Eight Common Tax Mistakes to Avoid
Errors that can cause delays…
We all make mistakes. But if you make a mistake on your tax return, the IRS may need to contact you to correct it. That will delay your refund. You can avoid most tax return errors by using IRS e-file. People who do their taxes on paper are about 20 times more likely to make an error than e-filers. IRS e-file is the most accurate way to file your tax return.
Here are eight common tax-filing errors to avoid:
- Wrong or missing Social Security numbers. Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.
- Wrong names. Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.
- Filing status errors. Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on IRS.gov can help you choose the right one. Tax software helps e-filers choose.
- Math mistakes. Double-check your math. For example, be careful when you add or subtract or figure items on a form or worksheet. Tax preparation software does all the math for e-filers.
- Errors in figuring credits or deductions. Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.
- Wrong bank account numbers. You should choose to get your refund by direct deposit. But it’s important that you use the right bank and account numbers on your return. The fastest and safest way to get a tax refund is to combine e-file with direct deposit.
- Forms not signed or dated. An unsigned tax return is like an unsigned check – it’s not valid. Remember that both spouses must sign a joint return.
- Electronic filing PIN errors. When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If not, you’ll need to enter the Adjusted Gross Income from your originally-filed 2013 federal tax return. Don’t use the AGI amount from an amended 2013 return or a 2013 return that the IRS corrected.
Phone Scams Becoming More Prevalent
Things you should know…
Tax scams can take many forms, with perpetrators posing as the IRS in everything from e-mail refund schemes to phone impersonators. Be vigilant of any unexpected communication that is purportedly from the IRS or another government agency. Don’t ever give personal information over the phone, through the mail or on the Internet unless you have initiated the contact and are sure of the recipient.
This year sophisticated phone scams have been on the rise. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. Victims who refuse to cooperate, are threatened with arrest, deportation or suspension of a business or driver’s license.
What makes these phone calls particularly convincing is that scammers use fake IRS badge numbers and are able to recite the last four digits of a victim’s social security number. Scammers also spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling. They follow-up the phone call with fake IRS emails to some victims to support their scam calls.
Scammers go as far as playing background noise of other calls being conducted to mimic a call site. After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
The Federal Trade Commission (FTC) and Federal Communications Commission (FCC) have reviewed thousands of complaints about the scams like this and expect the problem to grow.
The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts, even over the phone.
If you know you owe taxes or think you might,we can work with you in ensuring that you have proper documented contact with the IRS. If you know you don’t owe taxes or have no reason to think that you do (for example, you’ve never received a bill) or receive a call as described above, you may report the incident to the Treasury Inspector General for Tax Administration at 800.366.4484.
Two Tax Credits Help Pay Higher Education Costs
You may be eligible…
Did you, your spouse or your dependent take higher education classes last year? If so, you may be able to claim the American Opportunity Credit or the Lifetime Learning Credit to help cover the costs. Here are some facts about these important credits.
The American Opportunity Credit is:
- Worth up to $2,500 per eligible student.
- Only available for the first four years at an eligible college or vocational school.
- Subtracted from your taxes but can also give you a refund of up to $1,000 if it’s more than your taxes.
- For students earning a degree or other recognized credential.
- For students going to school at least half-time for at least one academic period that started during the tax year.
- For the cost of tuition, books and required fees and supplies.
The Lifetime Learning Credit is:
- Limited to $2,000 per tax return, per year, no matter how many students qualify.
- For all years of higher education, including classes for learning or improving job skills.
- Limited to the amount of your taxes.
- For the cost of tuition and required fees, plus books, supplies and equipment you must buy from the school.
For both credits:
- Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. Make sure it’s correct.
- You must file Form 8863, Education Credits, to claim these credits on your tax return.
- You can’t claim either credit if someone else claims you as a dependent.
- You can’t claim both credits for the same student or for the same expense, in the same year.
- The credits are subject to income limits that could reduce the amount you can claim on your return.
- Give your local Peoples Tax Professional a call to see if you’re eligible to claim these credits. We are happy to help! Call (804) 204-1040 or email us.
Energy-Efficient Home Improvements Can Lower Your Taxes
Find out if you qualify…
You may be able to reduce your taxes if you made certain energy-efficient home improvements last year. Here are some key facts that you should know about home energy tax credits.
Non-Business Energy Property Credit
- This credit is worth 10 percent of the cost of certain qualified energy-saving items you added to your main home last year. This includes items such as insulation, windows, doors and roofs.
- You may also be able to claim the credit for the actual cost of certain property. This may include items such as water heaters and heating and air conditioning systems. Each type of property has a different dollar limit.
- This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.
- Your main home must be located in the U.S. to qualify for the credit.
- Be sure you have the written certification from the manufacturer that their product qualifies for this tax credit. They usually post it on their website or include it with the product’s packaging. You can rely on it to claim the credit, but do not attach it to your return. Keep it with your tax records.
- This credit expired at the end of 2013. You may still claim the credit on your 2013 tax return if you didn’t reach the lifetime limit in prior years.
Residential Energy Efficient Property Credit
- This tax credit is 30 percent of the cost of alternative energy equipment installed on or in your home.
- Qualified equipment includes solar hot water heaters, solar electric equipment and wind turbines.
- There is no dollar limit on the credit for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
- The home must be in the U.S. It does not have to be your main home.
- This credit is available through 2016.
You must file Form 5695, Residential Energy Credits to claim these credits. Give your local Peoples Tax Professional a call to see if your eligible to claim these credits. We are happy to help! Call (804) 204-1040 or email us.
Small Business Corner
Deducting Business Expenses
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.
What Can I Deduct?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
It is important to separate business expenses from the following expenses:
- The expenses used to figure the cost of goods sold,
- Capital Expenses, and
- Personal Expenses.
Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold.
- The cost of products or raw materials, including freight
- Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
- Factory overhead
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
For additional information, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.
You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.
- Business start-up cost (See the note below)
- Business assets
Note: You can elect to deduct or amortize certain business start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses.
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Home Office Deduction and Publication 587, Business Use of Your Home, for more information.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.
Other Types of Business Expenses
- Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
- Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ retirement.
- Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
- Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
- Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
- Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
This list is not all inclusive of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses. Or, give your local Peoples Tax Professional a call to find out what is deductible for your specific business situation. We are happy to help! Call (804) 204-1040 or email us.