During the beginning of the year many clients seem most concerned about their finances and taxes. Therefore in this segment we decided to devote this first installment to tips to reduce your individual taxes.
How did I do?
Did you make more or less money than you anticipated?
Do you think that you paid Uncle Sam enough in advance to avoid a large tax bill when you file by April 15th?
Are your 2014 records as robust as you would like them to be?
What to do now
As your year-end documents start to arrive, begin gathering your information now and requesting any missing statements, to avoid the April 15th deadline rush.
If you have not already done so, set up a folder to store all of the paper documents and if you are computer savvy consider scanning the documents and saving as password protected files. Also consider setting up a computer spread sheets using Excel or another software to summarize and capture important deduction details such as charitable donations, unreimbursed employee business expenses, rental property repairs, investment expenses, etc…
3 Tips to save taxes
- Understand the difference between a deduction versus a cash outflow
- Ensure all brokerage statements are complete
- Report all income
Deductions versus cash outflow item
Over the years you have probably found out (hopefully not the hard way through a tax audit) that not all cash outflow items are tax deductible.
Try this exercise with three columns for computer users or 3 stacks if using the manual method:
- Deductible (i.e. church contributions, charitable foundations)
- Not sure if deductible (i.e. radio-a-thon fundraiser, mortgage payments for rental)
- NOT deductible (i.e. political contributions, girl scout cookies)
For the items that are in the “not sure” column/stack either do more research to determine deductibility or bring to your CPA or professional tax preparer to help determine if any portion is allowed.
Report all brokerage activities
Often times brokerage statements are amended after they are received or you may have switched companies and forgotten about the activities.
You can avoid missing year-end statements by gather a quick list of broker relationships, look at the previous year’s tax documents, check out mid-year if there are additional brokerage relationships and at year-end if less.
Remember, although Uncle Sam uses fairly complex software that identifies and captures sales of investments, unfortunately the cost basis is sometimes missing (not reported by the brokerage house to the IRS) so you might receive a threatening letter stating that you forgot to report some much larger amount on your return.
Unreported money is NOT tax-free money
Just because you did not receive a 1099-Misc for that 1-day freelance activity or bank savings account that you rarely use, these figures were probably reported to the IRS, especially if the payer uses a CPA or professional tax preparer.
All income is reportable, even if you do not receive a year-end form. The form might be late or lost in the mail.
What if you are audited? You will want to make sure that all of your deposits and funds spent can be accounted for properly and there are no sources “unknown.”
Most likely you have expenses to account for some or all of the income and would miss out on these if you fail to keep up with this data.
Always remember “Big Brother” is watching (trusting but always re-verifying).
Use this time to get a jump on gathering your deductible expense and taxable income so you can have an uneventful season.