You Should Ask These 5 Questions Before Filing Your Taxes
When it comes to preparing your tax return you want to make sure you have all the bases covered.
Not asking the right questions can cause you to overpay on your taxes, or worse. To avoid the disappointment of owing more than you anticipated, the fear of an audit and other issues, ask the following questions before filing taxes.
Do You Know All the Tax Credits, Deductions and Rules?
If your taxes are relatively simple to file, a good tax software can walk you through most of the relevant tax credits and deductions.
However, you could miss out on money if you file your taxes on your own. When you prepare your taxes on your own you run the risk of missing out on a bigger tax refund or on your ability to lower your current tax liability.
This is especially true for freelancers and small business owners.
It’s easy to forget to write off expenses such as business mileage, the costs of your home office and other relevant expenses if you have a small business.
On the flip side, when filing it’s important to understand rules about deductions you can’t take.
If there’s a chance you’ll run awry of the IRS, it’s best to leave it to the professionals.
Complicated deductions have complicated rules, and you need to ensure you get everything on paper correctly, or risk an audit.
What Tax Deductions Are Available For Me If I Am Not Itemizing My Deductions?
One of the biggest tax breaks available is retirement contributions.
Any contribution you make to a traditional IRA or 401K plan reduces your Adjustable Gross Income (AGI) dollar for dollar.
So, if you are in a 25% federal tax bracket, a $5,000 contribution to your retirement plan will save you $1,250 in taxes not including savings on your state income tax.
If you’re covered under a high deductible medical plan (HDHP) you can make contributions into your Health Savings Account (HSA) of up to $3,350 if you are an individual and $6,750 if married.
Any contributions made lowers your AGI and reduces your tax liability.
Also, when preparing your tax return don’t forget about claiming any qualified moving expenses, your student loan interest and you might be eligible for a tuition deduction if you attended a college or university that tax year.
There are many other tax credits available so you may want to consult your tax professional.
Are You Raising Red Flags for an IRS Audit?
Prior to filing taxes be sure to double check your information for these red flags that can draw extra IRS attention.
For small business owners, reporting income on Schedule C increases your chance to be audited and subjects you to more intense scrutiny.
Therefore, be sure to claim all of the income that you have earned throughout the year and be prepared to substantiate it with proper records.
In addition, taking deductions such as claiming 100 percent business use of a vehicle are also worth a second thought.
Writing-off big dollar amounts for business expenses that could also be personal entertainment such as dining out and travel can cause the IRS to take a second look at your return as well, especially if the deduction amounts seem too high for the type of business that is claiming them.
When filing an individual return you need to be aware that, if deductions on your return are disproportionately large compared with your income the IRS may pull your return for review.
But, if you have the proper documentation for your deductions don't be afraid to claim them. There's no reason to ever pay the IRS more tax than you actually owe.
What is the Best Way to Use Your Refund?
In addition to making sure that you take the appropriate steps to maximize your tax refund, you should also consider what you do with it once you receive it.
You could have it deposited directly into a savings or retirement account. Another smart use for your refund is to use it to pay down any debts that you may have.
Whether filing taxes yourself or using a tax professional, make sure to ask the appropriate questions so you know you are paying the lowest tax liability while keeping in compliance.
You worked hard for your money and you deserve to keep more of it.