It’s Not What You Make That Counts – It’s What You Keep!
By Patrick Astre
hardest thing in the world to understand is the income tax.” –
are two things in life you don’t want to watch closely as they’re
made; the first is sausages, the second is tax laws. While death and
taxes are inevitable, death doesn’t worsen every time Congress
meets. The constant push-pull of special interests, partisan and
“pork barrel” politics left us with an income tax system that is
convoluted and overly complex.
system has one saving grace: it’s semi-voluntary. For example,
everyone knows that if you own a home, you may deduct the property
taxes and mortgage interest. But you are not required to. You could
file form 1040A or 1040EZ, forego deductions and “volunteer” to pay
are more opportunities in the IRC (Internal Revenue Code) than the
common deductions people confine themselves to. These opportunities
are not well-known and are often ignored even by tax planners, CPAs
and attorneys. By ignoring them, you will have “volunteered” to pay
are a number of highly effective strategies that result in paying
less income tax legally without triggering audits. These strategies
enhance retirement, estate and investment planning.
Flexible people never get bent out of shape! Flexible or not,
the strongest person’s knees may turn to Jell-O when the dreaded IRS
audit notice lands in his or her mailbox. It’s one of the most
feared things in life, right up there with public speaking and your
mother-in-law coming to live with you.
are differing degrees and levels of audits, yet they all have one
thing in common: They are triggered by what people put in their tax
returns. The IRS has something called Discriminate Function
programmed into their computers. When the numbers on a return fall
under certain criteria, the return is flagged for manual review. An
agent will determine if that return should be audited. Although the
specific criteria are secret, we know that certain things will
trigger audits: Ratios and unusually high deductions, and certain
tax shelters and strategies. You should claim these deductions if
you have incurred them, but retain documented proof such as receipts
and cancelled checks.
are many legitimate opportunities within the tax code to reduce your
taxes. Proper planning is the key.
The #1 tax audit is due to Earned Income Credit (EIC). The
EIC is a cash credit for low-income workers with dependents. In
1997, 25.6 percent of EIC were erroneous or fraudulent. Congress
meant well, but the rules were so complex and changed so much
that low-income persons couldn’t claim EIC without professional
help they often cannot afford. Be careful with this one!
Round Numbers: Deductions rounded off to the nearest hundred
or thousand will lead the IRS to think the taxpayer is guessing
rather then determining from accurate records.
Answer all questions and boxes: Blank doesn’t mean “no.”
Questions on various returns involving trusts, partnerships,
foreign accounts, accounting methods, etc. should be answered.
Don’t leave them blank.
Categorize deductions: Large deductions headed
“Miscellaneous” or with vague wording may lead the IRS to decide
you can’t prove it.
Choose your preparer carefully: You are responsible for your
return. If there are errors triggering an examination, you are
the one who will be audited. When the IRS suspects tax preparers
of incompetence or misconduct, it can force them to produce
lists of clients who may face examination. A few years ago this
happened to a mass-preparation firm in Brooklyn, NY: Preparers
would ask the client how much refund they wanted, and then they
would fraudulently increase the charitable deduction to get the
refund. IRS computers picked up the pattern, the firm closed and
hundreds of their clients were audited. Here are some guidelines
to use when choosing a preparer:
Always use preparers with certifications. EAs
(Enrolled Agents), CPAs and Attorneys are the only ones
authorized by the Treasury Department to represent clients
before the IRS. There are many good preparers out there without
certification, but how would you know which are good and which
Never accept a return without the preparer’s tax ID
number and signature … this is required by law. If it is left
blank or states “Self Prepared” there’s something wrong!
Review your return. Are the figures on the return
the ones you gave? Ask questions. Even the best preparers can
make a mistake, especially during the pressures of a busy tax
Talk to your accountant. Be sure you’re on
the same page and ask about strategies. Be proactive.
It will keep you out of trouble and save you money.
The income tax has made more
liars out of Americans than golf. –Will
There are plenty
of tax savings in the system without resorting to illegal strategies
that can come back to bite you. Stay away from tax evasion schemes
such as foreign trusts, secret offshore bank accounts, claiming your
house as a “church,” and other shady deals sold out of magazines or
the Internet. Remember what happened to Wesley Snipes recently?
Well, here are a few legitimate strategies you can implement now:
in a year you expect more taxable income. Pay the first property
tax installment for next year in the current year. Pay your
January State Estimated payment in December (Deductible on
Federal.) If possible, arrange medical expenses such as dental
and eyeglasses in that same year.
Ask your employer
for fringe benefits instead of cash raises. Health, dental and
group term life to $50,000 are deductible to your employer, but
not taxable to you.
Consider a tax credit program.
credit is a dollar-for-dollar reduction of your taxes. There are
a number of credit programs backed by the Government for social
reasons. Not all may be right for you but anyone in a high tax
bracket should consider them.
Buy a house;
it’s the best
deduction of all. Points paid on the mortgage, interest and
property taxes are all deductible. If you rent, you don’t get to
deduct anything. Your rent goes to pay those things and your
landlord deducts them. Skip the middleman and buy!
Contribute to an IRA or maximize
your 401K or 403B contributions.
Since it comes off the top, this will save 27.5
percent and 7.5 percent (NY) in the average brackets. Sure, you
can’t spend it until you retire, but so what? You’re going to
get older and need money in retirement; where will it come from
if you don’t accumulate it?
your accountant to develop safe, tax-saving strategies. If you
want to “volunteer” money, give it to your favorite charity, not
recent years IRS audits have dropped for staffing reasons, but are
now increasing and average-to-higher income individuals have greater
chances for audits in coming years. This is just a small sample of
the savings possible with good planning. There’s not enough room to
list them all, but they’re out there waiting for you … just like the
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