Thoughts on taxes

Here is one that ended up being so long that I did not do a section on preparedness for that month. Still, taxes do relate to financial preparedness, so I thought it worked. The author is very savvy about taxes, and has ideas for things that don't really come up in my life, but that could apply to many people.

Thoughts on Taxes by Debbie Moulton

I was asked to give some advice about taxes. My first piece of advice is to keep accurate records. Get in the habit of logging the mileage of your vehicles, especially if you have a calling that requires a lot of driving (like scouts or YW leader) or travel a lot for medical appointments. Your time isn’t deductible because there is no way to measure the value of one persons time as compared to another’s, but mileage is deductible because is can be easily measured.

When you get your tax forms at the beginning of the year, verify the information on the forms. The people who prepare the forms are human and can misunderstand the tax laws or make mistakes based on the information they were given to prepare the forms. A common mistake I have seen is related to employee stock transactions as they are reported on brokerage statements. Compare your yearend pay stub with your W-2 and make sure that all the employee stock transaction amounts included in your W-2 wages have also been included in the cost basis on your brokerage statements so that you aren’t double taxed on those amounts. It is a common enough problem that this year the IRS even adapted the Schedule D form to allow you to easily make corrections to what was reported on your brokerage statements. You may want to get a professional to help you figure this out if you aren’t quite sure if everything is correct.

As you may know, medical expenses have to exceed 7.5% of your income to be deductible (including the set rate for the medical miles you have logged), however, if either spouse is over 62 years of age the medical expenses are fully deductible on your Oregon return.

By owning a home you get income tax deductions for the property taxes, mortgage interest and any mortgage insurance premiums you pay on your home. If you have a business you run out of your home you are also allowed a deduction for the space in your home you dedicate to the business. You are allowed to deduct a percentage of the home expenses (utilities, homeowners insurance, any repairs made on the home, etc.) besides the property taxes, mortgage interest, and mortgage insurance premiums. A home business is only allowed to report a net loss for a certain number of years before it is classified as a hobby and loses its deductibility, so be careful about that.

Those who have children attending college need to be sure and take advantage of the education credits. Generally, if you can claim a person as a dependent then you can claim school expenses paid for that person. The expenses could have been paid by either the child or the parent. For a child who has not yet finished 4 years of college education this includes tuition, books, computers, lab fees, etc. Check the IRS website for a complete listing of what is deductible. Make sure you/they keep receipts for all those purchases. There are various deductions for education other than that first college degree, such as classes you take to improve your own education. Generally, these expenses reduce your income rather than giving you a tax credit. Tax credits are preferable to income adjustments, so be sure to classify those education expenses correctly. The tax software you use should help you select the education deduction that will give you the best tax benefit. If you do have student loans, remember that the interest on those loans is deductible.

Don't forget the moving expenses. Keep the receipts! As long as the move was job related and the distance from your old house to your new job is over 50 miles more than the distance from your old house to your old job, then you can deduct the expenses. There no longer is a house-hunting trip deduction, but the actual move is deductible. Again, check with the IRS website to get the current list of what is deductible for the year of your move.

If you pay daycare so that you can work, make sure to get the SSN of the provider and their address so that you can take a deduction for it.

Get and keep official receipts for those charitable contributions you make.

There are guidelines about the limits of IRA contributions based on how many spouses work and what their company offers as far as retirement plans. Check about your specific situation if you want to make IRA contributions. Donating to education funds for your children also gives you a tax credit.

One other thing to be aware of is that fact that some tax credits are refundable and some are not. A refundable tax credit is one that will be paid to you even if your tax liability has been reduced to zero. If you look at a 1040 tax return, the items listed below the line that says, This is your total tax.. are refundable tax credits. Increasing tax credits that are non-refundable gets you no benefit if your income tax liability has already been reduced to zero by your itemized deductions, exemptions and other non-refundable tax credits. For instance, the residential energy credit you get for buying that new energy efficient washing machine may not get you any benefit if your income tax is already wiped out by your itemized deductions, and exemptions.

If you have questions about tax issues, the IRS website is really quite easy to easy to navigate and you can search for different topics and find examples of most scenarios of tax situations. If you find information to justify something you chose to deduct on your tax return, print it out and keep it with your tax file in case you are audited.

In this day of doing everything electronically, I still recommend making sure you have paper copies of receipts or logs to back up all the numbers on your tax return. If you do get audited and they find a discrepancy, they are justified in auditing prior years also. Keep those tax returns and backup in a safe place in case you should need them.