11 Common Tax Planning Mistakes
With some basic knowledge and planning, you can take simple steps to avoid costly tax errors. Avoiding the mistakes cited by the BP Holdings Tax Management below will save you money.
1) Ignoring the Alternative Minimum Tax (AMT)
The AMT is a separate income tax system with its own set of rules. Basically, you have to figure your tax bill two ways . . . and pay the higher amount.
In the world of the AMT, many valuable deductions are not allowed, including the deduction for state and local income taxes, property taxes, car license fees, certain home-equity loan interest paid, a portion of your medical expenses and most miscellaneous itemized deductions (such as income tax preparation fees and employee business expenses).
•If a significant portion of your miscellaneous itemized deductions happens to be employee expenses you’re not reimbursed for, check with your employer to see if you can be reimbursed directly for your costs.
•Don’t assume that it’s always best to prepay your state income taxes or your property taxes before the end of the year. If you are subject to the AMT, neither of these expenses is deductible.
2) Ignoring Entitled Tax Deductions
Take charitable contributions into consideration. You may not think the clothes you give to charity are worth much, but consider using valuation software and see how much items actually sell for when determining how much to claim. You may be surprised. At the same time, note that the law now says you can’t deduct anything unless the clothes are in good condition or better.
Also, keep track of out-of-pocket expenses you incur while working for a charity — the cost of stamps you buy for a fundraising mailing, for example, or the cost of ingredients for food prepared for a church soup kitchen. Add those costs to your cash contributions when toting up your deduction.
Some taxpayers who work out of their homes steer clear of home-office deductions for fear that such write-offs plant a red flag on their return, begging for an audit. That’s silly. If you legitimately deserve such deductions, claim them.
3) Not Accounting for Mutual Fund Dividend Reinvestments
Each time you reinvest dividends, you buy extra shares in the fund. Be sure to add the cost of those shares to your tax basis when you calculate your taxable gain from a sale. Otherwise, you will overpay the IRS. If your fund tracks the average basis of shares for you, it will automatically include reinvested dividends in the calculation; otherwise it’s up to you.
4) Failure to Track Year-to-Year Carryover Items
If you paid state and local taxes when you filed your 2006 state tax return in 2007, remember to include that amount in your 2007 state and local tax payments. In addition, if you had capital losses in a prior year in excess of the $3,000 annual deduction limit, be sure to carry the unused losses over to your 2007 income tax return. The same goes for any charitable contribution you couldn’t deduct in a previous year because of limits on such write-offs. Don’t let such carryovers get lost in the shuffle.
5) Failing to Name (or Naming the Wrong) Beneficiary to Your Retirement Plan
When you die, your IRA, 401(k), or other qualified retirement plan account passes to whoever you have designated as the beneficiary. In many cases, that will be your spouse. But if you designate no beneficiary, the money may go to your estate. If that happens, your heirs are required to clean out the account over a five-year period instead of over their life expectancy, which greatly accelerates the taxes they owe. And naming your grandchildren as beneficiaries may trigger the generation-skipping transfer tax if the amount in the retirement account is very large.
Pages: 1 2