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MONTHLY TAX NEWSLETTERMarch 2015
It's a fact of life. The current tax system rewards taxpayers who are aggressive with their deductions. When it comes to your taxes, are you aggressive with your deductions each year? Or do you play it safe, hoping to avoid being audited by the IRS?
To find out what people are deducting, we undertook an informal survey of many of our CPA colleagues. What we found out is that there are a handful of tax deductions that show up repeatedly on the tax returns of those taxpayers who tend to be very aggressive with their deductions, including the following:
Home Office Deduction:
Two things make claiming the home office deduction very attractive. First, the rules are pretty liberal regarding who is eligible to claim the home office deduction. And if you don't own your home, the rent you pay isn't otherwise deductible on your federal tax return.
Let's take a look at the rules. To be eligible for the home office deduction, you must use a portion of your home regularly and exclusively for your trade or business. If your home office is used even one day during the year for any other purpose, no deduction will be allowed. In addition, you must perform either the income producing activity or your administrative or managerial tasks within the home office on an ongoing basis to qualify for this deduction.
Temporary Job Assignment:
Temporary job assignments provide taxpayers with the opportunity to claim a huge tax deduction. As long as the following three conditions are met, individuals can deduct all of their travel and living expenses while away from home on a temporary job assignment:
Just imagine how huge this deduction can be. Remember, someone qualified to claim the temporary job assignment deduction can deduct travel to and from the job location plus the total amount spent for lodging for up to one full year plus the daily per diem allowance of up to $71 per day (see below).
Claiming the automobile deduction has been a favorite of aggressive taxpayers for years. For 2015, people are allowed to claim a deduction of $.575 per business mile driven, which includes:
Since the only information needed to calculate the automobile deduction is the number of business miles driven, it's not too difficult to see why this is one of the favorite deductions for taxpayers who like to be aggressive with their deductions.
Individuals who itemize their deductions are allowed to claim a deduction for contributions they make to qualified charitable organizations. The gift can be either cash, check, or property. Gifts of property, such as clothing and household items, are known as "non-cash" contributions, and are deductible based on the fair market value of the donated property as of the date of the gift.
To deduct a non-cash contribution (of up to $5,000), it's up to the person who made the donation to determine fair market value. Enough said.
Per Diem Rates:
Each year, you might travel quite a bit in connection with conferences and seminars, job searches, and/or temporary job assignments. The cost of travel, lodging and 50% of the cost of meals incurred while away from home (and not reimbursed) in connection with these business trips is generally deductible.
There are two ways that you can keep track of the cost of meals and incidentals incurred while away on business. You can either keep receipts each time you eat a meal during your business trips, or you can use the per diem rates established by the IRS. Depending on the city, the per diem rate is up to $71 per day. A list of per diem rates by state can be found in the IRS Publication 463, Travel expenses or using the interactive tool available at www.gsa.gov.
Taxpayers who are aggressive with their deductions generally prefer to base their meals and entertainment deduction on the per-diem rates since the only information needed to calculate their deduction is the number of days they were away on business. And from what we've seen, these taxpayers seem to always find some business purpose for every trip that they take.
How Aggressive Are You With Your Tax Deductions?
How aggressive are you with the deductions you claim on your income tax returns each year? We've put together this five question quiz to help you perform a quick self-evaluation:
1. Did you claimed the home office deduction last year?
2. Have you ever deducted for a temporary job assignment?
3. Do you claim a deduction for you automobile expenses each year?
4. Did you claim any non-cash contributions last year?
5. Did you do much business travel last year that wasn't reimbursed?
Interpreting you score:
Greater than 5: Consider yourself aggressive
Between 4 and -4: You're an average Joe
Less than -5: Go to Home Depot, get yourself a red flag, and raise it up. Maybe that will help you get over the irrational fear that you have about raising the proverbial red flag.
WASHINGTON — The Internal Revenue Service wrapped up the 2015 "Dirty Dozen" list of tax scams today with a warning to taxpayers about aggressive telephone scams continuing coast-to-coast during the early weeks of this year's filing season.
The aggressive, threatening phone calls from scam artists continue to be seen on a daily basis in states across the nation. The IRS urged taxpayers not give out money or personal financial information as a result of these phone calls or from emails claiming to be from the IRS.
Phone scams and email phishing schemes are among the "Dirty Dozen" tax scams the IRS highlighted, for the first time, on 12 straight business days from Jan. 22 to Feb. 6. The IRS has also set up a special section on IRS.gov highlighting these 12 schemes for taxpayers.
"We are doing everything we can to help taxpayers avoid scams as the tax season continues," said IRS Commissioner John Koskinen. "Whether it's a phone scam or scheme to steal a taxpayer's identity, there are simple steps to take to help stop these con artists. We urge taxpayers to visit IRS.gov for more information and to be wary of these dozen tax scams."
Illegal scams can lead to significant penalties and interest for taxpayers, as well as possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them. Taxpayers should remember that they are legally responsible for what is on their tax returns even if it is prepared by someone else. Make sure the preparer you hire is up to the task. For more see the Choosing a Tax Professional page.
For the first time, here is a recap of this year's "Dirty Dozen" scams:
Additional information about tax scams is available on IRS social media sites, including YouTube http://www.youtube.com/irsvideos and Tumblr http://internalrevenueservice.tumblr.com, where people can search “scam” to find all the scam-related posts.
How would you like to get a higher return on your investment portfolio without taking on any more risk? Believe it or not, it's easy to do. All you need to do is set up your various investment accounts to take full advantage of the current tax rules. And with taxes at the highest rates in recent memory, tax-wise investing is even that much more valuable to you.
The first step is obvious. Start by maximizing your contributions into your retirement accounts such as IRAs, 401(k) and 403(b) accounts, and self-employed retirement plans is a great first step. Amounts contributed to these accounts are generally tax deductible and always grow tax deferred unless you go with the Roth version of the retirement plan. That means you won't owe any taxes on the investment earnings until you begin withdrawing money from your pre-tax accounts. Each year you can contribute quite a bit of money into these accounts - up to $18,000 into your 401(k) or 403(b) plan this year, or up to $53,000 into your self-employed retirement plan. Higher limits apply if you'll be 50 or older by December 31, 2015.
To illustrate the power of tax-deferred investing over your working years, let's assume you have the choice of contributing $10,000 to a 401(k) plan each year for 25 years, or you can take the $10,000 as a bonus, pay the applicable taxes, and then invest whatever's left. If you choose the 401(k) plan route, your account will grow to be worth more than $1,000,000 after 25 years, assuming a 10% rate of return. If you choose to pay taxes along the way, your investment portfolio won't even grow to $500,000 over the same period of time.
Next, take a look at your tax-free investment opportunities. These include Roth IRAs for your retirement and and 529 Accounts for your child's education. You don't get a tax deduction for contributions made into these accounts, but you'll owe no taxes on amounts withdrawn, as long as certain conditions are met.
If you haven't taken full advantage of these tax-free investment opportunities for 2014, there's still time. You have until April 15th to contribute the maximum of $5,500 ($6,500 if you were 50 years old by December 31, 2014) directly into a Roth IRA, subject to certain income limitations, or first into a traditional IRA that you will convert to a Roth IRA.
Investing in tax-favored accounts is only half the battle. It's also important to give some thought as to the specific investments you'll hold within your taxable accounts and your tax-advantaged accounts.
As a rule of thumb, try to hold those investments that pay out the least amount of interest and dividends within your taxable accounts. Examples of tax-wise investments for your taxable accounts include index funds, ETFs, individual stocks, and "tax-efficient" mutual funds. These investments generally pay little or no dividends each year. Remember, while the tax rate on interest and dividends can be as high as 43.4% this year, the long-term capital gains tax rate for most individuals is capped at 23.8%, as long as the investment is held for more than 1 year before being sold.
You might also consider switching some of your fixed-income and money market investments to tax-exempt bonds, bond funds and money market accounts. Since the earnings on these investments generally isn’t subject to federal income taxes, this strategy could help you increase the after-tax return on your fixed-income investments. Most of the mutual fund companies offer a variety of tax-exempt investment choices.
Finally, in your tax-advantaged accounts, hold those mutual funds, bond funds, and other investments that historically pay out large dividends each year, since you aren't being taxed on the investment earnings within these accounts.
By maximizing contributions to tax-advantaged accounts, and giving some thought to the investments you hold in each of your accounts, you should be able to increase the after-tax return of your investment portfolio without taking on any more risk.
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