Should I work with a certified public accountant (CPA)? What happens if I get audited? Taxes can generate substantial anxiety—yet, as Benjamin Franklin famously once said, nothing is certain except for death and taxes. The vast majority of Americans file each year without problems and move on with their lives.
LeAnn Luna, professor of accounting and the Jeff and Janet Davis Faculty Research Fellow in UT’s Haslam College of Business, provides insight into minimizing your tax load and bureaucratic burden.
What factors should I consider when deciding whether to do my taxes myself or go to a CPA?
Keeping good records and being comfortable with numbers are the biggest hurdles in preparing a tax return. There are a number of good software packages that can assist you—some are free—and lots of information is available online to answer simple questions such as “Is this deductible?” However, if you own your own business, have several jobs, or hold a number of investments, you may want the security of working with a CPA.
What are some of the most commonly missed deductions?
One of the advantages of using a quality tax prep software program is that it takes users through an interview process to help identify potential deductions. Below are a few common deductions that people miss.
Individuals who itemize are allowed to deduct either state and local income taxes or state and local sales taxes. For most Tennesseans, the sales tax is a better deal. The IRS has tables that estimate the sales tax paid based on income, but the tables do not account for large items such as a car, boat, or building materials. The actual sales tax paid on these purchases can be added to the IRS amount.
Job-hunting costs for a position in the same line of work as your current or recent job are deductible as miscellaneous itemized deductions. Deductible expenses could include travel costs such as mileage, food, and lodging if you stay away from home overnight, cab fares, postage, and the cost of printing resumes.
People also often forget to deduct points on a refinanced home mortgage. In the year you pay off the loan, either because you sell or refinance again, you get to deduct the remaining points.
Although the recent tax overhaul isn’t in effect yet, are there things I need to consider now that will affect my taxes next year?
Individuals should consult with their tax advisors or use the IRS withholding calculator to perform a quick paycheck checkup to make sure the correct amount of tax is being withheld from their paycheck. Some individuals will need to increase their withholding to keep from facing an unexpected tax bill or a penalty; other individuals will want to reduce their withholding. The withholding calculator helps you determine if you need to give your employer a new Form W-4.
The Tax Cuts and Jobs Act reduced tax rates, doubled the amount of the standard deduction, and eliminated the personal and dependency deduction. If you don’t itemize on your 2017 tax return or if your itemized deductions are less than $24,000 (married) or $12,000 (single), then you probably won’t need to worry about keeping receipts for charitable contributions, including noncash donations, this year.
Because Tennessee has no income tax, my focus has been on federal taxes. Under what circumstances am I required to file in Tennessee, and what can I do to minimize my state tax burden?
While Tennessee does not impose an income tax on wages, the Hall income tax imposes a 4 percent tax on individuals receiving interest from bonds and notes and dividends from stock. The Hall income tax does not apply to the first $1,250 of income ($2,500 married, filing jointly). The tax is in the process of being phased out and will be completely eliminated by January 1, 2021.
I’m scared of being audited. What are the chances that I will be, and what should I do if it happens?
The chance of being audited is quite low. In fact, the IRS audited less than 1 percent of all individual returns filed in 2015. Most of the time, individuals will receive a letter from the IRS letting them know they made a mistake with the amount reported or perhaps forgot to include income like interest reported to the IRS on a Form 1099.
First of all, never assume the IRS is correct, so verify their information. If they are correct and the amount is small, it is easiest just to pay what is owed. If there is a large penalty, and the taxpayer has a good reason for the error, the IRS will sometimes waive the penalty. It never hurts to ask. The IRS will not waive the tax or interest in most cases, so one strategy is to pay interest and taxes and include a letter asking the IRS to waive the penalties for good cause.
If you are selected for an audit, the IRS will ask you to supply additional documentation about items on your tax return. You may want to ask your accountant or lawyer to assist in the matter. In any case, you will want to get organized and supply only the requested documentation to the issues at hand. Don’t be rude to the agent, and don’t try to justify an error by stating that you’ve always done it that way. Finally, don’t panic or be pressured into settling an issue just to end the audit.
Gerhard Schneibel (865-974-xxxx, firstname.lastname@example.org)
Tyra Haag (865-974-5460, email@example.com)