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How To Maximize Tax Deductions And Minimize Audit Chances

Fill all taxes correctly the first time. Common sense dictates that you should avoid bouncing checks to the IRS, failing to declare winnings on a popular reality television show, and not attempt to file your own taxes when you have a complicated fiscal situation (e.g. you own a diverse set of liquid assets, have partial ownership of a business, have received an inheritance, etc.). By filing your taxes correctly the first time, you can earn every dollar you are legally entitled to.

tax deduction

Do NOT stretch the truth

  • Charitable deductions Certain deduction such as charitable donations and business expenses need to remain reasonable. Eyebrows tend to be raised when an individual that earned under $30,000 in the past year made a charitable donation worth $10,000. Donating to a fake charity (e.g. the help me and my roommates upgrade our kitchen and entertainment system charity) does not count. Similarly, a low-end car purchased in 1998 probably should not be valued at $15,000 when donated.
  • Claiming a false AGI Other red flags for the IRS include those working at jobs that are primarily paid in tips. A waitress who claimed a single income of $20,000 per year probably would barely scrape by, not have recently purchased a luxury vehicle. The IRS views those making large purchases while claiming a low gross annual income as one of the first groups to audit.
  • Concerns for self-employed employees Those who are self-employed also need to be cognizant about how many deductions are realistic. For example, claiming that your living room is your home office is largely missing the point. Similarly, making claims that over 25% of your primary residence is used as a home office can seem skeptical. Also, careful records of mileage driven for work and work-related lunches need to be reasonable. Keep all receipts and logs in dated envelopes dated by week to avoid confusion.

An easy way to keep records for tax season

Instead of scrambling to find loose receipts during tax season, get in the habit of keeping weekly records. Keep all logs in a logical place. For example, keep a log of mileage driven in your car. Also, keep track of all pertinent account numbers that correspond to various investments such as mutual funds and employee stock programs in a safe place for ease of access.

When you absolutely need an accountant

U.S. citizens working abroad under a work permit almost always need to consult with an accountant with specialized experience as the U.S. are not exempt from U.S. taxes unless they formally renounce their citizenship. If unsure about anything, always hire an experienced accountant.

Throwing Your Receipts in the Trash Could Cost You

receipt

You probably don’t think twice about tossing receipts right into the trash the split second following a purchase. Why burden yourself with such minuscule clutter? These aren’t minuscule, however. Receipts aren’t trash, especially when they can save you money, prove purchases, and help prevent credit card fraud. Keep the following five reasons in mind next time you’re about to throw away a receipt:

Taxes

Save those receipts for annual tax reductions. From seemingly inconsequential purchases to big-ticket items, you may just be able to write off an expense for personal and professional purposes. It varies from job to job, person to person, and expense to expense, but you never know how and when your receipts will come in handy when it comes to filing your taxes in April. Also, business owners and homeowners who’ve made significant home improvements, for example, can write off expenses. If you’ve claimed something, hold onto a receipt for seven years following a return in case you get audited, suggests Mainstreet.com.

Security

Receipts floating around can end up in the wrong hands — hands that un-crumple that small piece of paper and then conspire to turn your world upside down. An unwittingly trashed receipt can easily become the weapon used to steal your identity and destroy your credit. Even receipts tucked in your wallet can be a high risk for identity theft in case your wallet is stolen. If your wallet full of receipts ends up in the possession of a thief, you are susceptible to not only identity theft, but loan, bank, benefits and tax fraud forewarns Lifelock services.

Proof of Purchase

Receipts can handily prove purchases without stress and frustration. Let’s say you buy a gift card and it’s non-redeemable; Without a receipt, you have no real means of recourse. A receipt can serve as a safety net for mistakenly un-activated gift cards as well as damaged purchases or purchases that you’d like to return. You’ll wish you had that receipt when you want a hassle-free refund, exchange, or warranty.

Reimbursements

Receipts are essential for employees who file expense reports. As long as you have your work-related receipts safely stored, you’ll never have to worry about being questioned about a purchase. Unless you responsibly handle those receipts, be prepared to cover the costs from your own wallet.

Checking Against Your Credit Card

If you use your credit card for all of your spendings, make sure no purchases slip through the cracks by checking your balances. Refer to your receipts while evaluating your credit card report to ensure that all purchases are valid. For instance, you’ll be happy for that one receipt to prove an extravagant unauthorized tip.

Balancing & Budgeting

Balancing your checking account according to your receipts helps organize your finances and sustain your budget. While adding up those numbers, you can gain a visual for how much you spend and on what, which may motivate you to modify your spending habits. The iPhone app Receipts can help you easily track your spending and quickly log purchases. Take pictures of receipts, back up and export information, categorize expenditures, and use charts for the organization— all conveniently on your smartphone.

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