Do you really want to pay more taxes to the IRS than you actually owe? No one does. Calculating the correct income and filing for the right income tax is the aim of everyone. One legitimate way of reducing tax liability is to claim tax deductions. You can make use of every penny available as a tax credit or a deductible expense.
Numerous forms of deductible expenses can reduce your tax liability. The benefits are all yours as long as you don’t get tricky and play fair. As with underreporting of income or exaggerated expense reporting, you may get a call with uneven deductions.
Here are a few mistakes that filers make while applying for Tax Deductions.
Deducting Tax Benefits That Are Not Allowed
You may not face the issue if you file the returns through a tax agent or a specialist. Numerous expenses come closer to deductible expenses. Even if that expense qualifies for a tax deduction, it needs to be filed under the proper category. For example, the IRS allows for certain educational expense deductions, such as the purchase of a computer for attending college under American Opportunity tax credit. You may not get a straight credit for it if you buy the computer for personal use.
Similarly, your work-related training and educational expenses need to be covered by your employer. You may not qualify for the direct deductions of such expenses.
Filing For Too Many Itemized Deductions
Even if you do it unintentionally, filing for too many deductions will raise an alarm bell with an IRS audit for you somehow. For example, if you listed two or three deductible and itemized transactions the previous year and more than ten this year, it wouldn’t make sense. Applying for more than the average number of itemized transactions will surely create a red flag for the IRS.
Regardless of your income resources, all of your itemized deductions must match the average deductions. The IRS will closely evaluate your deductions against the similar income persons and your previous deductibles.
Claiming Large Charitable Works and Donations
All of your charity donations and welfare works are legitimately tax deductibles. But filing for a substantial portion of your income against the charity donations will not satisfy the IRS auditors. Unless of course, you can document the proceedings and back up the claim with evidence.
Even if your earning potential increased substantially or your previous earnings are above average, all of your charity donations must fall within means. A large one-off charity donation or received gift may also land you in trouble. Remember, each charity organization also presents its financials before regulatory authorities.
Cash transactions with charitable works are allowed up to $500. Large charitable donations may also call for an explanation of cash and income resources. Similarly, receiving and donated property or substantially valued items need to be reported to the IRS on form 8283.
Wrongly Deducting the Home-Business Expenses
If you are a self-employed, a freelancer, or work from home person, you’re eligible to deduct work-related expenses. All of these expenses are deductible on an apportioning basis. It means you can deduct the expenses in a portion of the asset that is used for the business purpose. Often people mingle personal expenses with business ones.
A common mistake on home-based expenses is to deduct personal meals, travel, and entertainment expenses as tax deductions.
Deduction Mistakes for Couples
You can file tax returns jointly with your spouse or separately. Either way, all of your income and expense records must align with your combined resources. Similarly, tax deductions must also be filed with care. If you file tax returns separately, make sure to apportion the deductions properly. Also, with separate tax filing, both of you must file for tax deductions.
Similarly, make sure for deductions on the dependents’ expenses. One expense deduction, such as an educational loan interest, should not be deducted twice. Remember to remove the dependents’ deductions as soon as they separately file for tax returns. Even if they work part-time such as a freelancer, their income may be too high to ignore for separate tax filing.
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