Income Tax Deductions – The Most Common Ones

Common income Tax Deductions

We have written before about the importance of income tax deductions.  After all, deductions are an important factor in determining how much you are going to pay in income taxes.  The more deductions you can take, the lower your taxable income and thus, the lower your income taxes.  While there are hundreds, and perhaps thousands, of legitimate deductions that taxpayers may use to lower their income tax bill, most people make use of only a handful of them.  In a recent post, we wrote about some unusual income tax deductions that people have used over the years, and now we’ll turn the tables a bit and focus on some of the most common deductions that American taxpayers take.

income tax deductions - charityCharitable Donations – Americans remain a charitable lot, giving money to churches and nonprofits on a regular basis.  These donations, whether in the form of cash or goods, are legitimate income tax deductions, though it’s advisable to keep accurate records of your donations.  If you regularly write a check to your church, be sure to make note of it.  If you donate used goods to a charity, be sure to get a receipt or document the donation in some other way.

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Income Tax Fraud Hinges on the W-2

Income Tax Fraud and the W-2

We’ve written before about the growing problem of income tax fraud in the United States.  With the ease and speed of filing tax returns electronically and receiving refunds the same way within a matter of days, rather than weeks or months, unscrupulous individuals have discovered that income tax fraud pays pretty well, even when compared with other crime.

income tax fraud criminalThe crime of income tax fraud starts with simple identity theft; one only needs to have someone’s name and Social Security number in order to file a fraudulent tax return on their behalf.  The thief can change the mailing address on the 1040 form and have the refund sent to an address of their choosing or to a bank account or even a debit card.  Most income tax fraud happens relatively early in the tax season, as the crime only works if the thief can file a return before the person who actually owns that particular Social Security number can file their own return.  It’s easy to do, since employers aren’t required to mail W2 forms to their employees any earlier than the first of February.  At that time, they also send duplicate copies of those W2 forms to the IRS, ostensibly so that the agency can compare the information on the W2 they receive with the information supplied on the tax return.

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Income Tax Deductions – Context is Everything

Income Tax Deductions – It’s All About Context

In the United States, we have a hugely complicated income tax system.  The tax code, at last count ran more than 70,000 pages and no one really claims to understand it.  We all know that we must pay our income taxes each April, and that we are allowed to pay those taxes on our net income after allowable income tax deductions.  After that, everyone pretty much gets lost, and they either have their taxes prepared for them or they use tax preparation software to sort out the details.  Studies have shown, however, that average taxpayers really have no idea what is and what is not allowable when it comes to income tax deductions.  Those taxpayers that do claim to know something about it often wrongly assume that the judgment regarding whether certain things are allowable income tax deductions are binary; that is, something is either an allowable deduction, or it is not.

income tax deductionsThe truth, of course, is far more complicated than that.  In fact, almost all of the things that are considered to be permissible income tax deductions may not be permissible under certain circumstances.  Under other circumstances, items that the average person would dismiss out of hand as not being deductible have been allowed by either the IRS or the courts.  What’s the determining factor regarding whether certain things are considered valid income tax deductions under some circumstances but are deemed unallowable under others?

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Tax Protestors Invoke the Constitution

Tax Protestors and Tax Resistance

It’s not a secret that a lot of people in the United States don’t like paying income taxes.  The aversion to taxation is natural and seems to apply to taxpayers in all countries.  It’s rather surprising to see the tax resistance movement so strong in the United States, however, since the U.S. has some of the lowest income tax rates in the world.  Still, there are tens of thousands of people who argue every year that either Federal law or the U.S. Constitution actually make it illegal for the U.S. government to collect taxes from its citizens.  As you might expect, these arguments are never successful in court, and those attempting tax resistance through the use of these arguments generally end up paying taxes and court costs or serving time in prison.  Below, we’ll cover a few of the more interesting arguments put forth by tax protestors in defense of their unwillingness to pay income taxes.

filing income taxesSovereign Citizens

Some bold taxpayers claim that they simply aren’t citizens of the United States, but are actually “sovereign citizens”, effectively constituting a nation unto themselves.  They claim that they have requested nothing of the government, and therefore owe the government nothing.  Courts have ruled otherwise; if you fit the description of a citizen or a legal resident, you’re required to pay taxes, period.

Federal Zone Arguments

A few tax protestors have gone to court, claiming that the right of the Federal government to tax citizens only applies to “federal zones”, or those areas under direct Federal control.  Such areas would consist of Washington, DC, or U.S. military bases, either within the U.S. or abroad.

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Income Tax Fraud and Scams on the Rise

TurboTax Fraud Increasing

Tax fraud seems to be on the rise around the country as more and more states are seeing fraudulent tax returns being filed.  So far, some nineteen states have reported seeing fraudulent returns filed, and Intuit has responded to a rash of fraudulent filings by temporarily stopping the processing of state income tax filings through their TurboTax software.

Tax fraud is nothing new, and criminals know that filing a fake return is an easy way to pick up some quick cash.  By stealing the identity or personal information of a working taxpayer, the criminal can file a tax return with information that would warrant a refund before the legitimate taxpayer can file it themselves.  By having the refund sent to an alternate address, they can collect the cash before the victim has even had a chance to file their return.  This has been going on for years, but the problem seems to be on the increase.

turbotax reports fraudulent returnsUnfortunately, there’s little the victims can do to prevent this, as the perpetrators already have their Social Security numbers or other personal information required to file a return on their behalf.  Criminals seem to prefer to do this with state returns, which generally have somewhat more lax security built into the process than the Federal returns.  As Federal returns tend to be larger, the IRS has greater incentive to keep their systems more secure.

Intuit gave no indication as to when they’ll allow taxpayers to resume filing state returns, though they are still permitting people to use TurboTax to file their Federal returns.  TurboTax is one of the more popular do-it-yourself tax preparation software products on the market, and nearly thirty million Americans used it last year to prepare their Federal and/or state income tax returns.

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Suggestions for Avoiding a Tax Audit

Avoiding an Income Tax Audit

It’s no secret that nobody likes paying income taxes and of course, no one likes to get audited.  While the vast majority of the tens of millions of income tax returns that get filed every year are processed by the IRS without issue, on occasion, the system will mark a particular return for an audit.  This involves meeting with an IRS agent and discussing the details of that particular tax return.  While there is no published list of things that might trigger an audit, and many of them are simply selected randomly as part of the way the IRS operates, there are a few things that can trigger an audit and you should be careful when filing your return to avoid some of the traps listed below.

avoid an income tax auditIncome levels – We all want to earn a lot of money, as having a lot of money simply makes life easier than being poor.  On the other hand, those taxpayers with high incomes are simply more likely to be audited than those with lower income levels.  There are a number of reasons for this; high earners are more likely to be itemizing deductions and some of those can invite scrutiny.  In addition, since high earners are also more likely to be paying higher taxes, they’re more motivated to find ways, legal or not, to lower their taxable income.  There isn’t anything wrong with earning a lot of money and no one discourages that.  Still, those who earn higher incomes are going to more likely, on average, to be audited than those at the lower end of the income scale.

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Affordable Care Act Complicates Income Tax Returns

Filing Federal income tax returns is an annual task that few taxpayers enjoy, and the process rarely varies.  For most taxpayers, filling out the forms is simply a matter of providing income, subtracting a few deductions, such as those for mortgage interest or dependent children, and letting your tax preparation software or tax preparer handle the rest.  Then you file, either by mail or electronically and wait for the refund if you have one coming, or for the IRS to cash your check if you don’t.  It’s an unpleasant task that has to be done, and it rarely varies.

income taxesThis year, it’s going to be different for a few million taxpayers, and different isn’t necessarily going to be good.  While the Affordable Care Act was signed into law back in 2010, the major provisions in the bill didn’t take effect until last year.  The most significant of those provisions was the one that required all Americans to purchase health insurance coverage or to pay a penalty if they did not.  The IRS is in charge of assessing those penalties, so the process of filing income tax returns now necessarily includes some questions about the Affordable Care Act.

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Tips to Get Organized Before Tax Time

It’s the start of a new year, and that means it’s time to at least give some thought to how you’re going to get ready to prepare your income taxes.  True, taxes aren’t due, at either the state or the Federal level, until April 15.  That doesn’t mean that you should do nothing until April Fool’s day.  You can, of course, put it off until the last minute, but that tends to become a nightmare and it also tends to lead towards errors as you scramble at the last minute to find some receipt you’re sure you have somewhere or a W2 form that you saw on the counter just last week.

don't be like this - get organizedWe’re not suggesting that you start on your taxes now; after all, employers aren’t even required to send out W2 forms until the end of the month.  On the other hand, it’s never too early to at least give some thought to becoming organized.  The sooner you have everything you need to file your taxes in order and at hand, the more prepared you’ll be when you finally do decide that it’s time to fill out your tax forms and mail them in.  Even better – if you can come up with a good system for storing your necessary documents, receipts and forms year-round, you’ll already have everything pretty much in place when January rolls around each year and that will make the daunting tax of filing your income tax returns a whole lot easier year in and year out.
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Free File Alliance Can Save You Money

Free File Alliance

Americans hate paying income taxes.  That’s a simple fact.  The only thing worse than paying income taxes is having to pay to file them.  Paying money in order to pay money just doesn’t seem right to a lot of people, but tax preparation firms charge a lot for their services; it can cost several hundred dollars to have your taxes professionally prepared for you.  Even if you decide to do your taxes yourself, it can cost you up to $100 or so to make use of professional software in order to file your returns.  That price varies, of course, but it can still amount to a considerable sum of money.  Thanks to the Free File Alliance, it’s possible for many U.S. taxpayers to file their Federal income tax returns for free.

free file allianceOrganized in 2002, the Free File Alliance is a public-private partnership agreement between the Internal Revenue Service and a number of companies that provide tax preparation software to the public.  The idea was to create a way for the majority of Americans to file their returns for free.  The program has been a success; since the Free File Alliance was created, some 40 million Americans have filed their Federal income tax returns this way at no charge.

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Tips to Minimize Your Income Taxes

Income Tax Tips

Nobody likes paying income taxes, and when it comes to that obligation, Americans are particularly hostile to it.  Taxes are essential; they pay for schools and roads and other things that a society needs.  Besides, you can’t get out of paying them, but there’s nothing that says you can’t take advantage of available deductions in order to pay as little as possible.  There are thousands of ways to save money on your taxes, and many taxpayers aren’t aware of most of them.  A deduction that you ignore isn’t going to help you, and the IRS isn’t going to send you a check if you accidentally pay them too much.  While the subject of how to maximize your tax deductions is a complicated one and way too lengthy for this article, we thought we’d point out a few general items that can help you take advantage of legal opportunities to save money on your tax returns.

tax savings tipsTake advantage of opportunities at work – If your company offers a retirement plan, try to maximize your contributions, as these are made before taxes and thus lower your taxable income.  Most employers also offer a flexible spending plan, which allows you to put pretax earnings aside for anticipated day care or medical expenses.  Be aware that this money goes away at the end of the calendar year if you do not spend it, so you will need to carefully consider how much you wish to contribute.   Don’t have a 401(k) plan at work?  You can open an IRA instead.

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