Some final tax-filing tips and warnings
Saturday, April 11, 2009
This last weekend before the tax filing deadline doesn't have to be your return's Lost Weekend..
OK, maybe that 1945 Ray Milland classic film isn't the best metaphor. Then again, after dealing with taxes as the deadline bears down, you might want a drink or two. But I digress
The fact is there is still time to get your 1040 done and into the IRS by Wednesday. Just knuckle down and do it. That's my plan as soon as I get this posted.
I've got everything sorted. My biggest challenge is going through all my self-employment expenses. I try to keep good track, but every year I find notes in my business travel file folder that say "mileage to/from" various locations I've gone to for business meetings, seminars, conferences, etc.
Yes, I know I should be more precise. But in most cases, the amount is a repeat. For example, my freelance group meets once a month at the same place. I just need to find that January 2008 notation with the exact mileage and replicate it for each of the notes I dropped in the file for the subsequent meetings.
Of course, I've also backed up my attendance by noting the meetings in my calendar, as well as with the notes I took at each gathering, just in case the IRS ever asks.
Audit areas: And the tax man might one day ask. Not because I'm such a scofflaw, but because I am self-employed.
We small business folks are attractive audit targets because the IRS depends primarily on just us to accurately report our income and deductions. Aside from 1099-MISC forms indicating payment, and not every client provides those, there's not a lot of third-party verification for the IRS to double check.
In Navigating a Tax Return Minefield, New York Times reporter Tara Siegel Bernard examines areas where filers tend to fudge. Following are her categories and my thoughts on them.
Charity: Cash donations (this includes actual currency and also contributions by check or charge card) require a receipt or bank record.
Valuing donated goods, which now are supposed to be in good or better condition, is a bit dicier for the IRS to determine.
Get details on donation tax considerations in this post.
Capital gains: The amount you got when you sold is recorded and reported to IRS by your broker or the fund or stock manager, but you get to come up with the basis amount. For tax purposes, that's the figure that counts.
Your sale amount minus your basis equals your profit. A larger basis means less profit and that means a smaller tax bill.
Right now the IRS counts solely on your veracity in calculating your basis, but that will change somewhat next year. Starting in 2011, a new law will require brokers to report investor basis on investments bought after 2010,
Home office: This deduction is not as big an audit red flag as it used to be. However, since more entrepreneurs (including many who were forced into opening their own businesses because of layoffs) are working from home, there are more chances for the IRS to make sure this deduction is correct.
And that also means there are more taxpayers who will mess this up, either intentionally or by legitimate mistake.
At a meeting of freelancers last week (that repetitive mileage reporting event I mentioned earlier), several folks were surprised to learn that a home office doesn't have to be a separate room. Just a portion of a room can count as long as that space is used regularly and exclusively for business. More on the finer points of the home office deduction in this blog post and story.
Quasi-personal expenses: One of the things I advised the freelancers against last week was mixing (or mixing up) business and personal expenses. As the Times' story notes, this gets complicated when you take a spouse on a business trip with you.
Even locally, if you use your personal credit card to pay for a business expense, you've created a tax problem. Sure you can notate the receipt, just as you would if you'd used your business-only piece of plastic, but you're on much more solid tax ground by having separate business bank and charge accounts and using them for their designated purposes.
Cleaning quibble: At the end of the Times' story, a tax pro talks about how people tend to think they can deduct a lot more than they really can. "And no, you can't write off your dry cleaning," he says.
But in some cases, you can deduct your dry cleaning.
Of course, there are limits which tend to make this tax break effectively useless for many folks, but ...
Say you have a job that requires you to wear a special uniform. (Sorry, active duty servicemen and women, this doesn't apply to you.) Dry cleaning costs for your uniforms (or protective clothing your job requires) can be counted as unreimbursed business expenses.
The keys here are that the clothing is a job requirement and it's not suitable for everyday wear.
This eHow article provides a step-by-step guide to deducting work-related dry cleaning.
Of course, that deduction is part of the miscellaneous itemized group on Schedule A. That means the costs must come to more that 2 percent of your adjusted gross income before you can claim them. It's going to take a lot of dirty clothes for most people to get over that deduction hurdle, but technically dry cleaning costs can be deductible.
A few more people might be able to claim dry cleaning as a charitable deduction.
As a high schooler, I was a Candy Striper at our local hospital; the older women who volunteered were Pink Ladies. We bought our own colorful uniforms and were responsible for their upkeep.
When you volunteer for an IRS-qualified organization that requires you to purchase a uniform, you can deduct both the purchase price and any upkeep costs.
As with work apparel, the nonprofit must require that you wear the uniform while performing your volunteer services.
And again, the uniform must be something that's not suitable for everyday use. I know that today a lot of things get worn "out of context," but you and the IRS know what is meant here.
If I'd been filing taxes back then and itemizing, I could have counted my red-and-white jumper cost and upkeep as a charitable deduction.
This deduction is a bit easier to claim, since in most cases there are no income thresholds or percentages to worry about.
Some last-minute filing guidance: If you can count some of your dry cleaning on your 2008 tax return, good for you. For some other possible deductions and more helpful last-minute tax hints, check out:
Meeting your tax-filing deadlines (an excerpt from my book, The Truth About Paying Fewer Taxes)
And don't forget, if you just can't complete all the paperwork by Wednesday, get an extension. Just send in Form 4868, either via snail mail postmarked by midnight April 15 or electronically by 11:59 p.m. on Wednesday.
That will give you six more months to get your Form 1040 and all associated schedules and other forms filled out and to the IRS.
Remember, though, you still have to send in any tax you owe (or a good approximation thereof) with your extension request or the IRS will start tacking on interest and penalty charges.
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Posted by: Elisa Allen | Sunday, October 24, 2010 at 04:42 AM
What are common things that cannot be deducted as business expenses? I have trouble classifying some of my expenses every time I go to file...
Posted by: Jon | Monday, January 25, 2010 at 03:01 PM
in 2008 I replaced all the vinyl blinds in my house to wood to help lower the energy bill. Would I be able to write this off on my 2008 taxes?
Posted by: Rene | Monday, April 13, 2009 at 11:24 AM