It’s income tax week here in the U.S., and if you haven’t filed yet, you still have a few more days to squeeze in those last minute deductions. Filing income taxes is one of those tedious, necessary chores that all must face each year. In general, most people try put a positive spin on their taxes in order to get the maximum refund possible each year. However, claiming each and every deduction possible may not be the wisest choice for everyone.
When Not to Take that Extra Deduction
For some people, particularly those who are self employed, income tax reports can be a two-edged sword. You want to get money back from the government and pay fewer taxes whenever possible, but doing so can hurt your finances, especially when it comes to your credit. When you report your income to a mortgage broker, for example, and attempt to get a good rate on a loan, you may find that your tax report works against you if you claim all of your deductions, especially if you self employed and report a loss of business income for that year. Even though you ended the year with a regular paycheck and a positive bank balance, claiming too many deductions on your taxes can make it look like your overall income was far lower that it actually was. In some cases, your income level as reported on your tax return may be so low that it affects your credit and your ability to get a loan for large purchases, such as a car or a home. If you’re planning on making a big purchase, be sure to let your tax professional know the year before, so he or she can take fewer deductions to boost your recorded income, should you feel that this is necessary.
Having a lower reported income on your tax returns can also hurt you in other situations where you must legally prove your income to a court of law. This can happen during child support and alimony disputes, personal injury lawsuits, and a few other types of court cases. If you suspect you will be going to court soon, carefully consider your tax deductions in advance before filing.
What to Do If You Can’t Pay Your Taxes
If you truly feel that you need to take some tax deductions off the table, then you may need to come up with extra cash to pay for the extra taxes that you owe the government. Don’t end up owing back taxes, but if you do, you will pay up eventually no matter what. In fact, many lawyers won’t even touch a lawsuit involving back taxes because the chances of winning against the IRS are so slim. If you know you’re going to owe tax money, make sure to take action right away. Call the IRS and discuss your options. A representative will help you set up a monthly payment plan or installment plan to get the debt settled. The longer you let your tax debt ride, the more you’ll owe, so pay as much as you can as soon as you can. Even if it means you have to tighten your belt considerably with your finances for a period of time, pay off your IRS debt as quickly as possible to avoid wage garnishments, penalties, and possible fines and jail time.
Tax Tips from Uncle Sam Himself!
While a tax professional is best suited to help you decide what deductions are suitable for your individual situation, there are a few resources to help you get the most out of your tax return. One of the best sources is the IRS, who provides a monthly newsletter and tax resources for consumers every year. Some common tax tips include:
- deducting medical mileage for transportation costs to and from doctor’s appointments, therapy, or the hospital
- volunteer mileage for volunteer activities such as working at a soup kitchen, your local church, or nonprofit agency without receiving pay
- higher education tax credits many people can receive
What tax tips do you have for the 2011 tax return year?