23 June 2017

Last-Minute Tax Moves

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With the April 15 deadline less than three weeks away, taxpayers have filed just over half of the 150 million returns expected this year. If you do your own taxes, don’t expect much help from the Internal Revenue Service. With funding cut to 1998 levels, after adjusting for inflation, the agency is answering only 43% of phone calls from taxpayers, according to IRS Commissioner John Koskinen. Here are tips for coping with new and recurring issues this year.

Understand the new health-care provisions. Under the Affordable Care Act, filers this year must check a box on Line 61 on the 1040 form if they had approved health-care coverage for all of 2014, or possibly pay a penalty if they didn’t. The instructions for Form 8965explain how to calculate the penalty.

Employers aren’t required to provide evidence of ACA-approved insurance to employees until the 2015 tax year. Millions of people also qualify for exemptions from required ACA coverage.

Beware of new rules on employee stock options. Starting in 2014, financial firms have to report income from the sale of certain employee stock options to the IRS if the taxpayer receives cash. As a result, income could be reported to the IRS twice—once on the W-2 form from the employer and again on the Form 1099-B from the brokerage firm. Taxpayers who aren’t aware of this double reporting could overpay, especially if the amount of income is small.

But sellers of options shouldn’t ignore the 1099-B simply because there is overlap with the W-2. The IRS computer will almost certainly notice it is missing and send a letter. Instead, both reports must appear on the return. If they are properly accounted for, the taxpayer won’t overpay and the IRS will be satisfied.

Double-check W-2s, 1099s and other income reports. The only category in which the number of audits increased last year was in so-called correspondence exams of taxpayers earning more than $200,000, though the percentage of such audits fell. Correspondence audits can be triggered when IRS computers spot a mismatch between a taxpayer’s return and a report by a third party such as a bank, financial firm or employer.

To avoid the hassles of such audits, especially when they are unnecessary, it is important to scrutinize income reports such as W-2s and 1099s sent to the IRS about you. Try to have errors corrected by getting a revised form.

Got charitable donations? Get proof. Tax rules are clear and have been tested in court: To take a deduction of $250 or more, a taxpayer must have a notice in hand from a charity before taking the deduction. It should give the date and amount of the donation and the value of any goods or services received in return, such as a dinner or a party favor.

For cash donations of less than $250, a bank record such as a canceled check may suffice. For donations of property such as used clothing or books totaling $500 or less, a receipt from the charity also may be adequate.

Maximize medical deductions. The hurdle for taking medical deductions is high: 10% of adjusted gross income for taxpayers younger than 65, or 7.5% for many taxpayers older than that. But taxpayers who qualify should remember that a variety of expenses that aren’t covered by health insurance are tax-deductible. These can include inpatient hospital or nursing-home care, acupuncture, a smoking-cessation program and even attendance at a conference on a chronic disease.

Write-offs for transportation costs, nontraditional medical treatments, and tuition for special-needs children also are typically allowed.

Take the right education break. There are a host of tax breaks for education, but often taxpayers must choose among them. For most, the best benefit is the American Opportunity Tax Credit, a tax offset of as much as $2,500 per student a year. Don’t confuse it with the $4,000 tuition and fees deduction, which merely reduces taxable income and is likely to save less.

These breaks are subject to income limits. For the American Opportunity Tax Credit, the benefit begins to phase out at $160,000 of adjusted gross income for most couples and $80,000 for singles.

Disclose foreign accounts and payments. U.S. taxpayers with foreign financial accounts or payments above certain levels—including an inheritance from a relative abroad—can wind up owing huge penalties if they don’t properly report them on IRS Form 8938 or 3520, which are due with the tax return, or on the Treasury Department’s FinCen Report 114, due June 30. For more information, see the instructions to these forms.

These rules don’t apply to investors in U.S.-based stocks, mutual funds, exchange-traded funds or entities with foreign holdings.

Update logs and records. Now is the time to get records in order for audits that may not arrive for two years. The IRS likes to see logs for deductions related to business, charitable or medical travel. State tax officials can be picky about proof that a taxpayer with a home in state didn’t reside there for more than 183 days—and hence doesn’t owe income taxes.

Gauge the year ahead.  Tax planning often adds the most value when there is an unusual event, especially if the event can be timed—as with the sale of stock options. If you see such a change coming, act now to lower your future taxes.

Click here to access the full article on The Wall Street Journal. 

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