The Tax Top 10 List - Mistakes that Cost You Money
With
the arrival of 1099s and W-2s from your employer, banks and others, it's
time to get down to the business of filing your income tax return. While
technology has certainly eased the burden of filing, mistakes still happen.
This article focuses on some of the more common mistakes that will cost
you money.
Math Errors
Despite the explosion of electronic filing solutions, math errors are still the taxpayer's No. 1 problem. While most common for those who file old-fashioned paper forms, even computer-prepared returns can be incorrect if the preparer transfers the wrong number from one schedule to another.
IRS computers are adept at catching these errors. If your return is wrong and you owe more taxes, you will get a bill for the tax, plus penalties and interest. If you owe less, you will get a check from the IRS.
Don't assume that the IRS calculations are correct either. Even they make mistakes sometimes. Take a good look at the numbers before you pay any bill.
Interest and Dividends
If you earn interest or dividend income, make sure you include it on your return. The IRS matches the income on your return to the amount reported by payers. This results in about 10 million notices annually, including a number of which are incorrect. Unfortunately, fear of the IRS leads many taxpayers to simply pay the notice without investigating its validity. Depending on the amount, this can be a reasonable course of action. However, if you believe the IRS is wrong, follow the prescribed procedures to contest the assessment.
Incorrect Investment Basis
Whenever you sell an investment, you pay tax on the proceeds less your basis. Basis is generally the original cost of the investment, plus any dividends or other income reinvested, less prior sales. In the case of mutual funds and stocks, it can be tricky to calculate the basis for investments held for many years. Here is an example: You purchase Mutual Fund A for $1,000. At the end of the year, the Fund declares a dividend of $100. You will pay tax on that $100, but your basis will also increase. If you sell half of your shares the next year for $1,000, you will recognize a taxable gain of $1,000 minus half of $1,100, which comes out to $450.
It is not unusual for a client to provide the original cost of the investment but fail to share information on dividends, sales and other events that affect the basis of the asset. This can literally mean the difference between taxable income and a loss.
Failure to Report Stock Sales
n a rush to file for a refund, taxpayers might forget to wait for Form 1099-B, which brokers file with the IRS to report sales of stocks, bonds and other investments. Unfortunately, the IRS will compare the amount reported by the payer to your tax return. If you have not reported a stock sale, the IRS will send you a bill for tax on the entire amount of the sale. Should this happen, do not send a check to the IRS. It is probable that you have some basis in the asset that can be used to reduce taxable income or even totally eliminate it.
A Final Word on Stock Basis
Until 2010, if you inherited property, your basis in the property equaled its value on your benefactor's date of death. For example, your mother bought $10,000 worth of Exxon stock on Jan. 30, 1970. She died on Dec. 15, 2009. Six months later, you sell the stock for $1 million. The closing price on Dec. 15, 2009, was $69.17, making the value of the stock your mother gave you about $393,000 when she died.
Heirs sometimes refer to the original cost basis of inherited property when reporting the gain or loss from the sale of property. If this happened in the example above, the heirs would incorrectly pay tax on $990,000 in capital gains and not $607,000.
We often see cases where a spouse dies and the survivor provides us with the original cost basis of stock. If the stock is community property, the basis of all the stock in the community is the value on the spouse's date of death.
Change in Marital Status
With some exceptions, your marital status on Dec. 31 dictates your filing status for the year. Marrying on Dec. 31 might sound romantic, but it can have serious tax consequences. While Congress addressed the marriage penalty several years ago, many tax provisions still work against you if you marry at the end of the year. In some cases, spouses who decide to file as married but on separate returns lose the entire benefit of tax breaks. The reverse is also true.
The bottom line is this: before taking the plunge or ending your marriage, do the math. If a change in marital status by year-end costs you money, postpone the event by a few days. Even if you don't change the big date, at least you'll know what it will cost you.
Keep Up With Your Receipts
If you take a deduction, the IRS might ask you for proof of that deduction in the form of a receipt. No receipt means a lost deduction. Typically, the IRS has up to three years from the date your return is filed to adjust it, unless fraud can be proven. Since a disallowed deduction will increase your tax, by the time you get the bill from an audit added penalties and interest will significantly increase the amount you owe.
Improperly Paying Itemized Deductions
Many taxpayers do not pay enough in a given year to exceed the standard deduction. With a little timing, though, you can realize significant tax savings by bunching itemized deductions.
For example, say you are married, file jointly and typically give $10,000 to your favorite charity every year on Dec. 31 and this is your only itemized deduction. For 2009, the minimum you can deduct regardless of your actual itemized deductions is $11,400. If you follow your typical pattern and give $10,000 on Dec. 31, 2009, 2010 and 2011, your deductions for 2009, 2010 and 2011 will be $11,400. If, however, you wait to make your 2010 donation until 2011, you will deduct $11,400 in 2009, $11,400 in 2010 and $20,000 in 2011, resulting in significant tax savings.
Failure to Pay Estimated Taxes
If you are required to make estimated tax payments, failure to do so will cost you money. Certain taxpayers are required to make quarterly estimated tax payments during the year in anticipation of their year-end tax liability. This is in addition to or in lieu of withholdings from your paycheck. If you fail to make the required payments, you will owe an estimated tax penalty. Depending on the required payments, those penalties can be significant.
Failure to Properly Extend a Return
Many taxpayers fail to extend their returns on the April 15 due date. Sometimes this is accidental, but some taxpayers will not extend because they believe they must send a check with the extension. Even if you can't make an extension payment, the penalty for failure to file your return on time is 5 percent of the tax due multiplied by the months you delayed filing. The late payment penalty is 1.5 percent per month. Lower those costs by extending, even if you cannot pay.
The Bottom Line
The tax law is complicated and there are numerous traps for unsuspecting taxpayers. Before you file this year, consider this list of common tax return errors and do your best to avoid them. If you have any questions, give us a call. We will be glad to help.
General Business News - Developing a Viable Exit Strategy
We spent a great deal of time last year discussing how to start and grow a business, but what happens when you want to slow down or retire? Unless you have developed a workable exit strategy, you could be in for a rude shock when it's time to leave, as many in the accounting industry have discovered when approaching their own retirement.
nother term for developing an exit strategy is succession planning. It is the process whereby one generation of business ownership/management determines when and how to pass the baton to a new generation. It is important to note that generation in this context does not refer to age, but rather to a new ownership group.
In order to develop a viable succession plan, current management/ownership must first identify what life cycle the business is in. Is the company young and just getting off the ground? Is the business in a growth phase or has it reached its maturity? Knowing the company's current position will help identify its needs if current management suddenly becomes incapacitated.
Once you have a clear understanding of where your company stands, you must then develop a vision of where it is headed. This is critical if you want the company to support the buyout of your interest by future owners. With a firm vision in mind, you can begin to position a new management/ownership group to take over when you retire.
There are a number of exit strategies you might consider:
Close the Doors This is where you simply sell the business assets and go home.
The Buy-Sell Agreement You and your partner(s) agree on a fair price to pay when one party wants to leave the business.
The Family Sale With this approach, you simply pass on the ownership/management of the business to family members through a sale of your interest in the company.
The Third-Party Sale Another company or unrelated individual purchases your ownership interest.
Employee Ownership With this strategy, you sell the company to one or more key employees, perhaps even to the entire employee group.
The Drop Dead Strategy Believe it or not, there are business owners who expect to work in their business forever and do not take time to develop a plan to ensure business continuity. This is not a viable or desirable exit strategy.
Except for the Drop Dead Strategy, there is a common thread running through all of these exit plans: you need to have the right people in place to carry out the transition. This means you need to recruit your successors early in the life cycle of the business. Then you must create a development plan to help them reach their full potential and design a compensation plan to retain them. It's unlikely you'll keep everyone you recruited to form the backbone of the company once you leave, and that's why it's crucial to begin your talent search early.
There are other key ingredients that are necessary in order for you to exit your company when you are ready. These ingredients include a business model that works; an industry for which there is a product demand; and a buildup of customer satisfaction/loyalty. Furthermore, successful implementation depends on having seasoned managers who will help guide and build the business along with you.
So, do you have a good exit strategy? Take a look around you and ask yourself, "If I left today, would the business continue?" If you can answer "yes" to this question, congratulations! You have positioned your company to move into the future. If you are uncertain or your answer is "no," give us a call and let's talk about your next steps.
Technology: Cell Phone Signal Boosters
Several manufacturers unveiled new cell phone signal boosters at this year's International Consumer Electronics Show. These new offerings tackle the most fundamental and frustrating problem that can stymie cell phone users: a weak signal that results in dropped calls, poor sound quality and limited range. Even with today's plethora of Internet applications, music playing options and camera/video possibilities, the most sophisticated smart phone can't function without a good signal. As we all become increasingly reliant on our smart phones for information, news and day-to-day dialog, our demand for access to consistent, clear communications at work, on the road and at home becomes even more compelling.
Cell phone signal boosters have evolved quickly to meet users' needs. The first products were in-house booster devices designed to improve the strength of cell phone signals used in office or residential buildings. These boosters were designed to be mounted on a roof or high wall to remedy problems experienced by people who lived or worked in buildings with dead spots. Mobile boosters soon came along to offer the same solution for cell phone users on the road. The exterior antenna is placed on the vehicle's roof or window to feed the signal into the car. Later models offered a completely wireless option.
Whether they are in-house or mobile, signal boosters work by using a powerful antenna to capture and strengthen weak signals that cell phones can't pick up. Some manufacturers, including AT&T, offer a different option that uses an Internet connection to get a signal. Advantages of the Internet boost, according to the manufacturers, include a better bang for the buck from your cell phone plan and less drain on your phone's batteries.
The new booster products offered at the CES were slimmer, user-friendly and easier to install and operate than earlier models. Here are some that attracted a lot of attention:
- Wilson Electronics Sleek signal booster , $129 Designed to fit around most cell phone models, the Sleek allows users to hold the phone in the usual manner or to use an earpiece. It is powered through a car cigarette lighter adaptor and works on all major 3G frequencies except Nextel. Users report that it significantly increases ambient wireless signals.
- CelLynx 5BARz Road Warrior, $299 Perhaps the most versatile option compatible with all carriers and wireless devices is the CelLynx 5BARz Road Warrior device, which plugs into electrical outlets and car cigarette lighter adaptors. Simple to pick up and use, this device works with cell phones and data-enabled laptops.
- zBoost, products range from $119 to $ 499 A variety of products created to solve the problems of dropped calls, poor signal reception or dead zones are available at www.wi-ex.com. Wi-Ex offers a number of different zBoost products for home or mobile use. The zPocket YX110 is perhaps the closest competitor to the Sleek. The less expensive models designed for 800 MHz and 1900 MHz frequencies have a shorter range and are most useful in smaller spaces such as hotel rooms and dorms.
Before rushing out to buy a cell phone signal booster, make sure that it will benefit you. Boosters will not conjure up a signal where there is none. If you are not entirely sure that coverage exists, be sure to find a retailer that will allow you to return the booster if it doesn't work in your area.
Questions?
Have Questions? Call Us
We are here to help, if you have any questions please don't hesitate to contact us.