Avoid These Common Tax Mistakes
Nobody’s perfect. Mistakes happen. But if you make a mistake on your tax return, it will likely take the IRS longer to process it. That could delay your refund. The best way to avoid errors is to use IRS e-file. Paper filers are about 20 times more likely to make a mistake than e-filers. IRS e-file is the most accurate way to file your tax return.
Here are eight common tax-filing errors to avoid:
1. Wrong or missing Social Security numbers.
Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.
2. Wrong names.
Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.
3. Filing status errors.
Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on IRS.gov can help you choose the right status. If you e-file, the tax software helps you choose.
4. Math mistakes.
Double-check your math. For example, be careful when you add or subtract or figure items on a form or worksheet. Tax preparation software does all the math for e-filers.
5. Errors in figuring credits or deductions.
Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.
6. Wrong bank account numbers.
You should choose to get your refund by direct deposit. Be sure to use the right routing and account numbers on your return. The fastest and safest way to get your tax refund is to combine e-file with direct deposit.
7. Forms not signed.
An unsigned tax return is like an unsigned check – it’s not valid. Both spouses must sign a joint return.
8. Electronic filing PIN errors.
When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If you don’t know it, enter the Adjusted Gross Income from the 2013 tax return that you originally filed with the IRS. Do not use the AGI amount from an amended return or a return that the IRS corrected.
Seven Tax Tips about Reporting Foreign Income
Are you a U.S. citizen or resident who worked abroad last year? Did you receive income from a foreign source in 2014? If you answered ‘yes’ to either of those questions here are seven tax tips you should know about foreign income:
1. Report Worldwide Income.
By law, U.S. citizens and residents must report their worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.
2. File Required Tax Forms.
You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. See IRS.gov for more information.
3. Review the Foreign Earned Income Exclusion.http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Tax-Credit---Choosing-To-Take-Credit-or-Deduction
If you live and work abroad, you may be able to claim the foreign earned income exclusion. If you qualify, you won’t pay tax on up to $99,200 of your wages and other foreign earned income in 2014. See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, for more details.
4. Don’t Overlook Credits and Deductions.
You may be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce your taxes if both countries tax the same income.
5. Use IRS Free File.
Almost everyone can prepare and e-file their U.S. federal tax returns for free by using IRS Free File. If you make $60,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Some Free File software products and fillable forms also support foreign addresses for those who live abroad. Free File is available only through the IRS.gov website.
6. Tax Filing Extension is Available.
If you live outside the U.S. and can’t file your tax return by April 15, you may qualify for an automatic two-month extension of time to file. That will give you until June 16, 2015, to file your U.S. tax return. This extension also applies to those serving in the military outside the U.S. You will need to attach a statement to your return explaining why you qualify for the extension.
7. Get IRS Tax Help.
Check the international services Web page for the types of help the IRS provides. For all free IRS tax tools and products, visit IRS.gov at any time.
Top Six Tips about the Home Office Deduction
If you use your home for business, you may be able to deduct expenses for the business use of your home. If you qualify you can claim the deduction whether you rent or own your home. If you qualify for the deduction you may use either the simplified method or the regular method to claim your deduction.
Here are six tips that you should know about the home office deduction.
1. Regular and Exclusive Use.
As a general rule, you must use a part of your home regularly and exclusively for business purposes. The part of your home used for business must also be:
• Your principal place of business, or
• A place where you meet clients or customers in the normal course of business, or
• A separate structure not attached to your home. eg: a garage or a studio.
2. Simplified Option.
If you use the simplified option, you multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet. This option will save you time because it simplifies how you figure and claim the deduction. It will also make it easier for you to keep records. This option does not change the criteria for who may claim a home office deduction.
3. Regular Method.
If you use the regular method, the home office deduction includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid may qualify. If you own your home, part of the mortgage interest, taxes and utilities you paid may qualify. The amount you can deduct usually depends on the percentage of your home used for business.
4. Deduction Limit.
If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.
If you are self-employed and choose the regular method, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. You can claim your deduction using either method on Schedule C, Profit or Loss From Business. See the Schedule C instructions for how to report your deduction.
If you are an employee, you must meet additional rules to claim the deduction. For example, your business use must also be for the convenience of your employer. If you qualify, you claim the deduction on Schedule A, Itemized Deductions.
Standard or Itemized: Choose the Deduction Method That's Best for You
Most people claim the standard deduction when they file their federal tax return. But did you know that you may lower your taxes if you itemize your deductions? Find out if you can save by doing your taxes using both methods. Usually, the bigger the deduction, the lower the tax you have to pay. You should file your tax return using the method that allows you to pay the least amount of tax.
The IRS offers these six tips to help you choose:
1. Use IRS Free File.
Most people qualify to use free, brand-name software to prepare and e-file their federal tax returns. IRS Free File is the easiest way to file. Free File software will help you determine if you should itemize and file the right tax forms. It will do the math and e-file your return — all for free. Check your other e-file options if you can’t use Free File.
2. Figure your itemized deductions.
Add up deductible expenses you paid during the year. These may include expenses such as:
• Home mortgage interest
• State and local income taxes or sales taxes (but not both)
• Real estate and personal property taxes
• Gifts to charities
• Casualty or theft losses
• Unreimbursed medical expenses
• Unreimbursed employee business expenses
† Special rules and limits apply. Visit IRS.gov and refer to Publication 17, Your Federal Income Tax, for more details.
3. Know your standard deduction.
If you don’t itemize, your basic standard deduction for 2014 depends on your filing status:
• Single $6,200
• Married Filing Jointly $12,400
• Head of Household $9,100
• Married Filing Separately $6,200
• Qualifying Widow(er) $12,400
† If you’re 65 or older or blind, your standard deduction is higher than these amounts. If someone can claim you as a dependent, your deduction may be limited.
4. Check the exceptions.
There are some situations where the law does not allow a person to claim the standard deduction. This rule applies if you are married filing a separate return and your spouse itemizes. In this case, you can’t claim a standard deduction. You usually will pay less tax if you itemize. See Pub. 17 for more on these rules.
5. Use the IRS ITA tool.
Visit IRS.gov and use the Interactive Tax Assistant that takes you through a series of questions just like one of our customer service representatives would. The tool can help determine your standard deduction. It can also help you figure several of your itemized deductions.
Reduce Your Taxes with the Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit can reduce the taxes you pay. If you paid someone to care for a person in your household last year while you worked or looked for work, then read on for 10 facts from the IRS about this important tax credit:
1. Child, Dependent or Spouse.
You may be able to claim the credit if you paid someone to care for your child, dependent or spouse last year.
2. Work-Related Expense.
The care must have been necessary so you could work or look for work. If you are married, the care also must have been necessary so your spouse could work or look for work. This rule does not apply if your spouse was disabled or a full-time student.
3. Qualifying Person.
The care must have been for “qualifying persons.” A qualifying person can be your child under age 13. A qualifying person can also be your spouse or dependent who lived with you for more than half the year and is physically or mentally incapable of self-care.
4. Earned Income.
You must have earned income for the year, such as wages from a job. If you are married and file a joint tax return, your spouse must also have earned income. Special rules apply to a spouse who is a student or disabled.
5. Credit Percentage/Expense Limits.
The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on the amount of your income. Your allowable expenses are limited to $3,000 if you paid for the care of one qualifying person. The limit is $6,000 if you paid for the care of two or more.
6. Dependent Care Benefits.
If your employer gives you dependent care benefits, special rules apply. For more on these rules see Form 2441, Child and Dependent Care Expenses.
7. Qualifying Person’s SSN.
You must include the Social Security Number of each qualifying person to claim the credit.
8. Care Provider Information.
You must include the name, address and taxpayer identification number of your care provider on your tax return.
9. Form 2441.
You file Form 2441 with your tax return to claim the credit.
10. IRS Free File.
You can use IRS Free File to prepare and e-file your federal tax return for free. Free File is the fastest and easiest way to file your tax return. It’s only available on IRS.gov/freefile.
Are You Self Employed? Check Out These IRS Tax Tips
Many people who carry on a trade or business are self-employed. Sole proprietors and independent contractors are two examples of self-employment. If this applies to you, there are a few basic things you should know about how your income affects your federal tax return.
Here are six important tips about income from self-employment:
1. SE Income.
Self-employment can include income you received for part-time work. This is in addition to income from your regular job.
2. Schedule C or C-EZ.
There are two forms to report self-employment income. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040. You may use Schedule C-EZ if you had expenses less than $5,000 and meet other conditions. See the form instructions to find out if you can use the form.
3. SE Tax.
You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax. If you owe this tax, make sure you file the schedule with your federal tax return.
4. Estimated Tax.
You may need to make estimated tax payments. People typically make these payments on income that is not subject to withholding. You usually pay this tax in four installments for each year. If you do not pay enough tax throughout the year, you may owe a penalty.
5. Allowable Deductions.
You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.
6. When to Deduct.
In most cases, you can deduct expenses in the same year you paid for them, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.
Education Tax Credits: Two Benefits to Help You Pay for College
Did you pay for college in 2014? If you did it can mean tax savings on your federal tax return. There are two education credits that can help you with the cost of higher education. The credits may reduce the amount of tax you owe on your tax return. Here are some important facts you should know about education tax credits.
American Opportunity Tax Credit:
• You may be able to claim up to $2,500 per eligible student.
• The credit applies to the first four years at an eligible college or vocational school.
• It reduces the amount of tax you owe. If the credit reduces your tax to less than zero, you may receive up to $1,000 as a refund.
• It is available for students earning a degree or other recognized credential.
• The credit applies to students going to school at least half-time for at least one academic period that started during the tax year. • Costs that apply to the credit include the cost of tuition, books and required fees and supplies.
Lifetime Learning Credit:
• The credit is limited to $2,000 per tax return, per year.
• The credit applies to all years of higher education. This includes classes for learning or improving job skills.
• The credit is limited to the amount of your taxes.
• Costs that apply to the credit include the cost of tuition, required fees, books, supplies and equipment that you must buy from the school.
For both credits:
• The credits apply to an eligible student. Eligible students include yourself, your spouse or a dependent that you list on your tax return.
• You must file Form 1040A or Form 1040 and complete Form 8863, Education Credits, to claim these credits on your tax return.
• Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. This form contains helpful information needed to complete Form 8863. The amounts shown in Boxes 1 and 2 of the form may be different than what you actually paid. eg, the form may not include the cost of books that qualify for the credit.
• You can’t claim either credit if someone else claims you as a dependent.
• You can’t claim both credits for the same student or for the same expense, in the same year.
• The credits are subject to income limits that could reduce the amount you can claim on your return.
† Visit IRS.gov and use the Interactive Tax Assistant tool to see if you’re eligible to claim these credits. Also visit the IRS Education Credits Web page to learn more. If you can’t claim a tax credit, check the other tax benefits you might be able to claim.
IRS Issues Revised Publications this Week, 3 out of 5 Still Need to File
With almost 59 million tax returns filed so far, the Internal Revenue Service estimates that three out of five taxpayers have yet to file their tax returns, according to statistics released.
For taxpayers still working on their taxes, the Internal Revenue Service added three revised publications to IRS.gov just this week. These publications will help businesses and individuals understand how to figure depreciation as well as pension options.
• Publication 946, How to Depreciate Property explains how you can recover the cost of business or income-producing property through deductions for depreciation. The publication was updated to reflect the extension of expiring tax provisions in legislation signed into law on Dec. 19.
• Publication 4587, Payroll Deduction IRAs for Small Businesses explains that individuals saving in a traditional IRA may be able to receive some tax advantages on the money they contribute, and the investments can grow tax-deferred.
• Publication 4334, SIMPLE IRA Plans for Small Businesses explains how a SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA plan offers great advantages for businesses that have 100 or fewer employees (who earned $5,000 or more during the preceding calendar year) and that do not have another retirement plan.