Avoid These 6 Tax Blunders, Say Accountants
We’re Accountants. Here Are 6 Things We’d Never Do When Filing Taxes.
Tax season has rolled around once again, and so has the inevitable dread that comes with it.
It’s understandable that many of us worry that we might make one small, accidental mistake and then get in big trouble with the IRS. When it comes to something as complicated and serious as taxes, it’s sometimes hard to feel confident that we’re doing it right.
Enter accountants. Their entire job is to make sure of their client’s taxes. And their taxes? They are all squared away and mistake-free. That’s why we asked them to share what they would never do (and warn others from doing) when filing. Steal their secrets below as you work on yours:
1. They would only file if they were sure all documents were in.
For one, this means reporting your income, no matter how small.
If I were to file my tax return without reporting some income that was reported to me on my tax return, the IRS would likely catch it, calculate what my taxes should have been had I reported that income, often without giving me any credit for legitimate deductions or basis against that income, and send me a CP2000 notice, said Logan Allec, a CPA and the owner of tax relief company Choice Tax Relief.
He added that CP2000 notices are a pain to deal with and might even propose to assess a substantial understatement penalty, which can be pretty large.
Additionally, Allec suggested the following:
* Making a list of all the tax documents used to prepare the previous year’s return
* Recalling any new accounts opened or new sources of income to add to the list
Alternatively, another approach is to pull the wage and income transcript for the year directly from the IRS, he said. This transcript shows all the tax documents issued to you that year.
However, since wage and income transcripts for last year typically aren’t ready until late spring or summer of the current year, I would have to file an extension of time to file and also ensure that I had paid all the taxes I owe for last year (or my best estimate of this amount) by the original deadline, he continued.
2. They would take their time to file instead of filing for an extension.
It’s OK to ask for an extension if needed, according to Victoria Rothbauer, a CPA and member experience manager at Collective, a back-office platform for entrepreneurs.
She said an extension is just a tool to help relieve stress and ensure taxes are accurate. They are free to file, and, contrary to popular belief, filing an extension doesn’t raise red flags. (You can file for an extension on the IRS website.)
Further, she continued that rushing increases the risk of making a mistake, and extra time can be used to research tax deductions and make retirement contributions, lowering your taxable income.
3. They would only file with an understanding of the rules behind tax deductions.
Only write off items while doing your due diligence. There’s a lot of bad advice out there promoting overly aggressive tax strategies without fully explaining the rules or requirements for taking advantage of these deductions, Allec said.
He continued that a common one is using bonus depreciation to write off most of the cost of a new car against your business income this year. That’s not automatically illegitimate, he said. It’s just one to be careful about since the rules and requirements are complex.
If you don’t want to spend the time researching the rules yourself, he recommends hiring a tax professional to do your taxes for you. The cost of doing so will be much less than the cost of hiring a professional to defend you in an IRS audit.
4. They wouldn’t deduct a business expense for something that isn’t 100% part of their business.
Rothbauer also stressed that it’s best to understand what counts (and doesn’t count) as a tax deduction. She said that several deductions are available to people who work for themselves, but the IRS maintains that anything deducted needs to be exclusively used for business.
The rules around that are relatively strict, too. She recalled clients asking about emotional support animals, exercise bikes in the home office, event tickets for wooing new clients, home office space used to entertain guests, and wedding or event costs for content creators, all of which can ‘t be deducted since they aren’t used exclusively for business purposes (as helpful as they may be).
But all is not lost. I would familiarize myself with what is deductive instead, she said. She listed potential examples that can save you a lot of money, such as retirement plans for the self-employed, charitable donations, portions of a home office, and specific mileage.
5. They would only claim a loss with top-notch bookkeeping and receipts.
According to the IRS website, Schedule C, aka Form 1040, is where you report income or loss from a business you operated or a profession you practiced as a sole proprietor.
Allec said the IRS loves auditing individual taxpayers who report significant business losses on Schedule C, especially if the taxpayer is using this loss to offset other income, such as W-2 wage income, to lower their tax bill.
6. They would pay attention to the S Corporation tax election if self-employed.
This one is crucial to note for those in the creator economy.
Rothbauer said running a solo business is becoming increasingly accessible, and people are realizing that they can profitably pursue their passions. However, many of these business owners don’t understand their tax options, and one that is often overlooked is the S Corp election.
It can help with self-employment taxes. When an LLC or C Corp owner elects Subchapter S as their tax status, their business is considered a pass-through entity. Thus, the owner can split their earnings between payroll and business profits, easing the burden of self-employment tax, Rothbauer explained. For many, this can potentially mean a difference of thousands of dollars in taxes each year.
However, this tax status is only viable and the best option for self-employed people. Rothbauer said it’s not available to sole proprietorships, and it only makes sense once someone makes a profit of $60,000 a year or more.
Finally, remember to double-check your work before submitting it. And remember that if this information (or just the idea of tax season) stresses you out, you’re not alone. A lot of people worry about filing taxes, but there are a bunch of resources (and people!) out there to help you tackle the process successfully. Reach out to a tax pro or use online tools to assist you in the process.
Related articles from your friends at Your Career Place.
https://yourcareerplace.com/finances/tax-guide-2024-prepare-and-pay-federal-taxes-now
https://yourcareerplace.com/finances/unlock-financial-success-find-your-accountant
