3 Common Tax Return Myths

Nobody wants to be the target of an IRS audit. Fear of an audit leads taxpayers to believe myths about what may or may not catch the eyes of the IRS. Unfortunately, these misconceptions could steer taxpayers toward greater audit risk and a higher tax liability. Below, I unpack three widespread individual tax return myths — and reveal the truth behind them.

Myth #1: Extending an Individual Return Increases Your Chances of Being Audited

The IRS offers an automatic six month extension to all individuals with no explanation necessary. If the IRS viewed extended returns as risky, then there would be rules in place to restrict extensions. Quite the opposite is true — the IRS makes it very easy for individuals to file extensions.

Individuals may rush to file their personal returns out of fear that they will be penalized for an extension, even if their returns are incomplete or inaccurate. This behavior may result in higher audit risk if the IRS catches the inaccuracies. Instead, taxpayers should take the time to collect and review their tax information to ensure they have included everything. If that involves filing an extension, then it is better to extend than to file without all of the information.

While an automatic extension extends your time to file your income tax return, it does not extend the time you have to pay your tax. If you expect to owe additional money with your income tax return, then you will need to pay all tax due when you file your extension.

Myth #2: Getting a Large Refund Means You Are Maximizing Deductions and Minimizing Risk

A large income tax refund may simply mean that you are over withholding on your Form W-2 or overpaying your estimated taxes. That refund is actually interest-free money that you overpaid to the government.

Be leery of those who brag about their IRS Refunds. Rather than optimizing deductions, they may be getting back money that they had over withheld. Discuss your personal circumstances with your CPA to ensure that you maximize your deductions.

Large refunds have now become potential red flags for the IRS. With the drastic increase in identity theft, the IRS is now on the lookout for returns seeking large refunds to ensure that those returns are legitimate.

Myth #3: Individuals Should Not Take the Home Office Deduction Due to Audit Risk

Unlike in the past, working from home is very common today due to technology and the savings to companies in office space. Therefore, remote employees and the self-employed do not necessarily increase their audit risk.

There are some rules to consider. First, individuals can only claim space used exclusively and regularly for business. Also, the home office deduction is available only to individuals who do not have nearby access to a physical office location. Also, the deduction is only allowed to the extent of profit in the business.

If you have additional tax questions, give me a call at (713) 785-8939. I’d love to hear from you.

5 Tips for Tax-Smart Charitable Contributions

The generosity of the American people is never more evident than during a disaster event. Houston has experienced widespread devastation as a result of Hurricane Harvey. In its aftermath, hundreds of relief funds are being set up and promoted to aid those impacted by the storm. You clearly want to help, so how do you ensure that your generous donation will not only benefit those in need but also be tax deductible?

Here are a few things to consider.

1. Verify Tax Exempt Status

Make sure your recipient organization has been granted 501(c)(3) tax exempt status by the Internal Revenue Service. These organizations have been established for charitable purposes and donations to them are tax deductible as allowed by law. They also are required to file annual tax returns reporting their charitable contribution income, their unrelated business taxable income, and their business expenses. These returns are available for public inspection, usually upon request. You can confirm an organization’s exempt status on the IRS website.

2. Get a Receipt

Organizations that are eligible to receive tax deductible donations are required to provide a receipt to donors for any gift of $250 or more. The receipt acknowledges the donation amount, the date of donation, the organization’s tax exempt status, and their tax ID number. You should obtain and keep the receipt as additional support for your tax deductible donation.

3. Be Wary of Crowdfunding

Crowdfunding sites such as GoFundMe or YouCaring are popular ways to raise money for various types of causes on social media. Since crowdfunding websites are open for use by anyone, many of the funding pages are not established by qualified charitable organizations. Before giving through such sites, do your homework to ensure that your support is going to a charitable organization with qualifying tax-exempt status.

4. Appreciated Securities

Consider donating appreciated stocks, bonds, or mutual funds to a charity or a donor advised fund. When you donate appreciated securities held longer than a year, you are able to deduct the fair market value of the security as a charitable contribution. This also avoids the capital gains tax because the security is being donated instead of being sold.

5. Autos and Boats Worth More Than $5,000

In most cases you will need a written appraisal, which will be attached to the return. You will also need a written acknowledgement from the donee organization which will include any proceeds from the disposition of the vehicle by the donee organization. This acknowledgement must also be attached to the return.

In addition, you will need a Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, from the donee organization. Most charities will use the Form 1098-C to fulfill the written acknowledgement requirement. And yes, you will attach the Form 1098-C to your tax return.

If you have additional tax questions, give me a call at (713) 785-8939. I’d love to hear from you.

9/12 Weekly Tax Letter: Casualty Loss Deduction and New Filing Deadline

Dear Taxpayer,

I would like to send you my weekly tax letter to keep you informed and also to stay in touch.  I will try to keep it to the point and informative.  If you have questions, please feel free to call me at 713-785-8939.  If you think a friend would benefit then pass it on.  Let’s begin.

Casualty Loss Deduction from Hurricane Harvey

I promised that I would explain the rules and the math behind this deduction in my last letter.  I will try to give you the most important things you need to know in a simple example.  Remember to take photographs of the damage and to use your HCAD appraisal for your allocation.  This example will have a family that had their home and their car flooded.

For each asset, you are allowed to deduct the lower of the fair market value (FMV) before the storm or your cost basis, less insurance proceeds, less the FMV after the event, less $100 per item, and for each event subtract 10% of your adjusted gross income (AGI).

Example: Your home was flooded by Hurricane Harvey.  The FMV of your home before the event was $300,000, of which $100,000 was land and $200,000 was improvement.  You bought the home in 2010 for $150,000.  The FMV of the improvement after the event was zero, your insurance proceeds were $40,000, and your AGI was $120,000.  Your car was a total loss.  Your cost was $21,000 and the FMV before the storm was $10,000, the insurance proceeds were $7,000.

Your Casualty Loss Deduction would be $50,800.  Computed as follows: ($100,000 less $40,000 less $100 plus $10,000 less $7,000 less $100 less $12,000 equals $50,800).

This example is very simplified and does not include personal property.  I would combine your personal possessions such as furniture, clothing, and household items into one amount.  Remember, you deduct the lower of FMV or cost.  Also remember that you may amend your 2016 tax return to take the deduction or wait and take it on your 2017 Form 1040.  You will also need to provide the date you acquired the property and the date you incurred your casualty loss.  The casualty loss deduction is taken on Form 4684 Casualties and Thefts.  I imagine this leaves many of your questions unanswered, so please give me a call if I can be of any further assistance.       

New Filing Deadline

The filing deadline for income tax and payroll tax returns and estimated tax payments due on or after August 23, 2017 and before January 31, 2018 have been pushed back to January 31, 2018.  It includes taxpayers who had valid extensions to file their 2016 return that would have been due on either September 15, 2017 or October 16, 2017.  It also includes the quarterly estimated tax payments originally due on September 15, 2017 and January 16, 2018, and the quarterly payroll tax returns normally due on October 31, 2017.  Please don’t wait until January 31, 2018.  Come and see me as close to the original due date as possible – you will be glad you did.  Thank you.  See www.irs.gov for more details.

Till next week,
Robert Stevenson, CPA
September 12, 2017