Tax Myth #38 - Married Filing Jointly

I am married, so don't I have to file a joint return?

Not necessarily. Filing a joint return will usually result in lower taxes. But in specialized cases, filing two separate returns may result in a lower total tax. This option is available to every married couple on a year by year basis. So if one spouse has significant medical or employee business expenses, it may be beneficial. It doesn't happen often, but it only takes one year to save some money. We can run the numbers for you.

As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Head of Household Filing Status

We are all aware of the two basic filing statuses: single and married filing jointly. But what if you aren't married but maintain a home for other people? There is another choice for both federal and California - Head of Household. If you meet the requirements for HOH, using it will save you money!

To qualify for HOH, you need to have either a qualified child or other dependent.

To be a qualified child, your natural, adopted, step or grand child must be

1. younger than 19 or 24 if a full time student, and
2. a citizen or US, Mexico or Canada resident, and
3. resided with you more than 1/2 of the year, and
4. you provided more than 1/2 the support for the child.

Finally, if you maintained a household (paid for more than 1/2 of the expenses) for a parent that did not live with you during the year, you qualify for HOH status.

If you are currently single, qualifying for HOH status can save you as much as 30% off your total tax bill. We have a flowchart that details the items described here to provide you with the decision tree determination of HOH status. As always, please call (949-683-8111) or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #7 - Can I Deduct My Pet

I spend a fortune for my pet. Don't they qualify as a dependent?

While your pet is truly dependent on you, the IRS isn't as thoughtful. You cannot deduct Fido, Fluffy or Tweety as a dependent on your tax return. Additionally, in order to deduct a human dependent, you will need to record their social security number on the return.

When the IRS started requiring social security numbers on returns, the number of dependents claimed dropped by over 9 million from the prior year! Over 10,000 returns showed greater than 10 fewer dependents from the prior year.

As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #22 - Gambling Losses

Can't I deduct my gambling losses?

You can only deduct gambling losses to the extent of gambling winnings. And it doesn't matter what type of gaming caused the income or loss. For example, you won $1,000 playing the lottery, lost $300 at the track and another $900 in Vegas, you can deduct $1,000 of the $1,200 you lost since you are reporting the $1,000 won in the lottery.

Gambling losses are a miscellaneous itemized deduction, so you only get to deduct them if you itemize your deductions. Naturally, you always get to report the winnings!!!

As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #6 - Income Taxes Are Illegal

Doesn't the 5th Amendment make income taxes illegal?

Tried in court and answered many times. Income taxes are legal by the 16th Amendment to the Constitution. The 5th Amendment provides against self incrimination. Courts have ruled that telling the government how much you made and calculating how much you owe isn't incriminating. Justice Oliver Wendall Holmes wrote "Taxes are what we pay for civilized society." While he also wrote that taxes were every American's duty, it was every American's obligation to pay the least amount possible!

We can help fulfill your obligation. Please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #13 - Sales Tax Deduction

Can't I deduct the sales tax I paid for my new car?

Nope. Up until 2009, you had the option of deducting a standard amount of sales tax or the state income taxes you paid. This is no longer the case. Sales taxes are no longer deductible. Bummer....

As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #5 - Working Child Deduction

My child is working so I cannot claim them as a dependent?

Not so fast. While it is true your child only gets one exemption, just because he/she is working doesn't mean you don't get it. If you still provide over 1/2 of their support, you are eligible to take the deduction. The question then becomes who saves the most money using the deduction. That is where we can help!!!

As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #4 - The Wealthy Don't Pay Taxes

The rich in America use tax breaks to avoid taxes, don't they???

Yes and no. Although the wealthiest Americans take advantage of sophisticated tax planning services to reduce their taxes, they still pay a bunch. 99.7% of Americans making over $1 million paid federal income taxes averaging 27% of their earnings last year. The average American paid 18% of their income in federal income taxes.

We can help you reduce what you pay. As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tuition Deduction or Credit

If you paid college tuition for yourself, your spouse or anyone who claim as a dependent, you may be eligible to deduct up to $4,000 of those expenses, even if you don't itemize your deductions. The $4,000 limit is decreased if your income is over $65,000 if single or $130,000 if you are married.

The amount of expenses includes tuition and fees paid to college institutions. It does not include books, transportation and living expenses while at college.

As an alternative to the Tuition Deduction, the American Opportunity Tax Credit allows a credit of up to $2,500 for the first four years of college. As with the Tuition Deduction, the credit is reduced if your income is over $80,000 ($160,000 MFJ). If you don't owe any taxes this year, 40% of the credit (up to $1,000) is refundable, meaning that you can get the IRS to send you a check even if you didn't send them any money all year.

As always, please call (949-683-8111) or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #14 - Refunds Are Good

Should I increase my withholding to get a bigger refund?

Only if you think you cannot control your spending. By allowing the IRS to collect more from each paycheck, you are making an interest free loan to Uncle Sam. Ideally, you should only pay what you owe in withholding during the year and possible write a small check to the IRS in April. That allows you to bank the extra money and earn some interest on it. Even a small amount is more that you get from the IRS.

You can adjust your withholding on form W-4 that your employer provides to you. As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #2 - E-Filed Returns Are Look At Closer

Should I file on paper since the IRS won't look at it?

The obvious answer is no. But surprisingly, that wasn't true seven years ago. As the IRS began receiving returns electronically, they had to scrutinize these returns more closely to make sure they got all the information correctly. By doing this, they found more errors and selected more of these returns for audit. The CPA community complained about this procedure and got the IRS to stop looking at the returns. As of today, you have no greater risk of audit or correction filing electronically or on paper. But you still get your refund up to a month quicker filing electronically.

As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #1 - Audit Risk and Filing Date

Will extending my tax return increase the risk of audit?

There are three answers to this one. No, No and NO!!!

The IRS selects returns for audit during the following year. For instance, the 2009 returns were all filed by October 15, 2010. The IRS will begin selecting 2009 returns to audit in May 2012. The filing date means absolutely nothing to the selection process. It is not a selection factor in determining which return gets selected.

Extensions do give the IRS more time to audit as well as other advantages. As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #11 - Equipment For Work

Can I deduct my phone and computer for work?

If you use the computer and phone more than 50% for work, then yes. You will get to write off the business percentage on your tax return. For instance, if you have a $1,000 computer and use it 55% for business, you are entitled to write off $550 of the computer cost. Same is true for your phone.

If the equipment qualifies for business use, then you can also expense the costs associated with the use of the item. For a phone, the cost of the service and calls made for business. For a computer, the software and internet charges for the business use.

As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #2 - All Business Expenses Are Deductible

What business expenses are deductible???

The answer is all of them. The requirement for a deduction is that the expense be "necessary" and "ordinary". This means that the expense is needed in the ordinary operation of the business.

If you have your own business, rental property or expenses as an employee, keep track of them so you can deduct them on your tax return. They are all deductible!!!

As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Tax Myth #10 - Charitable Contributions

Can't I just deduct the normal amount for my return?

Can't tell you how often I am asked this question. Or the other answer when I ask clients how much they contributed: "About the same as last year." Neither answer works!

You need to have receipts for all contributions. You can no longer count the $10 each week at church. You must get a statement from the charity indicating how much you contributed. 

You can deduct up to 50% of your income, so if you have the receipts, take the deduction. But remember, if you cannot produce the receipt, the IRS may eliminate your deduction. As always, please call (949) 683-8111 or email us at info@southcountycpa.com if you have any questions. We are here to help.

Miscellaneous Tax Forms In Your Mailbox

You will soon be bombarded with forms and notices in the mail for your tax return. Don't get flustered over the paperwork. It is all required information being sent to you to assist in your tax return preparation. Let's go over a few of the basic forms for most of you.

First there is the W-2. This is a summary of how much money you made and how much was deducted during 2010. Your employer is required to provide this to you before January 31st.  Fortunately, the form hasn't changed from last year, so it should look familiar.

Next is the 1099. There are several variations of this form, depending on why it is being completed. Each is designed to report income that has been paid to you during the year. The most common is the 1099-INT, which reports how much (or how little!) interest you received. Other 1099 forms include the 1099-S for sale of real estate, 1099-B for stock sales and the 1099-DIV for dividend payments.

Form 1098 is used to report how much you paid for certain items, primarily interest and taxes on real estate. The form show how much interest, point or mortgage insurance you paid, as well as impounded taxes and insurance.

All these forms are useful in helping you gather the information needed to prepare your return. As always, if you have any questions, please do not hesitate to call or email us with questions. We are always here to help.