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Preparing for tax audit

Reduce Your Chance for a Tax Audit

Everyone fears the dreaded tax audit – and with good reason. It means that the algorithm scoring formula used by the Internal Revenue Service (IRS) has found what it deems to be an irregularity on your tax return. Few audits turn out well for the individual or small business being questioned and the following are just a few of the ways that people can help mitigate the chance of being audited.

Hire a Professional

Nothing can compare to the personalized service and expertise available with a tax professional. It’s tempting to use online tax software. It’s easy and convenient, but the software may not be able to account for special circumstances and you may be leaving money on the table that could go in your pocket. Hire a professional if your tax return is complicated or complex in any way.

File on Time

Seeking an extension or filing an amended return can activate you for review by IRS systems, particularly for high-end earners. The same is true for those that file paper returns. It’s always best to e-file and makes sure they’re filed before the deadline.

Documentation

When dealing with the IRS, documentation is everything. If there’s a chance that the IRS may not understand expenses you’ve claimed or deductions, the onus will be on you to provide documentation to prove your right to make the claims. A professional tax preparer will know what documentation you’ll need.

Deductions

Another instance that will red-flag your tax return is the deduction-to-income-ratio. Deduction amounts that are unusually high compared to stated income may be a symptom of claiming the same deductions twice in the eyes of the IRS. Stay away from dubious deductions.

Exemptions

A high number of exemptions and dependents will bring unwarranted attention from the IRS. There are specific rules about what dependents are eligible for you to claim. For example, in some instances, a dependent may be required to file their own return, which means you can’t claim them.

Compliance

Remaining in compliance with your responsibilities in regard to withholding taxes, filing status, deductions, and exemptions will significantly reduce the potential for a tax audit. If you do get audited, having a professional file your tax return will ensure you have knowledgeable backup should you need it.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Should I Itimize my Deductions?

When you finally decide it is time to prepare your taxes, the first question is whether you should itemize your deductions or take the standard deduction provided by the IRS.

Tax deductions are a very simple part of a theoretically simple tax reporting system. If you’ve ever prepared your own taxes, you know this simply isn’t true. Complicated tax forms can be a nightmare to fill out. Ever helpful, the IRS gives you an option of just taking a standard deduction instead of itemizing your deductions. So, what should you do?

The standard deduction is the easiest method because it requires no calculations or supporting documentation of any sort. You figure out your adjusted gross income and simply submit the amount for your classification. The amount differs based on whether you are filing as single, married, older than 65 or have kids.

Many people scoff at the mere idea of taking the standard deduction. As with all tax issues, deciding whether to take the standard deduction isn’t so easy. If you have a fairly simple financial life and don’t have many deductions, the standard deduction is almost always the best choice. For instance, if you make $45,000 as an employee of a company, rent a residence and don’t have any major medical bills or losses, the standard deduction is probably going to save you more money than itemizing. Unfortunately, you can never be sure until you take a stab at itemizing your deductions in a rough draft of a tax return.

Itemizing your deductions is exactly what it sounds like. You literally go through your records and categorize every possible deduction. These deductions are then subtracted from your adjusted gross income to get a final figure from which tax is determined using the tax tables. Itemizing is the way to go if you have significant tax deductions or tax credits in your financial life. For instance, you almost always want to itemize if you own a home as mortgage interest can be deducted. Generally, you want to itemize if you own a home, have significant medical bills, can claim a tax credit or suffered some type of major loss. Obviously, there are other situations where itemizing makes sense, but this gives you an idea of the situation.

If you have a simple financial situation, claiming the standard deduction may be the answer. If life is a bit more complicated, itemizing is probably going to save you more on your tax bill.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

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Determining Your Tax Status

There are five classifications from which you choose to file: single, married filing jointly, married filing separately, head of household or qualifying widower with dependent child. If for some reason, more than one status applies to you, you should choose the status that gives you the greatest tax benefit.

 

Determining your status as a single filer seems simple enough, but there are different situations that exist that can qualify the taxpayer as single. For example, if you are legally separated even in the last month of the year, you are considered single for the entire year. With no dependents and you are unmarried, you are considered single. Divorce and annulment within the year also qualifies you to file as single.

 

However, even if you are single, but you have a dependent, or were widowed during the tax year, and you have dependents, your filing status would change to head of household or widowed with qualifying dependent child, not single.

 

When it comes to determining your status as a married taxpayer, there are simple qualification assessments that establish your legal filing status and if you’re considered married. Obviously, if you are legally married and living together as husband and wife, even for a small part of the tax year, then you would be considered married. If you are living together as common law spouses, and it is legally recognized in the state in which you live, or you lived part of the tax year in the state where the common law marriage began, then your filing status is married. Your filing status is still married even if you are married but not living together, but are not legally separated or divorced.

 

If you have unique circumstances, it might not be so easy to determine your filing status. If, for example, you were widowed during the tax year and did not remarry, you can file as married with your deceased spouse, and then file as widowed with qualified dependents for the next two years, so long as you do not remarry. If you remarry within the tax year that your spouse passed away, you would file as married with your current spouse, and file with your deceased spouse as married filing separately.

 

If you are married and want to file a joint return, your tax status is married filing jointly. All income to the household must be included on the one return, and both spouses must sign and date prior to submitting the tax return. All exemptions, deductions, and credits are reported on the joint return, and you share equal responsibility and liability for the information reported on the tax return, as well as any tax money owed. There are ways to ask for release from joint responsibility, either through innocent spouse relief, separation of liability for spouses who have not lived together for the past year, or equitable relief.

 

There are sometimes reasons that a spouse cannot sign a joint tax return, such as a spouse stationed abroad for the military. In this type of situation, you may sign for your spouse as a proxy, and attach a written explanation.

 

Choosing your filing status, while lengthy and sometimes complicated, is an important in the process of completing your Federal Income Tax return.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Self-Employed Tax Strategies

The good news is being self-employed is one of the best tax strategies out there. Unlike a salaried employee, the full scope of tax credits and deductions available in the tax code are now available to you. The key, of course, is understanding the available deductions and organizing your business in a manner that allows you to maximize the write-offs.

The number one tax strategy for self-employed individuals is to keep receipts for every business expense and write them off. Practically anything can be deducted, so do it. Acceptable expenses include cell phone usage, business mileage, office supplies, home office deductions including part of mortgage or rent and so on. If you’ve filed a tax return while self-employed, you are probably already aware of this so lets move on to more specific tax strategies for self-employed individuals.

Maximizing your non-capital losses can result in major tax savings. If your expenses exceed your income for a year, you obviously will not have to pay taxes for that year. What most people don’t realize, however, is that such losses can be carried forward for seven years and deducted against future income. Alternatively, the same losses can be carried backward three years to recover past taxes paid. The end result of this situation is you can turn a bad business year into an income generator by applying the losses to taxes in other years which effectively wipes out your tax bill for those years.

Another tax strategy is to look at your side businesses. If you have one business, you’ll often have a second one that is tailored to making some money off a personal interest. While you are in it mostly because you like it, you may not realize it qualifies as a business and can help you reduce your taxes. Let’s assume you are primarily a self-employed consultant, but also write travel articles on the side. You may view the travel articles as a hobby, but it is in fact a business. If you’ve sold or even tried to sell any of your articles to a publication, all of your expenses related to travel writing can be deducted from your taxable income. This includes trips and so on. These, deductions can significantly reduce your taxable income from the consulting business. Make sure to get a grasp of your overall business efforts, even if you don’t really consider them to be a business.

Consider employing your children to save on taxes. A child under 18 that works for you does not have to pay FICA and so on. If the total wages for the year are under $4,250, they will pay no taxes and you can write off this amount as a legitimate business expense. Of course, the child needs to actually be doing a legitimate business task, but filing and similar manual tasks certainly will qualify.

Tax strategies for  the self-employed are plentiful. If you are self-employed, consider getting professional help. A good professional will save you thousands upon thousands of dollars in taxes, more than making up for their fees. Oh, you can also deduct their fees!

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

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