It's Always Tax Time!
By Roy Lewis (TMF Taxes)
The Motley Fool
The tax forms (or the extensions) have all been filed, the mad April rush has come to an end, and you can breathe a sigh of relief. Thank goodness -- you won't have to worry about taxes for another year.
The only way you can control your tax issues is to review them throughout the year. Was your refund too large? Why should you loan Uncle Sam your money interest-free? Fix it now! Did you have a large balance due with some penalties attached? Take action to get rid of those penalties! Did you fail to take a credit or deduction because you didn't know about it -- or worse, didn't maintain the appropriate records? Now is the time to look forward to tax year 2006, so you don't make the same mistakes again. But it takes thought, planning, and attention.
People often think that taxes are simply a chore, something to attend to once a year. These people are likely leaving money on the table. This is particularly true for investors, because investing is much more than just deciding which stocks to buy or sell.
Many tax-related matters are important components of any investing strategy. For example, how long you hold a stock or security makes a difference, given the lower taxes on dividends and long-term gains. Your cost basis for various securities may have to be adjusted on various occasions. If you're giving a gift to a child, or making a charitable donation, giving stock could help you come out ahead, tax-wise.
If you're generating sizable capital gains this year, the IRS might expect you to file estimated taxes each quarter. If you use your computer for investment purposes, you might have some deductions available to you. If you sell a stock for a loss, think twice before repurchasing it within 30 days. Got employee stock options? You can minimize your taxes by exercising and holding them for certain time periods. Heck, even your home is an investment, and a big one at that. Learn about the massive tax benefits available to you if you plan your home sale properly.
Even if you're not an investor, a number of tax issues should be important to you. Increasing numbers of taxpayers are getting nicked by the Alternative Minimum Tax. If you were one of them, consider actions now that will reduce your AMT bite. And what about all of the recent tax changes? Are you familiar with how you can make them work to reduce your taxes? Concerned about an audit? Perhaps you should be.
In short, you should have at least a working knowledge of numerous tax issues. Leaving things to a tax pro at the end of the year is just fine. But that tax pro can't follow you around to help you with your daily financial, investment, and tax decisions. It's ultimately up to you to take some of the teeth out of your annual tax bite.
It'll take some effort on your part to absorb the information and use it wisely. Tax planning isn't a passive activity; it's something proactive that you can (and should) do throughout the year. In the weeks to come, we'll be discussing tax issues with a direct effect on the lives of you, your family, and your friends. Proper planning will make your 2006 filing much less "taxing" for you and your loved ones.
As Ogden Nash put it:
Indoors or out, no one relaxes
In March, that month of wind and taxes.
The wind will presently disappear,
The taxes last us all the year.
When he's not dealing with tax issues,Roy Lewis is a motivational speaker who lives in a trailer down by the river. He understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.
Will Your Return Be Audited?
By Roy Lewis (TMF Taxes)
The Motley Fool
With the tax-filing season behind us all, many folks just tend to ignore their returns for another year. But many others wonder (and worry) about the chances for an audit. Will your return be audited?
Nobody can say for sure. But it's certain that the IRS has stepped up its enforcement staff in an effort to collect more tax dollars.
A recent IRS study estimates that the difference between the amount taxpayers owe and the amount they actually pay (known as the "tax gap") is between $312 billion to $353 billion per year. That's a staggering amount, and the IRS is aiming to reduce it.
According to IRS statistics, the number of individual audits has increased from 618,000 in 2000 to a little more than 1 million in 2004. That's an increase of more than 60% in just a few short years, and it equates to a 1 in 129 chance of audit based upon total returns filed. If your income surpasses the $100,000 threshold, your audit chances increase to about 1 in 68. If you're self-employed filing a Schedule C, your audit chances increase yet again. As you might imagine, those taxpayers earning virtually all of their income via W-2 forms, with no unusual deductions or large losses on their returns, are much less likely to receive an audit notice.
In addition to full-scale audits, the IRS sends out millions of "correction notices" each year. These notices are computer-generated, resulting from a discrepancy between information reported to the IRS and the information reported on your tax return. While these correction letters are less imposing than an audit, they could still cost you additional taxes.
The IRS has identifiable audit objectives, especially self-employed taxpayers and wealthy taxpayers with big losses on their tax returns. Likely targets also include worker-classification issues (employees vs. independent contractors), unscrupulous tax preparers, and their clients, including failure to report all sources of income in general. The IRS is working diligently to "target" tax returns that will return the greatest additional taxes to the treasury relative to the audit resources employed.
Should you be terrified that your return might be selected for audit? Certainly not. An accurately prepared return is the first line of defense, and well-maintained substantiation records are the ammunition for that defense. Audit selection doesn't necessarily mean that additional taxes will follow. That's especially true if you receive one of the IRS's computer-generated "correction notices". There are many defensible responses to an IRS audit or notice.
Don't stress about an audit. Instead, make sure that you maintain sufficient records and work hard to prepare an impeccable and completely defensible return. Then, if the IRS questions you, you'll have all of the ammunition to turn the audit into nothing more than a nuisance -- without costing yourself additional tax dollars, penalties, or interest.
When he's not dealing with tax issues, Fool contributor Roy Lewis is a motivational speaker who lives in a trailer down by the river. He understands that The Motley Fool is all aboutinvestors writing for investors. You can take a look at thestocks he owns, as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.