With tax season in full swing, here is a reminder of hazards
that can trip up taxpayers. These errors aren’t the obvious bloopers that cause
trouble, such as entering income information incorrectly or misstating Social
Security numbers. Instead, they are tricky issues that often confuse taxpayers
who do their own returns—and even some paid preparers—and cause people either
to overpay Uncle Sam or invite an IRS challenge. Here are issues to be aware
of, starting with those that are new this year.
New health-care
forms. The Affordable Care Act, the health-care law passed by Congress in
2010, brings two new forms many taxpayers will need to file with 2014 returns.
Form 8962 is for people claiming a tax credit to help pay
for coverage through federal or state exchanges, the online marketplaces for
buying health insurance. Since this is the first year for such reporting, the
IRS has said it won’t impose certain underpayment and late-payment penalties
related to this form. But to qualify for the relief, people must file their tax
return or an extension request by April 15.
Form 8965 is for millions of people who qualified for
exemptions from ACA coverage. Its instructions also explain how people who
didn’t have approved coverage should calculate the extra tax they owe and
report it on Line 61 of Form 1040.
New IRS reporting on
options. New rules affect options, both those traded on the open market and
those received as compensation by employees. Brokerages and other financial
firms must report to the IRS sales of stock and debt options acquired in 2014
if they involve an exchange of cash.
This year, for the first time, brokerages aren’t permitted
to report the investment’s cost on the 1099-B form, which would help lower the
taxable gain on the sale. It is up to the taxpayer to include it. People who
are unaware of this omission could easily overpay their taxes.
A different problem arises if the employee ignores the
brokerage’s 1099-B report for sales of option shares because the income already
has appeared on the W-2 form. This information on 1099-B forms must be
accounted for on forms associated with Schedule D (Capital Gains and Losses).
If it isn’t, the IRS will likely notice that it is missing and send a letter.
Charitable donations.
Numerous strict rules apply to deductions for charitable gifts, and errors are
common. For pure cash donations of $250 or less, a bank record may suffice. For
donations of property such as used clothes or books that total less than $500,
a receipt from the charity also may be adequate.
In many cases, however, it is best to have a notice from the
charity in hand before taking a deduction. The notice should state the date and
the amount of the gift and also the value of any goods and services you received—such
as a tote bag, dinner or auction prize.
Special rules apply to donations of cars, inventory and
appreciated assets, as well as to noncash property worth more than $500,000.
State-tax refunds.
These payments can be tricky: Sometimes they are taxable, and sometimes they
aren’t. If you received a state-tax refund for 2013 last year, and you took the
standard deduction in 2013, then the refund isn’t taxable. If you itemized your
deductions, the refund is likely to be partly or fully taxable, and your state
will tell the IRS about it—although it may not send you a paper copy. An
omission on your tax return, however, will probably bring a letter from Uncle
Sam.
Unemployment
benefits. Unemployment pay is taxable, and forgetting to claim it as income
often will generate a letter from the IRS. But don’t forget to account for tax
already withheld from the unemployment pay, which experts say some people
overlook.
Mileage deductions.
Taxpayers who qualify are allowed to deduct the expenses of driving their own cars
for business, medical, moving or charitable purposes. Taxpayers must be able to
support the deduction with a log or other records, and the IRS looks askance at
large deductions.
Passive losses on
real estate. Certain real-estate professionals can fully deduct losses on
rental properties immediately, while for other investors they often are
postponed until the property is sold—which could be years later.
Net investment income
tax. This 3.8% surtax—enacted as part of the Affordable Care Act—applies to
certain net earnings from investments owned by most couples with more than
$250,000 of adjusted gross income and singles with more than $200,000. Such
income can be reduced by deductions for applicable state and local taxes,
investment interest expenses, tax-preparation fees and net operating losses,
among other items.
Alimony. This
spousal support is deductible by the payer and taxable income to the
recipient—unlike payments for child support and property settlements. But a
government study released last year found huge discrepancies between total
alimony deducted and total alimony claimed as income. The IRS has since changed
its audit filters to pick up more of these discrepancies.
Foreign accounts or
payments. U.S. taxpayers with global financial ties face some of the worst
tax hazards of all, as they can wind up owing large penalties simply for not
reporting information to Uncle Sam, as well as for not paying taxes owed.
New laws and other efforts have stepped up what was
previously lax enforcement of foreign-reporting rules. For more information,
see the instructions for IRS Forms 8938 and 3520.
Click
here to access the full article on The Wall Street Journal.