There are only two sure things in life: taxes, and that slightly more preferable thing. The April 15 tax deadline is still almost three weeks away, but it literally pays to be prepared. Here are some surprising things you didn’t know about taxes that may help you avoid potential pitfalls and even beat the taxman.
DON’T: Stretch the truth
Simply put, audits suck. Virtually the only way to avoid the taxman knocking down your door is by ensuring that you have nothing to hide—that goes double for overstating certain deductions. Agents have red flags set up to easily (and we mean easily) catch people rounding up on how much charity they’ve given, and it should go without saying that you must include all your income, no matter how small. Another common situation they’re trained to watch for is someone flubbing their home office and business expenses, so keep it kosher if you choose to pursue such a deduction.
DO: Enlist a certified public accountant or a tax preparer you trust
Whether you own your own business or work for somebody else, it pays to enlist some help to squeeze every dollar out of your claim. However, finding the right person should take about as much effort as finding the right doctor—trust is a must, especially when CNN Money reports that 46 states have more regulations on hairdressers than tax preparers. A dishonest preparer may indeed deliver on his “free money” promise, but not without adding children you don’t have to your Earned Income Credit claim. Then, come audit time, they’ll either disappear or charge extra to represent your interests before the state.
DON’T: File your taxes late
There’s no harm in filing a little late, is there? Well, turns out there is. According to tax law, you’ll be liable to pay five per cent of the net tax liability you owe for every month (or fraction of a month) that you’re late. By Forbes’ estimate, that means being late just six weeks on a $100,000 tax liability can slap on an extra $10,000. Thankfully, the fee is capped at 25 per cent of the net. If you know it’s going to be a problem ahead of time, you can apply for a six month extension. Some leeway is given in the event of “reasonable cause,” such as a death in the family or a fire destroying your tax records. As a quick reminder, April 15 is also the date by which you have to pay your tax liability. Failure to do so adds 0.5 per cent monthly to your taxes due, up to a 25 per cent penalty.
DO: Be prepared for your tax appointment
If you opt to get help doing your taxes, you’ll need to be up front with several pieces of information. You’ll need the following documents:
- Income statements from all your employers over the last year, in the form of a W-2 form.
- A 1099 form that enumerates any income you receive from interests, dividends, self-employment, pensions and government cheques.
- Documentation of any real estate you had sold.
- If you’re a homeowner, you’ll need a property tax bill and mortgage statement.
- If you moved for a new job, you’ll need a list of expenses you paid (not including anything your employer covered).
- A year-end statement that lists the original and sales prices of any stocks you sold off.
- A list of contributions you’ve made to a Health or Medical Savings Account.
- Receipts for charitable contributions under $250, and statements from charities in the case of larger gifts.
- If you have kids, documentation showing any daycare costs you’ve incurred.
DON’T: Confuse your hobby with your business
You may be tempted to deduct the expenses of a small venture you started on the side to make some dough—especially if it’s something in line with your interests, like filming wedding videos or flipping signed basketball jerseys. However, know that no matter how seriously you’ve taken it, you can’t deduct your “business” losses unless you’ve already turned a profit for at least three years prior to tax day. This is to prevent claimants from seeking kickbacks for hobbies that can potentially be monetized.
DO: File a correction, if necessary
We all make mistakes, and that’s okay. First things first: if you submitted your tax forms and just realized you have made a mathematical error, take a deep breath. The IRS employs extremely sharp people who will catch your mistake and clear it up themselves. Anything you get back from them will reflect their changes. Similarly, if you forgot to send a form, they’ll ask you for it. However, if you gave incorrect information, you’ll need to submit an amended return by way of a 1040X form. If the change increases your refund, you can cash the original cheque and the IRS will send you an additional one for the remainder. If you’re in the red, hopefully you caught the mistake quickly, as deadline penalties still apply.