Are You Taking Enough Tax Deductions?

Even when anti-tax sentiment is running high, as it has been in recent times, Americans overwhelmingly accept the principle that filing an honest tax return is a civic duty.

Accountants say their clients often have a higher standard than the IRS requires. Some people will not itemize an expense when they cannot find a receipt, for example, even though not every tax deduction requires one. Estimates that conform to a "reasonable" standard are often adequate although some, like charitable deductions, must conform to a higher one.

Of course people are afraid of an IRS audit. But according to the 2012 Survey of Taxpayer Attitudes from the IRS Oversight Board, 86 percent say it's "personal integrity" that motivates them to be honest, and just 40 percent say they file faithfully out of fear of being caught doing something wrong.

To be sure, U.S. taxpayers don't skimp when it comes to claiming deductions. They list more than $1 trillion a year on tax returns. Still, accountants say they often miss obvious ones. Here are some ways people slip up:

Missing changes in tax laws. The tax code is not chiseled in stone like the Ten Commandments. In some years, there is not much new but in other years, the code can change significantly. The 2013 budget year was expected to bring big changes, but most were incremental. The top rate rises to 39.6 percent from 35 percent for the upper income bracket, which also faces higher dividend tax and a phase-out of tax deductions. Inheritance and gift taxes were added, but at relatively high thresholds. New or increased college tax credits and breaks for energy saving will soften the blow for many middle-income payers. Still, the tax code is as complex as ever.

[Read: Tax Time: Changes You Need to Know.]

"In general when people are preparing tax returns themselves, they not equipped to understand all of the changes in the law from year to year," says Gary DuBoff, managing director of accounting and financial planning firm CBIZ MHM.

Job-hunting expenses. With unemployment high, people are busy looking for jobs at all career stages. Even costs associated with an exploratory visit to a potential employer can be a deductible item. It's worth keeping track of all professional visits that might be considered job prospects. The IRS allows 56.5 cents per mile if you drive. But career re-inventors beware: One of the quirks of the tax code is that job searches outside your present line of work cannot be deducted.

Charitable work deduction. People at all ages, from teenage to retired, are doing more volunteering. Most people know to deduct contributions, but "a lot of people don't realize they can deduct expenses for their work," says DuBoff. They shrug it off as "just what I like to do." They can't deduct their time, but they can write off related costs such as transportation and supplies. You don't have to be a soup-kitchen volunteer to qualify. "Volunteering as a soccer coach or a class mom would also be a charitable work," says DuBoff.

Refinance point deduction. In this year's big wave of mortgage refinancing, most loans no longer require payment of points, the upfront interest charges assessed at the start of a home loan. But some people forget to take a deduction on points they still pay for previous mortgages, DuBoff says. When you extinguish your old loan, you repay remaining points all at once. That amount is entirely deductible.

Tax deductions vs credits. Not all tax breaks are alike. Be aware of the difference. A $500 energy tax credit might not seem like much, but it is what is known as an "above the line" item, meaning it lowers the amount of your tax bill on a dollar-for-dollar basis. Tax deductions are figured on your income tax rate. If you are in a 28 percent tax bracket, the tax deduction trims 28 cents from each dollar you deduct.

[Read: How Much Should I Contribute to My 401(k)?]

Childcare deductions and flexible spending plans. People often avoid this one because of the paperwork and hassle of paying "on the books" for a few hours of childcare here and there. But there are allowances that make it worth the effort. The childcare credit, an above-the-line item, reduces taxes by 20 percent to 35 percent of the first $3,000 spent for one child or $6,000 for two, depending on your income level. That credit can be used for parent care, too. The IRS also allows up to $5,000 for workplace flexible spending of pre-tax dollars for nannies, after-school care, and even day camps.

College and education. College costs are usually not deductible, but there are tax credits for tuition and a limited deduction for interest on student loans. Up to $2,500 in interest can be deducted if your income is under $75,000, or $155,000 for a joint return. A college credit of $2,500 for tuition and related expenses is available if your income is $80,000 or $160,000 for joint filers.

Retirement. One overlooked advantage of becoming self-employed, as many are in this era of non-retirement, is that you can use the SEP (Simple Employment Plan) to put 25 percent of your self-employment income up to $50,000 into a tax-advantaged employment plan. People who have had workplace plans often forget to set up their own. "That's a big mistake," says DuBoff. "It's a great chance to put more away."

[Read: 2 Simple Steps to Make Your Retirement Savings Leap.]

Tax deductions on taxes. Amid federal budget cuts in recent years, state taxes are picking up a larger share of the tax burden. Those payments are deductible. In states that do not have income taxes, sales taxes can be deducted. Even if you live in a state with an income tax, you might be able to opt to take the deduction for the sales tax paid. The purchase of a boat or a car in some states might generate sales tax that creates a larger deduction than income tax.

Storm expenses. Hurricanes Sandy and Isaac caused billions of dollars of devastation in the eastern United States. Storm damage can be a deductible item if it amounts to 10 percent of adjusted income. If you reside in an official federal disaster area, you can deduct those costs over a two-year period going back two years.

Beyond the fact that it's the right thing to do, being honest is a good guide. But tax codes are sometimes illogical. For example, there are virtually no tax breaks for people attempting career changes, but many for career advancement. So honesty and logic alone will not be enough. When in doubt, consult.

"If you are entitled to a deduction, I firmly believe you should take it," says DuBoff. "Even if you do not have a record of every expense, a reasonable estimate can work. But it can't be frivolous or way out of line." With the IRS increasingly relying on algorithmic filtering of electronic returns, those outliers quickly draw attention.

More From US News & World Report

View the original article here

Taking Advantage of Miscellaneous Deductions

Every tax season, frantic filers search for ways to reduce the checks they must write to Uncle Sam. A proven tax strategy is deducting as much as possible.

But sometimes, technically deductible expenses are wasted because they don't meet other Internal Revenue Service rules. This is often the case for most of the miscellaneous deductions found on Schedule A.

The roadblock preventing the write-off of these assorted expenses is the requirement that they total more than 2 percent of the taxpayer's adjusted gross income, or AGI. That means a taxpayer with $50,000 in AGI must come up with more than $1,000 in miscellaneous deductions before they do him or her any tax good. Even then, just the amount over $1,000 is deductible. So the 50-grand filer with $1,750 in tax-allowable miscellaneous expenses can only deduct $750, not the full $1,750.

While the 2 percent limit is tough for many filers to reach, it's not impossible. You just need to know exactly what the IRS considers as allowable miscellaneous deductions. The expenses fall into three general categories: unreimbursed employee expenses, tax preparation fees and "other" expenses.

Unreimbursed employee expenses

Remember that copier toner you bought that Saturday you had to work and the office machine ran dry? What about that fee you paid to become a notary public, a designation requested by your boss to speed up the flow of official documents? If you never got reimbursed for these costs, they could help reduce your personal tax bill as a miscellaneous deduction.

The IRS says you can deduct these expenses you paid out of your own pocket as long as they were required to do your job as an employee and were "ordinary and necessary" to your business or trade. An expense is ordinary if it is common and accepted in your type of business; it's necessary if it is appropriate and helpful to you in doing your job.

Because you have that percentage target to meet, be thorough here. Most taxpayers know to count the price of professional journal subscriptions and business-related meals and entertainment, but other items the IRS says you can deduct are the costs of work-related classes, legal fees and licenses. Don't overlook the price of job-required uniforms that you bought (and that aren't suitable as general attire), as well as amounts you paid for employer-required medical examinations. Even the fee to obtain the passport you needed for that overseas business trip is deductible here.

Certain home-office expenses also might count, as long as the residential workspace is for the convenience of your employer and not just to save you some commuting time. And don't forget about depreciation on personal computers you use for work. These, too, must be for your boss's convenience and required as a condition of your employment.

What if you've had it with your job and all its ancillary costs? You can deduct as miscellaneous expenses the amounts you spent looking for other employment in the same field.

Some of these expenses require you to fill out an additional tax form, schedule or work sheet. But when you get the final amount that you can deduct, report it on line 21 of Schedule A.

Tax-preparation fees

If collecting all your potential work-related deductions prompted you to seek tax help, then the IRS has a tax break for you here. And you don't have to hire a CPA to get this deduction.

You can deduct the cost of tax-preparation software, tax publications and even costs for associated tax-filing duties, such as copying your returns or paying for return-receipt postage or overnight delivery when you mail them.

If you choose electronic filing, any fee you paid for that service is deductible here. The IRS now even lets you deduct the convenience fee you were charged when you paid your e-filed taxes by credit card.

Just remember, you deduct your tax-preparation expenses for the tax year in which you paid them, not the tax year for which you are filing. So on your 2012 return, you count the tax-related costs you incurred last year to prepare your 2011 taxes. Any expenses you fork over now to complete your current return will count when you file your 2013 forms next year.

Once you've totaled your tax-prep costs, enter them on line 22 of Schedule A.

Other miscellaneous deductions

The final 2 percent deduction category is "other" expenses. For most taxpayers, these are costs to produce or collect income, such as investment-related fees, or to manage or maintain property that provides you with some extra earnings.

For the IRS to accept these deductions, the expenses must be "reasonably and closely related to" a taxpayer's income-producing efforts. Some common expenses that meet this requirement are clerical help in caring for investments, depreciation on home computers used to track and manage investments, and the fee for a safe-deposit box in which you keep investment data. If, however, your bank box holds only jewelry and other personal items, or even tax-exempt securities, the box rental fee is not deductible.

You also can write off several investment-related fees that, while small, could add up. They include service charges on dividend reinvestment plans and trustee's fees you paid for your IRA. Just make sure your retirement account fee is billed separately rather than included as part of your account's general management costs, and that you pay it separately.

Even costs associated with a recreational activity could come into play. Take, for example, an amateur photographer who snaps shots of graduations or weddings for the neighbors and gets a few bucks in return. The shutterbug can deduct camera-related expenses as a miscellaneous expense as long as the amount isn't more than the payments he or she got. The IRS frowns on using hobby expenses to reduce taxes.

All allowable "other" miscellaneous deductions are entered on Schedule A's line 23. Then all three category amounts (lines 21, 22 and 23) are totaled. Unfortunately, because of the AGI percentage limit, that's not what you can deduct.

Maximizing miscellaneous deductions

Now you must take your AGI (from line 38 of your Form 1040), multiply it by 2 percent and enter the amount on line 26 of your Schedule A.

If that income percentage is more than your miscellaneous deductions total, you're out of tax-deduction luck. You can't claim any of the expenses. But if your fractional AGI amount is less, subtract it from your miscellaneous deductions total -- the remainder is what you can claim as an itemized deduction.

In addition to your Schedule A calculations, you might have to complete additional tax forms or work sheets to claim some of these miscellaneous expenses. You can find a complete list of the IRS-approved deductions (and those that aren't OK), as well as the other tax paperwork each might require in IRS Publication 529, Miscellaneous Deductions. But if the extra paper gets you over the 2-percent-of-AGI hurdle, the time spent is probably worth it.

And what if your miscellaneous efforts fell a bit short this filing season? Then set up a deduction bunching strategy now to guarantee that future sundry expenses aren't wasted. This is simply bunching, or gathering your expenses into one tax year, rather than spreading the costs over several. By doing so, you often can accumulate enough expenses to exceed the deduction threshold.

For example, renew your business subscriptions in December instead of January, or prepay your professional association dues early. This will help turn "nearly" deductible expenses one year into full-fledged tax breaks the next filing season.

The only downside of this plan is that it usually helps you out only every other year. When you push expenses into one year, you generally will find yourself short of the itemized deduction percentage requirement the next year. But getting the breaks on alternate tax filings is still better than missing out on them every year.

More From Bankrate.com

View the original article here

The 8 Most-Missed Tax Deductions and Credits

It's hard to believe we are going into the home stretch of the 2012 tax season. With not much time left, taxpayers often make mistake, as they begin to scramble to quickly get their taxes done or are not aware of tax deductions and credits and leave money on the table.

Here are eight of the most-missed tax deductions and credits:

1. Dependent exemptions. Exemptions for dependents are $3,800 per dependent, but individuals often don't take it. Why? Because they don't realize their relative they've been supporting or their friend that's been sleeping on the couch may be claimed as a "qualifying relative," which may entitle them to a tax deduction.

2. Earned Income Tax Credit. The Earned Income Tax Credit is for low to middle-income wage earners that has lifted nearly 7 million people out of poverty. However, the IRS estimates 20 percent of eligible workers and their families miss out on this valuable credit. You have to file your taxes to get this tax credit, but oftentimes many think they don't make enough money to file their taxes. Not claiming the Earned Income Tax Credit can cost a family with three dependents a credit worth up to $5,891.

3. Child and Dependent Care Credit. Children can be expensive, but the IRS has some relief. If you work and pay for child care for your dependents under 13 years old, you may be able to qualify for a deduction of up to $2,100. You can even deduct the cost of summer camp. Summer was long ago, but don't forget this tax deduction.

4. State Sales Tax Deduction. You usually get a choice between deducting state income taxes paid or state sales tax, depending on which expense gives you the largest tax deduction. If your state does not have state income taxes, then the option to choose the state sales tax is beneficial to you. Even if you pay state income tax, if you purchased some big ticket items in 2012 you may keep more money in your pocket by choosing to deduct the state sales taxes paid.

5. Charitable donations. You would be surprised how much individuals donate to charity every year without ever thinking about how much money they could save at tax time. Many taxpayers have contributions to charitable organizations deducted from every paycheck, but they forget to include that as a charitable donation when preparing their taxes.

Don't forget about your out-of-pocket expenses while traveling to volunteer at the local soup kitchen. You can deduct 14 cents per mile plus parking and tolls for travel directly related to charity work. Spring and Fall cleaning are a yearly ritual, but we often forget donations of non-cash items like clothing and household goods are tax deductible. Looked at individually, these may seem small, but these tax deductions can add up.

6. Job-search expenses. If you were looking for a new job in 2012, you may be able to deduct costs related to job search, such as the cost of resumes, employment agency fees, postage, and even travel expenses--as long as the expenses are directly related to your job search and the positions you sought were in the same line of work as your previous job.

7. Moving expenses. Even though job-hunting expenses for your first job are not deductible, you can deduct your moving expenses for your first job. Your job must be at least 50 miles away from your old home. If you meet the time and distance test, you can deduct the cost of getting yourself and your household goods to the new area. You can even deduct the cost of moving your pet.

8. Previous State Tax Liability. Did you pay previous state tax liabilities in 2012? The amount paid can be added to the state income taxes withheld from your paycheck for an even larger tax deduction.

Lisa Greene-Lewis, Lead CPA, American Tax & Financial Center at TurboTax, has more than 15 years of experience in tax preparation, including positions as a public auditor, controller, and operations manager. For up-to-date tax tips and tax news, go to the TurboTax Blog, where you can find answers to the most commonly asked tax questions.

More From US News & World Report

View the original article here

Tax Prep: Don't Miss These Juicy Credits and Deductions

The IRS expects that 75 percent of all 2012 returns will be entitled to a refund, so if you haven't started preparing your taxes yet, do it: There's no reason to wait for April 15 to roll around to get that money back from Uncle Sam. And remember: If you do not file your return by the due date, you may have to pay penalties and interest. Even if you can't meet the deadline, you can file for an extension, which will give you until October 15 to file your 2012 tax returns.

Here are some updates before you start to prepare:

New for tax year 2012, the IRS is providing taxpayers whose incomes are $57,000 or less with "Free File",  available through IRS.gov, where a number of tax software companies make their products available for free. Additionally, some states are offering similar options. Electronic e-filing is available to all taxpayers, regardless of income.Mailing your return: If you are filing a paper return, you may be mailing it to a different address this year because the IRS has changed the filing location for several areas. See Where To File for a list of IRS addresses.Exemption amount: $3,800 from $3,700 in 2011Standard deduction: For married couples filing a joint return, the standard deduction is $11,900 for 2012. For single individuals and married couples filing separate returns, it is $5,950 and for heads of household it increases by $200 to $8,700 for 2012.Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.Estate and gift tax: The exclusion amount for 2012 is $5,120,000. The exclusion for gifts to a spouse who is not a citizen of the United States increases to $139,000 for 2012.Itemized deductions and personal exemptions: The itemized deduction limitation and personal exemption phase-out rules were repealed for 2011 and 2012, which means taxpayers can deduct the full amount of their itemized deductions and personal exemptions in 2012. These limitations ($250,000 for individuals and $300,000 for joint filers) will go back into effect for tax year 2013
Get the Credit(s) You Deserve:

Tax credits are the best tax deal going, because they reduce your taxes dollar for dollar, instead of being calculated based on your tax bracket.

The Earned Income Tax Credit (EITC) is a refundable credit for low- and moderate- income workers and working families. The 2012 income limit for the EITC is under $50,270 for joint filers and under $45,060 for singles and the maximum credit is $5,891. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children. Use Schedule 8812 to figure your additional child tax credit for 2012. (Details are in IRS Publication 596 — PDF.)

The Child Tax Credit is up to $1,000 for each qualifying child who was under the age of 17 at the end of 2012. This credit can be claimed in addition to the credit for child and dependent care expenses, but phases out for married couples that earn more than $110,000 and single filers who earn more than $75,000. In an IRS-esque move, taxpayers should use Schedule 8812 (instead of Form 8812) to figure the additional child tax credit. (Details are in IRS Publication 972 — PDF.)

The Child and Dependent Care Credit is available if you pay someone to care for a dependent under age 13, so that you can work or look for a job. The credit is 20 to 35 percent of your child-care expenses up to $6,000 -- the size of your credit depends on your income. This credit will be reduced significantly next year. (Details are in IRS Publication 503 — PDF.)

The Retirement Savings Contributions Credit is designed to help low- and moderate-income workers save for retirement. Individuals with incomes of up to $28,750, head of households with $43,125 and married couples with joint incomes of up to $57,500 may qualify for a credit of up to $1,000 per person. (Details are in Form 8880 — PDF)

Energy and Appliance Tax Credit If you made any energy-efficiency improvements to your home in 2012, you may be eligible for a tax credit of 10 percent for the cost, up to a maximum of $500. Approved improvements include new windows, insulation, high efficiency furnaces, water heaters and air conditioning, among many. Be sure to keep your receipts and manufacturer certification. (See which Energy Star items qualify for the tax deduction and use IRS Form 5695)

The Adoption Tax Credit in 2012 has reverted to being nonrefundable, with a maximum amount (dollar limitation) of $12,650 per child from $13,360 in 2011. The income limit on the adoption credit is based on your modified adjusted gross income (MAGI). For tax year 2012, the MAGI phase out begins at $189,710 and ends at $229,710. (IRS Topic 607)

College Costs

The American Opportunity Tax Credit: For tax year 2012, students can claim a $2,500 "higher education tax credit" for the first four years of college. The credit is based on 100 percent of the first $2,000 of tuition and related expenses, including books, paid during the tax year, plus 25 percent of the next $2,000 of tuition and related expenses paid during the tax year (subject to income phase-outs starting at $80,000 for singles and $160,000 for joint filers).

Lifetime learning credit: The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Tuition and fee deductions: Every family can deduct up to $4,000 of college tuition and fees in 2012, subject to income limitations. If your modified AGI is between $65,001 and $80,000 for singles or between $130,001 and $160,000 for joint filers, you are entitled to a reduced deduction of up to $2,000. (IRS Publication 970)

Student loan interest deduction: The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Itemized Deductions: Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes. Some of those folks are leaving money on the table. If your deductible expenses exceed the 2012 standard deduction limits above, be sure you itemize and grab these write-offs.

Miscellaneous deductions: These are deductible if they total more than 2 percent of your adjusted gross income. They include tax-preparation fees, job-hunting expenses, business car expenses, and professional dues.

Sales tax: You can deduct sales tax paid in 2012 if the amount was greater than the state and local income taxes you paid. In other words, you get to choose: Write off your sales taxes or write off your income taxes. If you didn't keep your sales-tax receipts, use the IRS's sales tax deduction estimator. Even if you claim the sales tax amount from the IRS tables, you can add in tax paid on vehicles or boats purchased during the year, except to the extent the sales tax rate on them is more than the general sales tax rate. If you live in a state with a high income tax, like California or New York, you will probably be better off claiming your state and local income taxes rather than sales taxes. If you live in a state with no income tax, like Florida, Texas, or Washington, be sure to take the sales tax deduction when you itemize.

Medical expenses: This one is hard to claim, because the bar is so high to qualify. You can only deduct the portion of your 2012 medical expenses that exceed 7.5 percent of your adjusted gross income.

Mileage: Deducting miles driven for work or other purposes can be a huge tax break and save you significant money. The 2012 rate for business use of your car remains 55.5 cents a mile; medical and moving is 23 cents per mile; and charitable use is 14 cents per mile

Mortgage insurance deduction: Borrowers with AGI's up to $100,000 may be able to treat qualified mortgage insurance as home mortgage interest, which means that 100 percent of 2011 premiums may be deductible. The insurance contract had to be issued after 2006 and deductions are phased out in 10 percent increments for homeowners with AGI's between $100,001 and $109,000. (IRS Publication 936)

Classroom deduction for teachers: K-12 educators who work at least 900 hours during the school year can claim an above-the-line deduction of up to $250 ($500 if married filing joint and both spouses are educators, but not more than $250 each) for any unreimbursed expenses (books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials) used in the classroom. (IRS Topic 458)

IRA/Roth Conversion

When you contribute to an individual retirement account, you help fund a future goal while lowering your current tax bill. In other words, socking cash in an IRA is like saving with help from your Uncle Sam.

You have until tax filing to contribute up the lesser of your taxable compensation for the year or $5,000 to a 2012 IRA ($6,000 if you are 50 or older). If you are self-employed, have a Keogh or SEP-IRA, and have filed for an extension to October 15, you can wait until then to put 2012 money into those accounts.

Even if you're covered by a retirement plan at work, you can deduct some or all of your IRA contribution. The 2012 IRA limits for modified AGI as follows:

More than $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er)More than $58,000 but less than $68,000 for a single individual or head of household, orLess than $10,000 for a married individual filing a separate return.
For married couples filing a joint return, in which the spouse who makes the IRA contribution is not an active participant in an employer-sponsored retirement plan but the other spouse is a participant, the deduction is phased out if the couple's income is between $173,000 and $183,000, up from $169,000 and $179,000 in 2012.

Charitable donations from IRA's: Taxpayers aged 70 1/2 or older can make direct tax-free transfers of up to $100,000 from IRAs to qualified charities. The transfers can satisfy minimum required distributions without increasing adjusted gross income.

Roth IRAs

Roth IRAs allow taxpayers to invest money for future retirement needs. Unlike a traditional IRA, there is no current tax deduction available for contributions to a Roth and all funds within the Roth IRA compound tax-free and all withdrawals from the account are also tax-free. To qualify to contribute to a Roth, your income must fall within the Modified Adjusted Gross Income (MAGI) limits. The 2012 limit for 2012 is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000. For single taxpayers, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000 in 2011.

Roth conversion: If you converted or rolled over an amount to a Roth IRA in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return. (See Publication 575 for details.)

View the original article here

6 Tax Deductions That Might Get You Audited

Exactly what triggers an audit from the IRS isn't always clear. There are plenty of urban legends about exactly which tax deductions can bring you to the attention of the IRS, but not a lot of facts.

In particular, the home office deduction has a reputation for bringing down an audit on a taxpayer. But the reality is a little more complex: Because the home office deduction is often claimed incorrectly, it's seemingly a lightning rod. But with a little care (i.e. good documentation), the IRS won't care about your home office. Rather, there are some other factors that are more likely to trip you up.

Noncash Charitable Donations
Because you have to assign a value to any noncash donations you might make, like dropping off used clothes at Goodwill, this deduction can be a problem area. It's easy to assign too high a value without meaning to. You need to be very pessimistic about the value of any noncash charitable donations you may make, unless you can clearly point to justification for your valuation.

Real Estate Losses
If you take a loss on a real estate investment, you need to be able to show that it's not a passive investment. That means that you have to be active on a regular basis, in a substantial way. This isn't an issue for real estate professionals, but if you're just collecting rent for a property and wind up with a loss, you may have some problems.

Travel and Entertainment Deductions
As a business owner, you may be able to write off a portion of your travel, entertainment and food expenses as deductions. But your deductions need to be in line with what's reasonable for your business. Even if you're earning a lot of money, each deduction needs to clearly meet the business purpose test if you don't want to talk to the IRS about it.

"Hobby" Losses
If you're taking deductions for a business that routinely carries a loss, the IRS is going to take a close look at what you're doing, and they may reclassify your business as a hobby. For a business, you need to be able to show that you depend on the income from the activity and that you're seriously looking for ways to turn a profit.

S Corporation Wages
For companies operating as S corporations, particularly smaller ones, there's a question of what constitutes a fair wage. The IRS will take a close look at the salaries of employees of the corporation to make sure that the wages meet market rates. If they don't, the agency may conclude that the corporate structure is simply an effort to avoid paying taxes.

Unreimbursed Employee Business Expenses
Because you can only deduct unreimbursed expenses incurred as an employee when the total goes over 2% of your adjusted gross income, there's a tendency to abuse this deduction by writing off work clothes, the cost of getting to work and other expenses that aren't allowed. You'll need to properly document any expense you're claiming as an employee and double-check that it is allowed.

The Bottom Line
If you're worried about your tax return, make the time to go over it with a tax professional before you turn it in to the IRS. You may be able to find potential problems and resolve them ahead of time. Avoiding math errors and accurately reporting the numbers on your other documents will reduce your chances of being audited dramatically. The IRS only audits about 2% of all tax returns it receives, so if you can avoid red flags on your tax return, you may be able to avoid an audit.

More From Investopedia

View the original article here