Your Mid-Year Personal Tax Checkup

It’s never too early to start thinking about and organizing for 2017 taxes, even if you haven’t filed for 2016 yet. Here are some tips to help you have the easiest tax year ever.

Medical and dental expenses. Amounts you pay for medical and dental expenses are deductible, including any amounts you put on a credit card. Now would be a great time to start gathering that information into one spot, like an Excel spreadsheet. If you really want to make your tax preparer happy (even if it’s you), categorize them by 1) prescriptions, 2) doctors and dentists, 3) labwork and radiology, 4) hospitals and other facilities, and 5) medical devices such as eyeglasses, hearing aids, wheelchairs, and crutches. Also, if you have a health insurance policy that is not through your employer, the premiums paid are deductible too. Don’t forget to include them. Click HERE for a more comprehensive list of qualifying medical expenses.

Charitable deductions. Have you donated this year? If so, you might have received a confirmation letter from the organization acknowledging the donation. Keep the original or a scanned copy in your tax file. Many charities wait until the end of the year to distribute these letters so there is a chance you might not have one yet. Remember that a canceled check is not adequate evidence anymore. A written confirmation from the donee is required. For noncash donations, ensure that you list out all items donated, estimated value, and date of the donation. If you are going to report more than $500 worth of item donations, you will need this information to complete Form 8283 that accompanies your personal return.

Documentation for dependents. If you are planning on hiring a tax preparer, get ready to provide proof that your dependents live with you or that you have the right to claim them. Due diligence requirements are in place where preparers must now request documentation of that proof, particularly if the Earned Income Tax Credit will be taken. Examples include report cards from school or medical bills…anything that shows the dependent’s name and your address. If you have joint custody and the other parent’s address is on most records, a copy of your divorce decree should be sufficient evidence.

Unfiled returns. If you haven’t filed tax returns for prior years, now is the time to catch up, especially if you’re planning on hiring a tax preparer. This time of year is perfect since it’s not the “busy season” and the preparer will, more than likely, have more time.

Your Chances of Getting Audited by the IRS

It’s a topic no one likes to discuss – an IRS audit. But, is it worth discussing? What are the chances, as an individual taxpayer, of getting audited? Here’s some statistics and tips:

What are the odds? In 2015, about 0.8% of prior year personal tax returns filed were audited. Out of those, 39% were for returns that claimed the Earned Income Tax Credit (EITC). The number of returns being audited has been decreasing since 2010. Examinations of returns claiming the EITC, however, are increasing as a percentage.

How are returns selected for audit? All personal returns are run through the Discriminant Function (DIF) system. DIF uses confidential and undisclosed mathematical formulas to assign a score to each return. The higher the score, the more likely the return will be audited. It does not, however, guarantee an audit. The score merely indicates the potential. Returns with high scores are then manually reviewed. Screeners look at the return as a whole and evaluate the significance of each item. At that point, it’s determined whether the return warrants an audit or not.

Sometimes, returns are selected for specific reasons. For example, if the W-2 wages you report don’t match the amount your employer submitted to the IRS, it will trigger an inquiry. For more information on other methods of selection, go to https://www.irs.gov/uac/the-examination-audit-process.

The good news. About 78% of audits are correspondence audits, meaning you’re not going to have an agent knocking on your door. Documentation and other evidence to complete the examination is requested via letter. In return, you mail back copies of whatever they’re requesting. Telephone calls might be involved as well, depending on the situation.

For more complex issues that can’t be feasibly resolved by correspondence, an in-person interview at the nearest IRS field office may be scheduled.

The first step. If a personal return is selected for examination, the IRS will send an initial contact letter. They will not call or e-mail you. The letter will either 1) request information or 2) indicate a correction on the return and ask for your written agreement to the change. Corrections can be challenged, though, if you don’t agree.

What you can do. If you receive a letter from the IRS, the best thing to do is open and read it immediately. This will give you enough time to respond. Time limits are usually imposed so the sooner you read it, the more time you have to prepare and send your response by the deadline.

Read the letter carefully from beginning to end. Since most audits are of the correspondence type, odds are that the letter is requesting copies of certain documents be submitted via mail or fax. Make copies of the documents requested, write your Social Security number on each document, and include a copy of the letter with your response. If you plan on faxing, consult the letter to obtain the fax number and what information to include on the fax cover sheet.

If you’re stuck. If you’re still unclear on what to do after reading the letter, contact your tax professional or accountant immediately. It’s important that a response is given by the stated deadline on the letter so the issue doesn’t escalate.

Final thoughts. The odds of getting audited are low. If your tax return gets selected, however, open IRS letters immediately, read them carefully, and be timely and thorough when furnishing the requested information. It will facilitate a smoother process and it will be a lot less stressful on you. And when in doubt, always contact your accountant.

Five Ways to Improve Your Credit Score

Over 90% of lenders review your credit score when deciding to approve you for a loan or other type of credit arrangement. Is yours helping or hurting you? Here are five ways you can improve it.

Pay Your Existing Debts on Time. 35% of your score is based on your payment history. Additionally, many debts, even cancelled credit cards that aren’t in use anymore, can stay on your credit report for up to 12 years. That’s a lot of history! Make it a priority to pay all your monthly debt commitments on time.

Monitor Balance Owed Versus Credit Limit. 30% of your score is based on how much you owe. It also matters how much you owe on credit cards relative to the credit limit. Both amounts are disclosed on your credit report. Although no hard and definitive numbers are published, it’s usually agreed that keeping your balance below 20% of your credit limit will improve your score.

Refrain from Obtaining New Credit Cards or Loans. 10% of your score is based on how much new credit you’ve opened recently while 15% is based on the length of your credit history. The average age of all your credit accounts is calculated and factored into your score. Every time you open a new credit account, the average age decreases, which adversely affects your score. Try to use your existing credit accounts to make purchases instead of opening new ones. Although it’s tempting to take that 18-month interest-free deal at the furniture store, it might not be in your best interest depending on your financial goals.

Check Your Credit Report for Accuracy. You are entitled to obtain a copy of your credit report from all three agencies (Experian, Equifax, and TransUnion) for free once a year. The website www.annualcreditreport.com is the only site authorized by Federal law that can provide this service for free. Beware of other sites as they will usually require a credit card number and you signing up for some kind of trial subscription service that will bill you if you forget to cancel it before the trial period ends. Every year, check all three reports to ensure all information is accurate and, also, YOURS. People do make mistakes. All it takes is one digit entered incorrectly and someone else’s negative item can show up on your report. The website also provides tools and resources to help you correct mistakes on your credit report – free of charge.

Paying Off Balances in Full is OK. There seems to be a constant debate as to whether paying credit card balances in full helps your credit score or not. What helps is having activity in general, so a history can be established and tracked. It’s perfectly OK to use a card every few months and then pay it in full the next month. You’re creating a consistent and positive track record and not paying interest in the process…a win-win. Paying interest has no bearing on your score so if you can avoid it, do it.