How to Manage Tax Deductions
Tax laws are complex
Tax laws are getting more and more complex. Even with online filing available, there is still a myriad of ways consumers can get tripped up. Although some people choose to have their returns prepared by tax professionals, many more do the job themselves. For those who want to avoid tax debt, there are some basic rules to follow.
Report all income
One of the biggest mistakes people make (and the easiest one to avoid) is failing to report all income. This is by far the most common reason taxpayers get audited. There are some people who believe that if pay doesn’t come with a 1099 form, it isn’t worth reporting. Though this is a nice fantasy, the IRS has a different set of operating rules. Income is income and regardless of how small it is, it needs to be reported. The long arm of the IRS seems to be able to find out where money is going and who received it. To protect themselves, taxpayers need to be aware that all income must be reported. The usual penalty for failure to do so is 6% per year but it can be as much as 20% in some cases.
Keep business records straight
A frequent problem area for taxpayers is business expenses. Too many people report false or padded expenses on their tax returns and hope the IRS buys it. This is always a bad idea. First of all, business expenses need to be logical. For example, a small online web-development company probably won’t be able to justify buying an office cappuccino machine. Next, reasonable business expenses must be supported by proper documentation. Receipts are crucial for any item reported as a business expense. The IRS will want proof of when, where, and how much the item costs.
Get receipts for charitable contributions
For consumers who want to list charitable contributions on a tax return, receipts are critical. The IRS is never satisfied with a number on a tax return, without supporting documentation. It wants to see receipts. If a contribution is over $200, the taxpayer needs to have a letter from the charity that substantiates it. Also, contributions in exchange for dinner or merchandise can only be deducted to the extent that the contribution exceeds the fair market value of goods or services received in exchange.
Keep a travel mileage log
Another problematic expense on tax returns is mileage. Many times, salespeople and other employees are entitled to deduct miles traveled for work. The IRS allows the deduction, but only with the proper records to support it. I you are entitled to deduct mileage, you must keep an accurate travel log. It must include dates, miles, reason for the trip, names of persons contacted, and any other costs involved. For example, a salesman who travels 100 miles to take a high-profile client to dinner needs to keep receipts for gas, dinner, and any tolls paid along the way. The IRS will want to see all the receipts to verify deduction of expense.