6 pointers tax pros want you to know
Nobody expects you to know everything about income taxes. With the Internal Revenue Code about five times longer than the Bible, that’s not practical anyway.
But there are some common-sense tips that tax experts have been preaching for a while. Here are some of those best-practices pointers that can improve your financial situation and prevent unpleasant surprises:
» Aim for zero. Although it’s nice to receive a tax refund around April 15, it’s not the best strategy. After all, a refund is just another way of
saying you finally got your money back on the interestfree loan you gave the government. The other extreme — owing a big tax bill around April 15 — isn’t smart either, especially if you struggle to pay it.
Ideally, you should plan your withholding and other tax tactics so that you either get a minimal refund or owe just a bit more in taxes after filing your return. A big zero on the tax owed/due lines might not be interesting, but it’s a laudable goal.
» Make your refund count. Assuming you get money back, as do most taxpayers, it’s important that you don’t squander it. For lower-income people especially, a refund could be the biggest chunk of cash received all year.
The American Institute of CPAs suggests a simple decision hierarchy on how to use your refund. First, spend it on food, shelter, health care or other basic needs if necessary. Otherwise, build up your emergency fund. If there’s still money left over, pay down debt. It’s critical to have a plan to maximize the benefits from a refund, said Ernie Almonte, chair of the CPA group’s financial-literacy panel.
On the debt side, focus on credit cards charging the highest interest rate, the group suggests. Americans have been making progress here, with the American Bankers Association recently reporting an 18-year low in card delinquencies, and creditbureau Equifax noting that cardholders are using less of their available credit balances.
As for emergency cash, three months used to be the suggested standard. But because it’s still hard to find high-paying jobs, it would be more prudent to build up a reserve from which you could pay bills for at least six months.
» Add it all up, then check it twice. The IRS recently reported that it spotted 2.7 million math errors on 2011 returns, more than double the number from the prior year. If you don’t want to get a letter from the agency, emphasize accuracy when preparing your return.
The biggest math mistakes involved inaccurate tax calculations, followed by an incorrect number or dollar amount of exemptions. Then came errors over the Earned Income Tax Credit, followed by those for standard or itemized deductions, the Child Tax Credit and the First-Time Homebuyer Credit.
While you’re at it, make sure you have spelled your name and those of your spouse and dependents correctly, and verify that everyone’s Social Security number is accurate.
» Know your audit odds. There is safety in numbers around tax time, with the IRS auditing just 1.03 percent of individual returns in the most recent year. Although that’s a low proportion, certain activities and behaviors can put you at greater risk.
High income is one such factor. Only 0.9 percent of people with income of less than $200,000 faced an audit in 2011, but 12.1 percent of those earning at least $1 million did. Certain business categories also face heightened IRS scrutiny including “flow-through entities” such as partnerships and Subchapter-S corporations. So, too, for self-employed individuals who file Schedule C. In fact, Schedule-C filers earning between $100,000 and $200,000 face especially high odds, with 4.3 percent of these returns audited.
Researcher CCH cites several types of deduction attempts that raise red flags for a good reason: They aren’t allowed. These include trying to claim a loss on your home, attempting to deduct excessive moving expenses and trying to claim medical deductions for unneeded cosmetic surgery.
Yet nobody draws scrutiny like parents adopting a child. A staggering 69 percent of returns claiming the adoption credit were audited last year, noted Nina Olson, the national taxpayer advocate.
» Safeguard your identity. Although most people fear audits, being victimized by tax fraud could be the bigger risk. The IRS said it prevented fraudulent refund payments last year on about 3 million returns, or three times the number it audited.
Taxpayer ID thefts mainly involve fraudulent requests for refund money using another person’s Social Security number that could have been obtained in various ways. Crooks typically file early, before the actual taxpayer, and have the refund check diverted to them. When a crook gets there first, that can delay a refund to the real taxpayer for six months or more, while the IRS investigates.
Such thefts also cost the federal government, because a refund eventually will be paid to the rightful taxpayer even after payment of a fraudulent refund. Plus, policing ID thefts diverts resources from other IRS operations.
All this should serve as a reminder to safeguard personal information such as Social Security numbers as much as possible. One thing that many people probably don’t secure like they should is their smartphone. Adam Levin, chairman of Credit.com, discourages people from storing Social Security numbers and those for credit or bank accounts on phones. “Make sure to delete all documents and e-mails containing sensitive information from your phone,” he wrote in a report.
Levin also suggests restricting access to your phone by using a password and not staying logged into banking or other sensitive apps. He likened that to leaving a credit card on top of your desk.
» Don’t neglect retirement. The government is willing to subsidize retirement planning through Individual Retirement Accounts, 401(k)style workplace programs and more, yet many people underutilize these benefits.
“Many individuals are still missing out on the long-term savings benefits of IRAs, simply because they don’t understand what they are and how they work,” said Dan Keady, director of financial planning for investment firm TIAA-CREF. In a recent poll, 80 percent of people surveyed by TIAA-CREF said they weren’t contributing to an IRA, up from 76 percent last year.
Yes, the rules are complex, especially for the different types of IRAs. And yes, socking money into a retirement account means you have less cash to spend now. Plus, the accounts do impose some restrictions for accessing the money, especially if you’re still in your working years.
Yet retirement accounts remain one of the best ways to accumulate wealth, and there has been talk lately of restricting their tax benefits as the government grapples with its own financial pressures. While it’s uncertain how endangered retirement tax benefits might be, it’s best to take advantage of them while you can.
Community foundation gives away $9.9 million
The Arizona Community Foundation said it distributed $9.9 million in grants and scholarships from January through March.
Distributions for health innovation amounted to $4.9 million and supported 454 programs, including Desert Mission, Benevilla, the EAR Foundation of Arizona and the Coalition for African-American Health and Wellness.
Some147 education-related entities and students shared $3.5 million including Be a Leader Foundation and Peer Solutions.
Some 83 arts and culture organizations received nearly $562,000, and 55 programs in community improvement and development got $406,000. Also, nearly $399,000 was awarded to 54 organizations and programs for environmental education, renewable resources, conservation and animal welfare.
azfoundation.org
Theater chain in talks to open in Queen Creek
Queen Creek officials say residents have wanted a movie theater for a long time, so Maya Cinemas’ announcement Friday that it is in final negotiations with the town to build a 14-screen state-of-the art movie complex comes as good news.
The site for the proposed 170,000-square-foot movie theater and entertainment district would be on the southeastern corner of Ellsworth Loop and Rittenhouse Road, according to a press release issued by Jon Willis, broker for Willis Property Co. He is the exclusive representative of Maya Cinemas, a Los Angelesbased company that opened its first theater in 2005.
mayacinemas.com