Yes, grumble, grumble. It’s that time of year to talk about everyone’s favorite subject — taxes.
To help make things a little easier, here are 10 tax preparation tips provided by CPAs Ed Decker and Doug Klein, both of Akron-area firm BDO. Both have served as the Beacon Journal’s advisers through the Ohio Society of CPAs for several years for our tax coverage.
But a disclaimer first: Material discussed here is meant to provide general information and should not be acted on without professional advice tailored to your individual needs.
1. The IRS publishes its “Dirty Dozen” scams to watch out for and updates the list frequently (see www.irs.gov/uac/newsroom/dirty-dozen). We normally warn you about identity theft and other scams, but this year, on their top 10 “worst of the worst tax scams,” a number of other important tips are on their radar as well. Choosing the right tax preparer and not falling for promises of inflated tax refunds is their top tip. They also mention phone scams and fake emails pretending to be the IRS. These are not new, but you still need to be wary.
2. Foreign accounts — including bank accounts, mutual funds and even embedded investments in a U.S.-based investment partnership — are required to be disclosed in more detail and may require the filing of additional forms. If, for example, you have a foreign spouse, a retirement account outside the United States or a rental property in Canada, seek out professional help or call the IRS for forms and publications. Don’t get stuck with late filing penalties or tax audits for failure to report. This goes for U.S. citizens living overseas and who must file a U.S. return even if paying tax in the other country.
3. Tax credits are often overlooked. IRS.gov has publications for all of them, but frequently missed credits include Alternative Minimum Tax credit, child credit, education credits, premium tax credit and retirement savings contributions credit.
4. You can pay what you owe online and avoid writing a check — which runs the risk of being lost or stolen in the mail. See www.IRS.gov/payments.
5. Claim the correct dependent exemptions (see Publication 501). One that most people miss is that if you have a child who is 18 to 24 and a full-time student in secondary education, you may be able to give up your claim of their dependent exemption and allow them to claim the education credit (nonrefundable portion only) to offset any tax on part-time wages they earn. Understand that they cannot claim the dependent exemption either, but their tax may go to zero anyway with the credit. This is especially useful for parents who are in high-income brackets who lose their dependent exemptions anyway because of phase-outs or the Alternative Minimum Tax trap.
6. Roth and IRA rules are complicated, so be sure to know and use them to supplement even existing 401(k) plan contributions. For example, depending on your income, you may be able to claim a traditional IRA deduction for a non-working spouse. Or you may be able to contribute to a traditional IRA and convert it to a Roth IRA even if prohibited from contributing directly to the Roth IRA by the income limitations. This allows you to essentially make a nondeductible IRA contribution pay you the extra benefits of a Roth IRA. See Publication 590-A.
7. Don’t file at the last minute (this year, April 18). Often, the mad rush causes mistakes and brings in the variables such as mail or third-party delivery service errors, or software/internet problems for e-filers. Give yourself plenty of time to gather your tax data, organize, and review a draft return before filing.
8. If you can’t afford a tax preparer, be aware of all the free services out there, including the Volunteer Income Tax Assistance (VITA) program (see Publication 3676-A), and many tax software providers allow Free File for federal returns that are less than published income figures. Search keyword “Free File” on www.irs.gov.
9. Avoid penalties by calling the IRS to double-check a tax position you are not sure about. Even if they get the answer wrong, you won’t owe any accuracy penalties as long as you wrote down the date, time, name and ID number of the IRS assistor who gave you the erroneous advice. It’s free, and usually accurate.
10. Use direct deposit for your refunds, especially on electronically filed returns. It is safer and faster for refunds, and can even split the refund between multiple bank accounts (for example, a spouse’s account for his or her part of the refund). Use Form 8888 to allocate. It is a myth that giving IRS your bank account information will subject you to later IRS collection action on that account.
Betty Lin-Fisher can be reached at 330-996-3724 or blinfisher@thebeaconjournal.com. Follow her @blinfisherABJ on Twitter or www.facebook.com/BettyLinFisherABJ and see all her stories at www.ohio.com/betty.