With the tax code approaching the size of the Encyclopedia Britannica, it’s little wonder there are many misconceptions and erroneous beliefs regarding tax regulations.
Many people feel that when making charitable deductions, as long as they have their cancelled checks or credit card receipt they’re covered. Nowadays, however, the IRS requires substantiation from the charity itself.
When keeping track of business meal and entertainment expenses, having receipts is not enough. You must also record the names of the people entertained and the business purpose.
Many taxpayers have a little side “business” that consistently operates at a loss. They often think that they might as well continue it because they enjoy it, plus they get a tax deduction.
These businesses are ripe for audit and being classified as “hobby businesses,” i.e. those entered into and conducted without a reasonable expectation of profit. When reclassified as a hobby the taxpayer must pay taxes on the profits but may not deduct losses.
Often taxpayers who own rentals that operate at a loss console themselves that at least they are getting a tax deduction on their tax return. Maybe.
If you actively participate in a residential rental activity, you can deduct up to $25,000 of losses if your adjusted gross income (AGI) is $100,000 or less. As your AGI increases from $100,000 to $150,000, this allowance is gradually phased out.
Those losses not currently deductible are carried over to future returns.
Many people who have foreign investment accounts think they are in compliance as long as they report the income on their tax return. Beginning this year, it may be necessary that you file Form 8938 with your return.
It may also be necessary to file an information return Form TDF 90-22.1 by June 30. To fail to do so when required can result in a penalty of $10,000 or more.
Many taxpayers doing their own return don’t bother to take depreciation on their business or rental schedule because they don’t understand it or don’t need the additional deduction.
When you sell the assets, IRS regulations require that you reduce the basis by allowed or allowable depreciation. In other words, even if you didn’t bother to deduct depreciation in the past, you still have to reduce your cost basis.
In today’s environment of complex tax laws, with more changes on the way, you need professional guidance to ensure that you stay in compliance and not pay any more tax than necessary.
Abraham Lincoln once said, “He who represents himself in court has a fool for a client.”