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– Towards Liberty –
A COMMENTARY ON CURRENT EVENTS
– by Jarret Wollstein –
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18 Ways To Save On
Your Taxes In 2006
– 03-23-06 –
As April 15th rapidly approaches, it's time once again to fill out
your returns and pay your taxes for 2005.
Unfortunately for many of us, that's going to be a lot more
difficult this year than it was last year for three reasons:
First, there are dozens of surprising changes this year in the
tax laws, which are going to trip up a lot of people. Changes for 2006 include what
costs you can write off for your business . . . what constitutes an "abusive" trust . . . and the
definitions of what constitutes a "child" and a "dependant."
Second, there are many new deductions a lot of people are going to miss
in 2006. Unless you want to pay more taxes than you actually owe, you won't want to miss
any of these new deductions.
Finally, in 2006, you will face a better-funded, less taxpayer-friendly
IRS. Under a new tax law enacted on November 30, 2005 (H.R. 3058) funding for the IRS in general
and IRS criminal investigation in particular has been vastly expanded to $10.7 billion overall and
$4.725 billion – almost half of the total – for IRS "law enforcement."
This huge new funding means that more taxpayers will be audited
and fined by the IRS in 2006 than were in 2005. The "kindler, gentler" IRS trumpeted just a few
years ago, is now largely history.
These changes are no small matters. Unless you are aware of these
tax-law changes and file accordingly, you could easily end up paying too much, too little, or even
make an innocent mistake that could result in your being penalized, fined or criminally investigated
by the IRS!
As a result, it pays to do your homework and get all of the
deductions you are allowed by law without crossing over the line into areas that could get you into
trouble.
Below you will find 18 tips that will help. However, before we
begin, you should also be aware that if your tax situation is at all complicated, you will want to
hire a qualified, independent tax expert to help you prepare your taxes.
Situations requiring expert advice include if you have bought or
sold real estate in 2005, if you have cashed in stock options, or if you have lots of complicated
investment transactions.
That being said, here are 18 tips on saving money on your 2005
taxes:
— Tax Tip #1 —
Start On Your 2005 Tax Return Now
If you wait until the last minute, you could easily miss
deductions, be unable to find crucial paperwork, or make costly mistakes. You also need to give
yourself time to consult with a tax expert if you need to, and to set aside money for your taxes if
you end up owing money.
— Tax Tip #2 —
Document Your Deductible Expenses
The #1 cause of tax audits and penalties is failure to document
expenses. By including brief documentation of expenses with your tax return, you can save yourself
a world of trouble and expense. Naturally, you should only send the IRS copies, and keep the
originals in a safe place.
— Tax Tip #3 —
Don't Miss Any of These Deductions
One of the most common reasons people pay more taxes than they owe
is because they forget common deductions. When paying your federal taxes, don't forget to deduct:
- Interest payments on your home
- State, city and municipal tax
- Sales tax
- Utility & phone tax
- Medical bills
- Gasoline tax
- Property tax
- Medical devices
- Many dental expenses
— Tax Tip #4 —
Watch Out for the New Definitions of
"Child" and "Dependant"
IRS deductions for children and other dependants are very
important for most parents and guardians.
Under IRS rules, parents and guardians are entitled to four major
deductions: 1) the $3,200 dependency deduction, 2) a $1,000 child tax credit, 3) a $2,100 child and
dependent care credit, and 4) an earned income credit of up $4,000.
But be aware, for separated parents and guardians, the rules have
changed for your 2005 taxes.
Under the previous rules, the definition of a "qualifying child"
for tax purposes was based upon which parent paid child support. In general, the more you
paid, the larger your exemption, up to the legal limit.
Under the new rules, the IRS has substituted "four qualifying
tests" to determine how much you can deduct.
The biggest change is that where a child lives is now
more important than who pays. As a result, if your child lives with the other parent or some other
guardian, your child support deduction will likely be reduced.
Although enacted in the name of "tax simplification," the new
rules are actually quite complex, and you will need to consult your IRS tax manual and possibly
also your tax expert to determine how much you can now deduct for any children you are raising or
supporting.
Do not assume that you can get the same child deductions this year as you did last year.
You may well be dead wrong, and a mistake on your tax return could be costly.
In general, custodial parents and guardians will benefit.
Non-custodial parents and guardians will pay more. Another loser: Guardians who have no
blood-relationship to the children they are raising. If you are raising a child that is not yours,
you could also lose your "head-of-household" deduction.
As the Knight Ridder news service explains:
"The retooled rules will be especially damaging for some lower-income taxpayers who will lose
thousands of dollars in federal and [state] tax savings despite no material change in their
lives."
"For them, the higher taxes for 2005 could rank among the biggest year-over-year increases since
federal lawmakers cracked down on tax shelters in 1986."
— Tax Tip #5 —
Take Advantage of Big New "Katrina"
Charitable Deductions
2005 was a year of horrific disasters, including hurricane Katrina
and Rita in the U.S., and earthquakes, mudslides and tsunamis overseas.
If you are among the many Americans who made charitable donations
to help out with these disasters last year, here's the good news:
You can deduct up to 100% of the adjusted gross amount in cash
contributions you made to certain charities, such as the Red Cross, between August 28th and December
3rd, 2005. That's twice the normal deduction limit of 50% of the amount you contributed.
In addition, you can claim an exemption of $500 for each Katrina
victim you sheltered for at least 60 consecutive days (max: $2,000 per household). You can also
deduct 29 to 34 cents a mile for any charitable activity on behalf of Katrina victims, such as
picking up clothing for hurricane victims. That's more than twice the normal charitable mileage
deduction of 14 cents a mile.
Itemize these deductions separately from other donations.
— Tax Tip #6 —
Itemize Charitable Donations
Starting in 2005, you need to break down your non-cash donations
into separate categories, such as "furniture," "appliances," "clothing," and "books", if the total
annual value of your non-cash donations exceeds $500.
Further, if your donation in any one category – such as
furniture – exceeds $5,000, you will need to provide the IRS with an independent, written
appraisal of the value.
Finally, you can only deduct the charity's actual selling
price of high-priced goods like cars, rather than their fair market value. Charities are now
required to give you this information.
— Tax Tip #7 —
Minimize Capital Gains Tax On
The Sale Of Your Home
With more and more signs that real estate in hot markets is
peaking, many home owners are considering selling their property before it falls in value or simply
takes too long to sell.
Under IRS rules, there are a number of ways you can delay or
minimize capital-gains tax on your property:
First, you can delay taxes by rolling over your profits into a
more expensive home, to a maximum of $1 million on your primary residence.
Second, you can reduce your taxes by deducting monies spent on
home improvement – such as a new furnace or air conditioning system, an upgraded kitchen, or
a new roof. However, you will need to have itemized receipts or other documentation. If you don't
have them, you can request copies of receipts from contractors, provide the IRS with copies of
checks and "before and after" photos, and other documentation.
— Tax Tip #8 —
Deduct Home Refinancing and Loan Charges
If you have refinanced your home or taken out home loans, you can
deduct some charges, including charges for points (each point is equal to 1% of the loan).
You can also generally deduct interest paid on home loans up to
$100,000, unless that income changes your tax bracket. If it does, you could find yourself paying
more tax because of the Alternative Minimum Tax, which is now imposed on a large portion of
taxpayers.
Again, unfortunately, rules are complex and you may need to
consult a tax expert to determine your liability.
— Tax Tip #9 —
Up to $89,000 In Offshore Income Is Tax-Free
Under IRS rules, in 2005 you could have earned up to $89,000 in
foreign-source income, such as consultant fees, and pay no U.S. income tax on those monies. You
may, of course, be obligated to pay taxes on that income to the country where you earned it.
— Tax Tip #10 —
Offset Investment Profits With Losses
Never forget to deduct your investment losses from your investment
profits, to legally lower your taxes, for any given taxable year. Make sure you have good
documentation for all losses.
— Tax Tip #11 —
Don't Take a Tax Refund Advance
Many tax preparers, like H&R Block, now offer to advance your tax
refund when you file through them. The idea is you get your cash right away, rather than having to
wait.
Don't do it. The annualized interest rate you will pay them for
what amounts to a few weeks' loan will be horrific, in some cases well over 500%!
Even worse, if your refund is delayed or lost in the mail, you
could end up owing the preparer.
There are few state laws regulating this type of loan, and the
risks are simply not worth the instant cash.
— Tax Tip #12 —
Be Careful Filing Electronically
Filing your tax electronically is a great convenience, and even
lowers your audit risk by helping you to "get lost in the crowd."
However, there are dangers.
Under the USA Patriot Act, agencies like the IRS are now
authorized to spy on the contents of your home computer, based upon mere suspicion of virtually any
crime – such as underpayment of taxes or charitable contributions to "suspicious" foreign
organizations.
Government agencies are now routinely putting cookies on the
computers of people who visit their web site. This software enables the agency to subsequently
monitor all of your web activity, until the cookie is removed.
Therefore, if you file electronically, do so from a computer at a
commercial tax preparer, rather than from your home computer.
Also if you file electronically, make sure you keep a hard copy
printout of your return, and your receipt from the IRS for filing. By law, you are required to keep
copies of your tax returns and documentation for at least five years.
— Tax Tip #13 —
Don't Take Tax Advice From the IRS
Never forget that the goal of the IRS is to collect as much money
in taxes as possible. As a result, IRS employees are trained to give taxpayers advice that most
benefits the IRS, not you. To minimize your taxes, never, never rely on advice from the IRS.
Relying on advice from the IRS can also be downright dangerous.
Most of the people who answer IRS "help lines" are low-paid employees who have little tax expertise.
Studies have found that some 70% of the time, they either give no advice or the wrong advice.
However, following their faulty advice will not legally protect you from late fees, fines and other
penalties when it proves to be wrong!
Finally, if you get frustrated and argue with them on the phone,
it could trigger an IRS investigation or audit.
If you feel you must call the IRS, do so anonymously from a pay
phone.
— Tax Tip #14 —
Triple-Check Your Tax Return
An innocent mistake could cause your return to be red-flagged for
an audit, or delay your refund check.
Make sure and avoid these common mistakes on tax returns: 1) not
signing the return, 2) mistakes in your Social Security Number or taxpayer ID number, and 3)
mistakes in arithmetic. Any of these mistakes will increase your chances of being audited.
— Tax Tip #15 —
File for A Tax Extension, if necessary
If you haven't finished your tax return by the deadline –
which is April 17th this year, since the 15th falls on a Saturday – you can get an automatic
six-month extension of the time you have in which to file by filing Form 4868 with the IRS. That's
two months longer than last year. You will still need to pay any estimated taxes due by April
17th, to avoid interest and penalties.
— Tax Tip #16 —
What If You Can't Pay Your Taxes?
You can request more time to pay your taxes by filing IRS Form
1127. You will need to show severe hardship to even have your request considered.
Granting your request for more time to pay is not automatic,
and paying late – with or without filing a Form 1127 – will almost always result in
interest charges and penalties, which can be substantial. It will also increase your chances of
being audited.
Generally, you will be far better off borrowing the money you need
to pay your taxes rather than attracting the attention of the IRS and racking up penalties and
interest charges.
— Tax Tip #17 —
Don't Reveal Ownership of Hard Assets
Never reveal to the IRS that you own precious metals, rare stamps,
or foreign real estate that doesn't generate income for you.
By law, the IRS has the right to know where you get your income,
not what assets you own.
If an IRS agent tries to browbeat you into revealing such
information, simply say it's not relevant to your income and you can't "confirm or deny your
interest in any such property."
The major exception to this rule is if you have signature authority
over foreign bank accounts with $10,000 or more in them. These do have to be disclosed to the
Treasury Department and IRS.
It is perfectly legal to withhold information from the IRS that's
none of their business. As Martha Stewart discovered to her dismay, it's a serious crime to lie to
a government agent. However, it's legal (and much safer) to keep your mouth shut.
— Tax Tip #18 —
Get help with your taxes
If you are over 50, free help in preparing your taxes is available
to you through the American Association of Retired Persons and other organizations.
I also strongly recommend subscribing to tax-expert Dan Pilla's
Confidential Tax Bulletin, available through American Lantern Press, 1015 Manning Drive,
Fredericksburg, VA 22405, 1-540-371-1807.
Excellent information on reducing your taxes by investing offshore
is available through The Sovereign Individual newsletter, PO Box 925, Frederick, MD 21705,
1-888-358-8125, Fax 410-230-1253.
To view back issues of Jarret Wollstein's Towards Liberty, Click here.
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