Tax Deductions

It is tax time again – which means time to fill out those tax returns, organize your tax deductions and prepare for a possible tax audit. But are you getting the most out of your tax deductions? Many self-employed people and home based business owners are overpaying on their tax returns because they don't know all the facts about which tax deduction they may be eligible to claim. Do not make the same mistake, this year make sure that you know exactly what tax deduction you are entitled to – and get it!

What are Tax Returns?

Firstly, an IRS tax return is the general name for the form used to file taxes payable to the federal or local government, which is filed with the IRS. This form includes information such as your gross income, allowable deductions, tax credits and tax that is due. As an individual taxpayer, you would file the Form 1040 on a calendar-year basis. Corporations should file the Form 1120 on either the calendar-year or fiscal-year basis. Also, tax returns must also be filed for partnerships using a Form 1065, estates with Form 706 and Form 709 is used for gifts you have received.

The IRS, or the Internal Revenue Service, is the federal agency that is responsible for administering and enforcing the American Treasury Department's revenue laws through the assessment and collection of taxes and other related procedures.

The Tax Deductions Everyone Seem to Forget.

If you are a self-employed person or a home based business owner you may already have some knowledge of the incredible tax savings which are available through tax deductions.

It is possible however, that you have been overpaying your taxes in the past, simply because you have overlooked just one tax deduction of the few mentioned here. Non-cash donations include any items (for example, clothing or furniture) donated to Goodwill or other similar non-profit organizations.

You must have a receipt of course and assign a value to the items, but this value is tax deductable. Points on refinancing are tax deductable over the life of your new loan, if you have recently refinanced and paid points to reduce you interest rate. Also, any unamortized points incurred on an old refinancing are tax deductable in the year of the new refinancing.

A miscellaneous deduction can be claimed for expenses spent on tax planning and investment advice, subject to the 2% Adjusted Gross Income (AGI) limitation. This includes tax preparation fees, safe deposit box fees, fees paid to investment advisors, legal and accounting fees related to tax planning, broker and IRA fees paid directly, investment publications, among others. Finally, contributions to college savings plans may be deductable on you state income tax return, depending on which state you live in.

What Will Happen at a Tax Audit?

The IRS audit more and more people every year, but generally audit target high income tax payers. If your tax returns show big charitable deductions, lots of business transactions, lots of itemized deductions and home business expenses, this may draw attention to your business from the IRS and increase the risk of being audited. If you have been chosen for an audit, you must be prepared.

First of all you should go through every letter of your tax return so you know it inside out, and make sure that you gather together all the records that support whichever items were questioned by the IRS. If you are confident that you are in the right, presenting your records should be the end of it; however, it may not always be this simple. Before the examination by the IRS, you should decide what kind of settlement you would be looking for if the IRS is right, as this may be an option open to you.

If things go this far however, it would be advisable to have a taxation attorney to help you deal appropriately with the situation. Taxation attorneys are knowledgeable when it comes to these situations and will have dealt with this before; just make sure you have a good one!

Make sure that you are not overpaying on your tax returns and claiming all the eligible tax deductions possible. Just make sure they are all legitimate claims, so that if the IRS decides to audit you, you don't get into any hot water!