Check your tax return for these items to make sure you are not paying too much.
October 30, 2020 4 min read
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Katie sits down with Marissa, her CPA, to finalize her taxes. It’s already past the deadline, so the pressure is on to submit it immediately to avoid further penalties. After two hours of questions and requests for documents, Katie is confident that she has revealed all the necessary details of her personal and business life.
Related: 75 Items That You May Be Deductible From Your Taxes
Three days later, Marissa emailed Katie with more inquiries! The brokerage firm did not have basic information about a share it had transferred, the rental home it sold had inadmissible losses in previous years that were not reflected in last year’s returns, and the losses from their new business are ineligible because they do not exist is basis. The good news is that the CPA identified these shortcomings. The bad news is that this means digging through old files more.
To better understand the tax situation of you and your family, most tax accountants and CPAs are very diligent in asking you the right questions, either over the phone or through a questionnaire. You will be asked about rental properties, buying and selling a home, deductions for your business, fees for childcare, etc.
However, there are some tax implications that are a bit more obscure and harder to detect with a simple questionnaire, and typically relate to multi-year deductions, unlawful losses and sales taxes.
There are many ways to fix this problem. The most obvious thing to do is to provide as much information as possible to your CPA, even if you don’t think it’s tax relevant – because it may. To give you a better overview when speaking to your CPA, there are a few concepts to consider and review line items:
Related: 4 Ways You Can Cut Your Taxes Like President Trump
1. Improper losses in previous tax years
Little attention is paid to impermissible losses. Most people view these as improper deductions that you can never benefit from, but improper losses are just delayed withdrawals. These losses can show up on your last year’s return but it is important to keep an eye on them as you should be able to benefit from this deduction when selling any property or business. Check Schedule 1, Line 5 and Form 8582, Line 1c.
2. State income taxes paid last year
If you owed government taxes when you filed your tax return last year, double check that your payment is included on your tax return. If you don’t provide details, contact your preparer to make sure these costs have been taken into account. Check schedule A line 5a.
3. Sales tax
If you live in a state with no income tax (Hello, Florida!) And you list your deductions, you’ll need to report sales taxes. The IRS provides a simple calculator so you don’t even need receipts! Remember to add sales tax to this calculation for larger purchases such as a car or boat. Check schedule A line 5b.
4. Invalid pass-through losses
When you own a business, there are years of losses – hopefully not too many. But more often when you are starting a new business you make some losses before you see any profit. While there are limitations, most business owners are ultimately liable for losses from personal guarantees. This means you have a credit base! Unless you are responsible for covering these losses, they should be deductible. Review lines 3 through 6 of Schedule 1.
5. Inventory base
The basis is the booking term for how much you paid for an asset. The proceeds of a sale minus the base are your profit – which you pay tax on. Brokerage firms do an excellent job of providing these numbers, but they occasionally lack basic information. Check the Schedule D e column.
Related: 4 Ways To Save Tax On Real Estate Selling
The more complex your investments and life, the easier it is to miss out on deductions. Be diligent and check out all possible ways to lower your taxes. A good CPA is a start, but nobody is perfect. And remember, just because you get a refund doesn’t mean you’re paying the least amount. it just means that you overpaid to begin with. Check line 16 on page 2 of your 1040 – that’s what you pay in taxes! Then, check the return to see if you missed anything that could lower those taxes.
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