Top 10 Tax Mistakes To Avoid At All Costs

Top 10 Tax Mistakes To Avoid At All Costs

A tax audit involves the time and expense of being examined and often a tax dispute. Avoid these common mistakes and you’ll reduce your chances of grief from the IRS.

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Depreciation, Expensing and Taxes

September 11, 2013

Bruce Bartlett wrote an article with a nice breakdown of the history of depreciation in the United States. An interesting point he makes is that depreciation was initially an accounting gimmick:

If the railroads treated capital expenditures the same way that operating expenses were treated, they would have huge losses for many years that would discourage investors. So the idea of depreciation was born – writing off capital investments over time.

Maybe that helped businesses sell projects to investors, but the addition of the corporate income tax in 1909 made depreciation rules important for taxes, too.

In the article, Bartlett lays out two common economic arguments why depreciation rules can be bad for tax purposes.

The first argument is that under current depreciation rules, inflation erodes the value of the tax right off. These types of depreciation rules understate the cost of the equipment to business, overstate the profit, and lead to higher taxes for the business.

The second argument is that as technology changes more rapidly, high-tech equipment becomes irrelevant sooner than it physically wears out.

Expensing solves both these issues and offers other benefits of its own – namely, increased investment and economic growth.

Expensing is effective in increasing investment, because it lowers the cost of capital. As the Tax Foundation’s Steve Entin wrote in a recent report:

The rules for how quickly a company can write off investments in plants, equipment, and buildings directly impact the cost of doing business. The higher those costs are, the slower the economy will grow. The lower the cost, the bigger the economy will be, and with it the number of jobs and the level of wages.

But it’s important for long-term economic growth that expensing not just be used as a short-term solution to stimulate investment, as it has been used in the past.

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Are Some Americans Paying Federal Income Tax They Don’t Owe?

Headline got your attention? No, it isn’t a come-on for a new tax avoidance scheme. Rather, it reflects an interesting but little known problem with the federal income tax system: People who have tax withheld from their paychecks but, for some reason, don’t file returns. For many, blowing off their 1040 means they are paying tax they don’t owe.

According to one estimate, in 2003 more than 8 million people had almost $16 billion in taxes withheld but did not file 1040s. Not only did many pay tax they didn’t owe but some likely missed out on refundable credits that could have improved their well-being.

To some degree, this is the flip side of another set of numbers that get far more attention—those American who pay no federal income tax.  The other day, the Tax Policy Center estimated that about 43 percent of Americans will be off the federal income tax rolls in 2013, down from 47 percent in 2009.

Nearly three in four non-payers file 1040s. Nearly all pay some tax—sales taxes, payroll taxes, excise taxes and the like. And most have income taxes withheld from their paychecks but get these payments returned from the government in the form of refunds or credits.

There are also people who make money, have no tax withheld, and owe no tax. Think low-income retirees who are living on Social Security or younger adults who work but make very little.

But a surprisingly large number of people do work, do have taxes withheld, but never file 1040s. Because we don’t know much about them, TPC treats them as non-payers of income tax even though some do pay through withholding. As a result, our estimate that 43 percent of Americans don’t pay federal income tax is probably high.

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Begging The Bank To Forgive Some Of The Mortgage On Your Primary Residence? Better Act Fast

[Note: this column was originally published in November 2012, but due to the Band-Aid approach to tax law favored by Congress, it is relevant once more]

If you are one of the 97% of the population whose home is worth significantly less than when you purchased it (relax real estate brokers of America, I’m exaggerating for effect), you’ve likely been seeking out some type of debt modification with your lender. Or perhaps things have gotten so bad that you’re contemplating a foreclosure or short sale.

Here’s the thing: anytime a mortgage is modified (i.e., reduced), the borrower is required to recognize cancellation of indebtedness (COD) income under Section 61(a)(12) to the extent of the debt forgiveness. Similarly, if a property is sold at foreclosure or in a short sale and the underlying mortgage is recourse (meaning the borrower has personal responsibility for any excess loan deficiency remaining after the sale), then to the extent the remaining deficiency is forgiven, the borrower will again recognize COD income.

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IRS Rule Leads Restaurants to Rethink Automatic Tips

An updated tax rule is causing restaurants to rethink the practice of adding automatic tips to the tabs of large parties.

Starting in January, the Internal Revenue Service will begin classifying those automatic gratuities as service charges—which it treats as regular wages, subject to payroll tax withholding—instead of tips, which restaurants leave up to the employees to report as income.

The change would mean more paperwork and added costs for the restaurants—and a potential financial hit for waiters and waitresses who live on their tips but don’t always report them fully.

Darden Restaurants Inc., DRI +0.58% owner of Olive Garden, LongHorn Steakhouse and Red Lobster, has long included automatic 18% tips on the bill for parties of eight or more at its more than 2,100 restaurants, but is experimenting with eliminating them because of the IRS ruling, said a spokesman.

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Top 10 Tax Mistakes Made by Investors

Investing is a complex undertaking. The supply of investment alternatives is seemingly endless. Evaluating various alternatives can be quite difficult and very time consuming.

And unless held in check, the actual decision-making process is fraught with human emotions that often lead investors to make counterproductive investment choices. Add to this the myriad tax rules and regulations that impact investments and you have enough to overwhelm many investors.

Trusted financial professionals are in a position to help make sense of it all. Certainly, appropriate portfolios should be structured for investors, and suitable investments should be chosen given the current economic environment and the investor’s unique set of circumstances. But tax consequences must also be carefully considered, and the accountant often plays a role in this. Tax treatment, good or bad, can make or break an investment decision.

Here are the top 10 tax mistakes made by investors as gathered in a recent survey we conducted of investment advisors:

VERY FUNNY – ‘The Daily Show’ Explains Why Our Congress Hasn’t Reformed the Tax Code”

“Congress may be out on its month-long August recess, but that doesn’t mean “The Daily Show” stops its skewering. Last night, host John Oliver took on our broken tax code – and used the issue to take down our broken political system….”

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QUIZ: How many page are in the U. S. Tax Code?

How long is the federal tax code?

Death & Taxes: Elvis Presley Topped Charts And Tax Brackets

Elvis said, about Parker, “I don’t think I’d have ever been very big if it wasn’t for him. He’s a very smart man.” Parker reportedly said, about his promotional efforts for Presley:

“I consider it my patriotic duty to keep Elvis up in the 90 percent tax bracket.”

And during the peak of Elvis’ career, there really was such a thing as a 90% tax bracket: in fact, it even went up to 94%. Yep, you read that correctly: 94%.

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Duck Dynasty Tax Tips

“Some say it’s a real head scratcher. A&E logged nearly 12 million bird watchers (birds of a feather) who spied the fourth-season premiere of the hit TV series “Duck Dynasty.” 11 Shows ‘Duck Dynasty’ Beat In The Ratings. Set in real Louisiana bayou country, “Duck Dynasty” follows a brood of real–life brothers who manufacture duck calls and love to go bird hunting.”

The vintage propaganda Donald Duck cartoon video on taxes is quite interesting.

Click on this line to read the full article and watch the Donald Duck cartoon.

 

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