Tis the season – tax season, the season we love to hate. This is the last return to be filed under our “old” tax system and 2018 should be a lower tax year for most taxpayers. While no one likes paying taxes, there are a few things you want to avoid with your 2017 return so you don’t raise any red flags.
Having higher than average deductions. As a self-employed person I fall into this category. If the deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don’t be afraid to claim it. There’s no reason to ever pay the IRS more tax than you actually owe. In 2015, we had to prove we were paying what we claimed in health insurance premiums, we had all of the documentation, submitted everything to the IRS, then received a letter stating everything was accepted.
Taking an alimony deduction can be tricky. Alimony paid by cash or check is deductible by the payer and taxable to the recipient, provided certain requirements are met. For instance, the payments must be made under a divorce or separate maintenance decree or written separation agreement. The document can’t say the payment isn’t alimony. And the payer’s liability for the payments must end when the former spouse dies. You’d be surprised how many divorce decrees run afoul of this rule.
IRA withdrawals done early can cause a problem if not reported correctly.
The IRS wants to be sure that owners of traditional IRAs and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions. Special attention is being given to payouts before age 59½, which, unless an exception applies, are subject to a 10% penalty on top of the regular income tax. An IRS sampling found that nearly 40% of individuals scrutinized made errors on their income tax returns with respect to retirement payouts, with most of the mistakes coming from taxpayers who didn’t qualify for an exception to the 10% additional tax on early distributions. So the IRS will be looking at this issue closely