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Tom's Blog

Do You Live in Fear of an IRS Audit?

February 6, 2014 7:24 pm

It is no secret that one of the biggest fears people have is receiving an audit notice from the IRS. It ranks right up there with being diagnosed with a life-threatening illness. Of course, the IRS does nothing to alleviate this fear because the more frightened you are, the less likely you will be to cheat on your taxes.

The IRS audited one out of every 104 tax returns in federal fiscal year 2013. It’s becoming increasingly evident that the greater your total income, the more you’ll attract the agency’s attention. Last year, the IRS audited about 10.85 percent of taxpayers with income greater than $1 million. The audit rate dropped to 0.88 percent for those with income less than $200,000.

Some of the audits were taxpayers pulled at random. The rest of the returns are selected for examination in a variety of ways.

Lowering your IRS profile will help minimize your chances of being audited.  Here are five ways to help you stay off the audit list.

1. Large Itemized Deductions: The IRS has established ranges for the amount of itemized deductions based on a taxpayer’s income. Deductions that exceed the statistical “norm” for a given state and region may be red-flagged for a closer look. This does not mean that you shouldn’t take legitimate deductions. Your deductions could exceed the IRS range due to high medical expenses and large charitable contributions. Take all valid tax deductions – just be sure you keep your backup documentation.

2. Self-Employment Income: The IRS believes that the vast amount of underreported income occurs among the self-employed. Self-employed taxpayers are audited by the IRS far more frequently than those who receive a W-2 for wages. People who are employed by others and receive W-2 income but also run a business that reports a loss are especially high on the IRS radar screen. You will need to be able to prove you are operating a business with the intention of earning a profit and not just trying to write off the expenses of a hobby. You will need to be able to pass both the “passive loss” and “hobby loss” rules in order for the deductions to stick.

3. Business Expenses: Big deductions for business meals, travel and entertainment are always ripe for audit. A large write-off will raise red flags if the amount seems too high for the business. Taxpayers claiming 100 percent business use of a vehicle is also a huge red flag. The IRS knows it’s extremely rare for an individual to use a vehicle strictly for business.  The IRS looks for personal meals or claims that don’t satisfy the strict substantiation requirements.

4. Rental Properties: The IRS is scrutinizing rental real estate losses for those who claim to be real estate professionals.  You must meet two requirements:  1. More than half of the personal services are performed in real property trades or businesses in which you materially participate, and 2.You perform more than 750 hours of services in real property trades or businesses in which you materially participate.

5. Home Offices: Taxpayers who operate a business from their home are entitled to deduct the portion of their home that is dedicated to operating the business. The IRS believes that many taxpayers use this deduction as a means of writing off personal expenses and carefully scrutinize tax returns that claim the home office deduction. Claiming this deduction greatly increases the chances that your tax return will be audited. You should consult a tax expert to determine if you are entitled to claim this deduction. If the tax savings are minimal you may opt not to claim the deduction simply to avoid the scrutiny. For details, see IRS Publication 587.

There is no way to completely audit-proof your return, and if you do get an audit notice from the IRS, don’t take it personally. It does not mean the IRS believes your return is fraudulent. When you get a notice, pick up a copy of IRS Publication 1 “Your Rights as a Taxpayer.” Be courteous and helpful without volunteering more information than what is requested. Plan ahead so that you are organized and can answer questions promptly. Ask for a postponement if you need more time to prepare.

If you are a self-employed taxpayer or have unusual circumstances that place your return outside of the statistical norm, let a professional prepare the return. Self- prepared returns are themselves more likely to be audited. The IRS believes that a non-professional has limited knowledge of the 4,000 pages of tax code.

Tax law is complex. The fee charged by an Enrolled Agent or CPA can be easily justified by the peace of mind they bring if you get the dreaded audit notice.

Certified Financial Planner Rick Rodgers is president of Rodgers & Associates, “The Retirement Specialists,” in Lancaster, Pa., and author of “The New Three-Legged Stool: A Tax Efficient Approach to Retirement Planning.”

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Building Your Professional Brand

February 6, 2014 7:24 pm

BPT—Personal branding is an elusive topic to most people, yet it is important for career success. Wise professionals with career success know it can mean the difference between landing that dream job and never getting noticed.

So what do you think of when you hear the word "professional brand?" Simply stated, a brand is a promise of the value you'll deliver. "You may think you don't need a brand, but the reality is that you already have one," says Jana Fallon, vice president, Executive Development for Prudential Financial. "By managing that professional reputation you already have, you increase your chances of being known for qualities that can land your dream job or get you noticed by a company you have always wanted to work. If you do start actively managing your brand, you can find real power in knowing and sharing what your unique differentiators are."

Fallon recommends five specific actions you can take today to improve your brand reputation.

B = Build

Build your brand by first defining what you want that brand to be. To make this simpler, it should include no more than three or four characteristics that describe what you offer or aspire to offer. It is good to be aspirational but it also must be realistic. If you are having trouble getting started, begin by asking people you trust what they immediately associate with you. Ask for honest feedback and listen to what you hear.

R = Reflect

Reflect on your strengths and liabilities frequently. What is the unique value that you have to offer and what do you aspire to be? Think about your strengths and what you do really well. What do you want to be known for in business? What differentiates you? Use those reflections to establish your unique brand. Perhaps you want to be known as a very curious, engaged consultant. Or perhaps your unique brand is one of intelligence, candor and strong ethics.

A = Actions speak

In order to sustain your brand, you have to act accordingly. Your behaviors and the decisions you make daily impact your brand. Be bold in defining your brand and then have the courage to live up to that brand promise. If you are finding it challenging to start living your brand, find someone that has a style, behavior or an approach that you admire. Emulate what works. Try it yourself and see if it feels right for you. Experiment until you find your own authentic behavior.

N = Network nonstop

To get others to recognize your brand, you have to market yourself. This clearly takes time and effort, but it can be done effectively if you follow these key steps. To share your brand, network in the organization you work in, outside work with other professional contacts and in your community. Make yourself visible to those that can influence your career.

The key to a successful professional brand is having strong "word-of-mouth marketing" from friends, coworkers, customers and other contacts. Having a strong brand means finding ways to network and manage what those contacts know and then say to others about your capabilities.

D = Decide today

"Decide to make managing your professional brand a priority," Fallon says. "Carve out time each week to fine tune and evolve your defined brand. Make time to reflect and try out new behaviors and to expand your network. There is real power in knowing where you are focused and letting others know for what you aspire to be known."

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Word of the Day

February 6, 2014 7:24 pm

FHA. Acronym for Federal Housing Authority, an agency created within the Department of Housing and Urban Development (HUD) that insures mortgages on residential property, with downpayment requirements usually lower than prevailing ones.

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Q: Should I Put More or Less Down, If I Can Afford It?

February 6, 2014 7:24 pm

A: Putting down as little as possible lets you take full advantage of the tax benefits of homeownership. Mortgage interest and property taxes are both fully deductible from state and federal income taxes. Also, making a small down payment frees up cash that you can use to meet unexpected home improvements.

Some real estate experts contend it is more economical, however, to make a larger down payment, thus reducing the amount of debt financed over the life of the loan. A borrower could potentially save several thousand dollars, maybe even hundreds of thousands of dollars.

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Putting off Working on Your Tax Return May Cost You

February 5, 2014 7:18 pm

Nearly 150 million Americans will file federal income tax returns this year and, unfortunately, many will be shelling out much more of their hard-earned money than necessary, says veteran financial expert Jeff Gorton.

“With the ridiculous complexity of our tax code, I can understand how the average person might want to put off doing their homework, but that’ll cost you,” says Gorton, a veteran Certified Public Accountant and Certified Financial Planner™, and head of Gorton Financial Group (www.gortonfinancialgroup.com).

“When you think about all you do to earn your money, and the lengths we’ll go to save a few bucks, it doesn’t make sense to not do all we can to prepare for the inevitable – our compulsory contribution to Uncle Sam’s bank account.”

There is nothing unpatriotic about taking advantage of legal measures to reduce your tax bill, Gorton says. Most Americans, however, don’t understand the basics of how to minimize the tax burden, he says.

“If you wait until the last minute to do your taxes, you’re sure to miss out on savings,” says Gorton, who offers some basic and more advanced tax-saving options.

• Credits: Tax credits are usually subtracted dollar for dollar from the actual tax liability and may be utilized when filing for 2013. They include the Child Tax Credit, which allows up to $1,000 for children younger than 17; the American Opportunity Credit, featuring up to $2,500 in tax savings per eligible student for tuition costs for four years of post-high-school education; and the Energy-Efficient Home Improvement Tax Credit, which grants qualifying taxpayers 10 percent of the cost of certain energy-efficient building materials — up to a $500 lifetime credit. The Child and Dependent Care Credit, for those who have to pay someone to care for a child younger than 13, or another dependent, offers up to $3,000 for one qualifying individual, or up to $6,000 for two or more qualifying individuals.

• Deductions: Like tax credits, deductions have phase-out limits, so you may want to consult with a professional. Deductions are subtracted from your income before your taxes are calculated, which may reduce the amount of money on which you are taxed and, by extension, your eventual tax liability. Some examples include contributions made to qualifying charitable organizations. And, you may be able to write off out-of-pocket costs incurred while doing work for a charity. Others may include amounts set aside for retirement through a qualified retirement plan, such as an Individual Retirement Account; medical expenses exceeding 10 percent of your adjusted gross income are now deductible – expenses exceeding 7.5 percent are still deductible for those older than age 65; and, potentially, mortgage interest paid on a loan secured for your primary residence.

• Tax-favored investing: This involves both tax-exempt investments and tax-deferred investments. Tax-exempt investments, which include such vehicles as municipal bonds and certain money market funds, offer a way to grow your money that’s exempt from federal taxes. Municipal bonds are free of federal income tax and may be free of state and local income taxes for investors who live in the area where the bond was issued. Tax-deferred investments, on which taxes are postponed until you withdraw your money, include qualified retirement plans, such as traditional IRAs and employer-sponsored plans, as well as insurance products such as annuities and, sometimes, life insurance.

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5 Tips for Finding Work-Life Balance

February 5, 2014 7:18 pm

With reports of the unemployment rate dropping to 7 percent, lower than it was even five years ago and down from a peak of 10 percent in October 2009, many are breathing a sigh of relief. But the effects of a long bout of high unemployment are sure to have thrown off the balance of employee well-being, says former Exxon executive Bob Epperly.

“Of course, the rate does not take into account those who are underemployed, including over-skilled workers in menial jobs and those with too few hours. For those lucky enough to have decent employment, many feel insecure and are willing to skew their work-life balance into a tailspin, with exaggerated emphasis on their career,” says Epperly, a CEO who realized at age 55 that even a very successful career cannot fulfill every aspect of life.

“Most people cannot afford to simply refuse the demands of their job, so what’s a worker to do?”

Epperly, author of “Growing Up After Fifty: From Exxon Executive to Spiritual Seeker,” (www.bobepperly.com), offers tips for correcting lifestyle imbalance.

• It’s never enough. Ambition is admirable, but if it’s all that drives you, no matter how much you accomplish, it will never be enough. If professional ambition is more important to you than anything else in your life, that’s a red flag that your life is dangerously unbalanced. The consequences will be painful feelings of emptiness, lack of fulfillment, and having missed out. Take steps now to restore balance, beginning with personal, non-work relationships.

• No one ever says, at the end of their life, that they should have worked longer and spent less time with family. When it’s all said and done, life is short, and many realize that time is life’s most precious resource. Intense focus on work tends to deprive professionals of opportunities with their loved ones – moments and memories that cannot be replaced. Set goals for how much time you’ll spend giving your family 100 percent of your attention each day and week, and stick to them!

• Make communication a top priority! The importance and value of real communication cannot be overemphasized. “More important than speaking is listening,” Epperly says. “My relationships immediately improved when I began listening very carefully to what was being said.”

• Only you are responsible for your life. The Serenity Prayer goes a long way in work-life balance; it reads: “God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.” Epperly says that recognizing he is responsible for his life and focusing on the aspects of it over which he has influence while recognizing those he needs to let go has been pivotal.

• Accept who you are. This can be challenging; it demands courageous self-reflection and letting go of the need for external approval. “When a friend asked me, ‘Do you think the world is ready to accept Bob Epperly just as he is?’ I suddenly saw that I had always felt I had to accommodate; that I wasn’t okay as I am,” he says. “I started to give myself permission to be me.”

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Word of the Day

February 5, 2014 7:18 pm

HUD. Acronym for the Department of Housing and Urban Development, an agency from which almost all of the federal government’s housing programs flow.

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Q: Do I Have to Disclose Information about My Home?

February 5, 2014 7:18 pm

A: Disclosure could protect you from a lawsuit. Today, home sellers in most states must now fill out a form disclosing material facts about their homes. Material facts are details about the home’s condition or legal status, as well as the age of various components.

If your state does not require a written disclosure, the real estate laws probably require sellers to disclose any known problems with the home they are selling.

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Three Easy DIY Tips to Maintain Your Vehicle

February 4, 2014 3:15 pm

BPT—When it comes to vehicle maintenance there are two schools of practice: the "do it for me" and the "do it yourself." The majority fall under the first category, meaning they opt to take their vehicle in for maintenance, mostly because having the ability to lift your vehicle for an oil change or having the proper tools for a tire rotation are not common in an average garage. We all know about the basic maintenance you should be doing, like getting your oil changed and checking the belts and hoses for wear. But did you know there are other aspects of your vehicle you can easily maintain and, by doing so, will extend the life of your vehicle?

Spark plugs - The role of the spark plug is to ignite fuel in the cylinders. Spark plugs that aren't working to their full capacity can reduce gas mileage or cause damage to other parts of the vehicle that can result in expensive repairs. If you choose to replace your own spark plugs instead of having the shop do it, the cost is less than $10 per spark plug.

Fuel injectors - Similar to spark plugs, fuel injectors are an important component to the life of your engine and car, particularly if you make a lot of short trips or have many miles on your vehicle. Fuel injector openings are half the size of a pinhole and can become blocked from sediment that gets into your vehicle via the gasoline. Why keep your fuel injectors clean? Driving with dirty fuel injectors can lead to poor acceleration, lower power, reduced fuel economy, rough idling and high carbon monoxide emissions. An easy way to maintain your fuel injectors is to use a fuel injector cleaner and stabilizer like Royal Purple's Max-Clean. Use a bottle of Max-Clean by simply pouring it into your gas tank before your fill up at the gas station. Good for both gasoline and diesel vehicles, it can restore fuel economy and clean injectors.

Air filter - How often you change your air filter depends on where you drive. Regular travel in rural areas will require you to change your air filter more often than you would if the majority of your driving is on the highway. Driving with a dirty air filter can cause a pressure drop that restricts airflow, reducing fuel economy, performance and emissions. A good way to determine if your air filter is dirty is to remove it and hold it up to the light. If it is caked with dirt you should replace it. Shaking or blowing it out will not clean it, but only embed the dirt further into the fibers.

In addition to following a regular maintenance schedule for your vehicle, checking less thought-of items can result in better fuel economy, and therefore, result in money savings and longer life of your vehicle.

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Who Doesn't Have to File Income Taxes?

February 4, 2014 3:15 pm

With tax season upon us, you might be wondering who doesn't have to file federal income taxes.

Whether or not a taxpayer is required to file income taxes depends on your age, filing status, and gross income. It doesn't matter if you're unemployed; what matters is if your income (from all sources) is above a certain amount as specified by your age and filing status (i.e., married, single, etc.).

So who must file? And is it a good idea to file taxes, even if you aren't required to?

Gross Income Thresholds for Filing Taxes

Many people assume that if they earned any amount of income last year, then they're required to file a tax return. However, depending on your gross income, you might not have to file at all.

If your income in 2013 fell below a certain threshold amount, then you likely don't need to file taxes. Here are some examples of income thresholds for different types of people:

  • Single adults under the age of 65 who earned less than $9,750 in 2013.
  • Married couples under 65, filing jointly, who earned less than $19,500 in 2013.
  • Dependent children whose gross income was less than $6,100 in 2013.

Non-citizens aren't totally exempt from filing income taxes either. In fact, nonresident aliens also have to file income taxes if they were involved in trade or business in the United States in the past year. However, there are several exemptions the IRS allows, like when the sole source of U.S. income is less than the personal exemption or if the noncitizen is a fiduciary for a nonresident alien estate or trust.

Should You File Even If You Don't Have To?

Even if you aren't required to file federal income taxes, it may be beneficial to do so. The IRS may still issue tax breaks or credits even if your income is below the required filing level. For example, you may be entitled to a refund for excess holdings or for the earned income tax credit, according to Forbes.

For more information on who doesn't have to file income taxes, the IRS has a click-through guide to help you. If you're still stuck, consider contacting a local tax attorney for more personal guidance.

Source: FindLaw

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