Monday, December 23, 2013

10 Simple Pieces of Tax Advice

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Here are a few of my best pieces of advice when it comes to taxes, in no particular order:

1.  If you are doing something just for the tax benefit, you're probably making a mistake.  Buy a house because it's time, not for the tax break.  Buy equipment that makes your business more profitable or efficient, not to get the deduction.  By all means, take the break, but don't make it a critical part of the decision.

2.  When in doubt, donate it.  If you have stuff you don't want, and you're not sure if it's worth the trouble of selling, give it to charity.  Make sure to deduct it's REAL fair market value, not what Goodwill is selling it for.  Clothes and other used items should be valued based on what a for profit thrift store would sell it for.  If you have a garage sale, don't give into the temptation to mark everything down to nothing at the end.  Ask a fair price, dicker a little, but don't just give it away.  After the sale, while everything left is still on the tables, take pictures of it all, load it in the car, and take it to a charity.

3.  Depreciate your rental property.  This isn't advice - it's a NO BRAINER!  You can't avoid depreciation recapture by not taking it.

4.  Have your taxes checked by a professional, or a different professional once in a while.  Especially have it checked after some big changes have happened.  You can usually find someone to check them for free (hint: ME!)  You would be stunned at the errors I've seen made, and the money left on the table.  You have three years after the due date to fix it, so don't wait to long.

5.  Don't cheat or lie.  Claim all income, don't make up deductions.  Stretch the rules as far as you can, but don't break them.

6.  Along those lines: Don't be afraid of the IRS.  If you're not cheating, you have very little to worry about beyond money and hassle.  Professionals like to scare you with the IRS, and, if you're cheating, you should be scared.  I prefer to scare people with the prospect of not getting all they deserve.  Let's put it this way: Say you've got a nice desk to donate to charity.  You check some stores and ebay, and the values are between $500 and $1000 dollars.  Assuming the $1000 isn't a huge outlier (5 sites between $500 and $550 and one at $1000), take the $1000.  It's reasonable, defensible, and not frivolous.  If you're in the 25% tax bracket, that's $125 on your tax return.  Now let's say the mean old IRS does it's worst, and face to face audits you.  The auditor looks at your documents and tells you the desk's only worth $500.  You argue a bit, but he insists and you have to pay back the $125, plus a bit of interest.  No handcuffs, no jail-time, no yelling or beatings.  You shake hands, sign some paperwork and write a check.  Now let's pretend we're in Vegas.  You find a table that gives you $125, and then spins a wheel, and if you lose you have to give them the $125 back, plus $15, except you only lose 1 out of 100 times!  Who wouldn't make that bet?  That's the same thing we're talking about with the desk.  JUST DON'T CHEAT!

7.  Don't count on getting your refund when promised.  The IRS gives estimates of 10-21 days from e-filing, but they screw this up regularly, and nothing stops them from reviewing it and adding additional delays.  That's also 10-21 days from acceptance, and there are a number of reasons a return might not be accepted.

8.  Don't over-complicate your records, and don't obsess about organizing every receipt.  Keep a good notebook, or series of notebooks that document income and expenses and deductions.  Keep them up to date and save your receipts where you can find them.  They don't have to be in perfect order - the odds that you ever need them is pretty slim, so if you get audited, you can match up your receipts with your books.  Odds are good you'll only have to do this once in a lifetime (literally).

9.  Don't claim kids that aren't yours, even if the parent gives you permission.  Your tax guy can tell you what the rules are to claim kids, and, if you don't meet them, don't do it.

10.  Pay your child support and your student loans.  The number one reason I see for people not getting refunds is delinquent student loans and unpaid child support.  If you're marrying someone with kids from a previous marriage, make sure they're up to date on their child support because their problem is about to become your problem, and it's not that easy to get around it.

BONUS: Don't believe everything you hear about taxes.  The myths out there are LEGION.  Talk to a professional (hint: ME!) or look them up on the IRS website.

Questions: taxadvisor@email.com
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