The IRS is officially open for business and is accepting 2016 tax returns, meaning it's time to file your return and get your tax refund. According to the IRS, about 75 percent of taxpayers received a tax refund close to $2,800 last tax season.
If you use TurboTax, you'll get the tax deductions and credits you're eligible for since the software reminds you of tax deductions and credits you may not have known exist. Whether you received the tax refund you deserved last year or think you could have gotten back more, here are six tips to help you maximize your tax refund this year.
File early. By now, you should have received your W-2 from your employer or your Form 1099-Misc if you were self-employed in 2016. Once you have all your tax forms together, go online and get your taxes done! The sooner you e-file with direct deposit, the sooner you will receive your tax refund. What you do with your tax refund is up to you, but having some extra cash on hand is a good opportunity to pay down any debt and eliminate interest charges.
Common tax missteps that will get you audited
Common tax missteps that will get you audited
1. Hiring the wrong tax preparer
This mistake might occur before you even get your name on the tax return. Select a tax preparer who is incompetent or unethical, and he or she could spell big trouble for you.
If the IRS audits one of the returns the tax preparer filed and finds significant problems, the agency could decide to audit all the returns that person prepared for the year, or for the past several years.
Let’s say you breed and sell dogs, or sell blankets on Etsy, or resell garage sale purchases on eBay. At the end of the year, you realize expenses exceeded what you made and decide to deduct a tax loss from your “business.”
However, if you do that for three or more years, the IRS is going to get suspicious. A business is something that makes money. If you haven’t made money in three years, what you have may actually be a hobby.
The IRS doesn’t allow business deductions for hobbies.
3. Filing certain schedules or forms
You might say the third item on our list isn’t a mistake because, in many cases, there is no way to avoid it. For example, if you have a business, you need to file a Schedule C. And yet filing a Schedule C increases your chances of an audit.
However, it would be a mistake to file a Schedule C if you have an unprofitable business that is more like a hobby. It might also be a mistake to file a Form 5213 if you’re not sure.
Form 5213 prevents the IRS from auditing you for the first five years of your business, and it is typically used when transitioning a hobby into a business.
This form allows you to claim losses from your hobby-turned-business, no questions asked. That is, until the five years are up, and the IRS comes calling to see what you’ve been up to.
4. Taking questionable deductions or credits
Experts generally agree that claiming excessive charitable contributions and claiming a home office are the two deductions most likely to raise red flags with the IRS.
If you donate a large percentage of your income to charity, be sure to keep careful records. Too many contributions, relative to your income, can be a problem. So think twice about inflating the value of those items you dropped off at the thrift store.
Keep careful records of all donations and be sure to get a written acknowledgement from any charity to which you donate $250 or more per year.
As for the home office, take the deduction to which you’re entitled — here’s a piece that explains how it works — but be ready to defend it if needed. The most important thing to remember is you can only deduct a home office if you use that space exclusively for business.
Under the category of credits, the Earned Income Tax Credit is most likely to get you in trouble, according to experts.
Back in 2013, the IRS came under fire for not taking enough action to curtail improperly awarded Earned Income Tax Credits. In a statement reported by multiple news outlets, the agency fired back by saying EITC claims were twice as likely to be audited as other returns. If you claim the EITC, consider yourself warned.
When housing prices were depressed, some people converted homes into rentals rather than selling them. Those who found the rent didn’t cover the mortgage and taxes may have assumed they were entitled to take a deduction for the losses.
Thinking you can keep secrets from the IRS is a mistake.
You may think the government won’t know about the money you earned freelancing on the side, but if the company you worked for files a 1099 form, the IRS knows.
You may think you can keep your alimony checks a secret, but if your spouse is reporting those payments on his or her return, the IRS knows.
You may think the interest you earn from foreign bank accounts is between you and that country’s bankers, but if those nice bankers are sharing information with the United States, the IRS knows.
Don’t take the chance of getting caught in a lie. Claim all your income. Then, the IRS won’t have any discrepancies to note, giving it one less reason to flag your return for an audit.
7. Making math errors
The last mistake on our list is also the simplest mistake to avoid: math errors.
If you can’t add and subtract correctly, the IRS might start wondering what else you got wrong in preparing your return. Avoid this audit trigger by using tax software or an online program that will virtually ensure the calculations are correct. If you earn less than $64,000, you can find free online tax prep through the IRS Free File program.
What’s your experience with the IRS? Share in our comments section below or on our Facebook page.
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Itemize your deductions if you can. The standard tax deduction is a deduction set by the IRS that allows you to reduce your taxable income if you cannot take advantage of more tax deductions by itemizing. While the standard deduction will help lower your taxes – $6,300 if you're single; $12,600 if you're married filing jointly – if you take a little time to gather your receipts, you may find that you can get a bigger refund by itemizing your deductions.
Some common expenses that you can itemize on your tax return include: charitable contributions, casualty losses, unreimbursed business expenses, job search expenses, state and local sales tax deductions, mortgage interest, and unreimbursed medical expenses in certain situations. TurboTax will ask you simple questions about you and give you the tax deductions and credits you are eligible for based on your entries. You also don't need to know whether to take the standard deduction or claim itemized deductions. TurboTax will also determine whether you are eligible to itemize or take the standard deduction and give you the option that gets you a bigger tax refund based on your entries.
Contribute to your retirement account. You have until the filing deadline (this year it's April 18) to contribute to an IRA and reap the benefits of a tax deduction of up to $5,500 ($6,500 if you're 50 or older) for tax year 2016. In addition to this deduction, you may qualify for the Saver's Credit. This is the only time the IRS lets you double dip, giving you an additional credit of up to $1,000 ($2,000 for married filing jointly) if you contribute to your retirement.
Get a deduction for the friend or relative you've been supporting. If you've been supporting your friend, significant other or relative, you may be able to get a dependent exemption of $4,050, which is deducted from your income. Now there are some rules, but the deduction is legitimate if your non-relative has lived with you the entire year (relatives don't need to live with you), you provide more than half of his or her support and they didn't earn more than $4,050 in taxable income.
Take advantage of above-the-line deductions, if eligible. Above-the-line deductions are great because they allow you to reduce your taxable income without itemizing. Common examples include if you are a teacher and paid for your students' school supplies, went back to school to get that promotion, paid alimony, pay self-employment tax, paid student loan interest, contribute to your IRA or had unreimbursed moving expenses.
Don't forget tax credits. Tax credits are even better than tax deductions because they are a dollar-for-dollar reduction of the tax you owe, and a refundable tax credit will allow you a credit beyond your tax liability. Such credits include earned income credit, child and dependent care credit, education credits, retirement saver's credit, child tax credit or residential energy credits.
If you earn money selling your words to websites and other publishers, the Internal Revenue Service will likely say you’re a small business owner. Freelance income is self-employment income, and so are any royalties you receive for that book you published or self-published. That can be a good thing, because the self-employed are privy to some tax perks that employees don’t usually receive.
The IRS considers unemployment compensation to be taxable income—which you must report on your federal tax return. State unemployment divisions issue an IRS Form 1099-G to each individual who receives unemployment benefits during the year.