IRA” should be in your vocabulary. A stretch IRA simply means that your beneficiary can withdraw funds from an inherited IRA over his or her lifetime, increasing the time those investments can grow tax-deferred.
Divorce
39. A divorce, annulment, or legal separation might complicate a tax return. The more familiar a tax payer is with the terms and agreement, the better they’ll understand the tax implications.
40. Alimony is deductible by the payer and it is taxable income to the payee. It’s also important to note that alimony is treated as earned income for purposes of eligibility to make an IRA contribution.
Charitable Donations
41. Taxpayers have until Dec. 31 to make donations to their favorite charitable organizations. For monetary gifts less than $250, a bank record or written acknowledgment from the charity is acceptable. For financial gifts of $250 or more, written acknowledgement from the organization is required.
42. If you give cash to your church or other qualified charitable organization, you must have a receipt with the name of the charity, the date and the amount of the contribution in order to claim it on your taxes.
Audits
43. An audit is an IRS inspection of an individual’s or entity’s books and records. It’s important to keep all supporting tax documentation for seven years in case of a tax audit. To help avoid an audit, taxpayers should report all income and claim only the deductions and credits they’re entitled to.
44. The IRS issues millions of taxpayer notices each year. Most issues can be resolved by correspondence and no face-to-face meeting with the IRS is necessary. At H&R Block, we have experienced tax professionals who can help you understand the IRS notice, and even help you prepare a response. Our enrolled agents can even represent you at your audit if necessary.
45. If you receive a letter from the IRS, don’t panic. H&R Block has an affordable Audit Service Program and experienced tax professionals who can assist you in responding to the notice or represent you at audit, even if we didn’t prepare your return.
Employment
46. Remember to keep track of job-search expenses. Taxpayers must itemize as part of miscellaneous deductions to claim job search expenses. Qualified expenses may include: resume development; professional placement services; or mileage for driving to job interviews or other unreimbursed travel such as airfare.
47. Taxpayers can deduct moving expenses if their move is work-related, the new job is more than
50 miles farther than their previous job was from the former home, and the taxpayer remains at the new job full-time for at least one year. Moving expenses are considered adjustments to income, so you can deduct them even if you don’t itemize your deductions.
Misc
48. Taxpayers really need to make sure they’re doing everything they can to get all the credits and deductions they’re entitled to. See your tax professional to make sure you’re getting the money you’re due.
49. Trading your signed Joe DiMaggio baseball for a set of vintage baseball cards? Bartering, or trading goods or services, is taxable. Knowing how to correctly report that income can be complex.
50. To qualify to file as head of household, a taxpayer has to be either unmarried or considered unmarried on the last day of the year. Also, a qualifying person must have lived in the home for more than half the year – unless the qualifying person is a dependent parent. Finally, head of household status requires paying more than half the cost of keeping up the home.