Remember, smart tax planning involves engaging in legal methods to lower your tax burden. Engaging in illegal methods to lower your tax burden is tax fraud. Unless you want to risk legal action, including fines and jail, you should always do the following:
Report All Income
If you work for a company, they automatically report your income to the IRS. But what if you are self-employed or earning money on the side? It is tempting to underreport your income or just leave it off your tax return, but you should resist the temptation. If you are audited, the IRS may look at your checking and saving account statements and ask you to account for all of your deposits. Why risk getting caught to save a few dollars? This doesn’t mean you have to report the $10 your elderly neighbor gave you for shoveling her driveway, but don’t hide the $200 a month you earn tutoring. If you are not sure if certain income has to be reported, check the IRS’s website (www.irs.gov) or consult with a qualified tax professional.
Claim Appropriate Number of Exemptions and Amount for Deductions and Credits
Many people joke about claiming their pet as a dependent. Few actually try, but some do inflate the amount they spent on such things as medical expenses and charitable donations to increase their deductions or credits. Remember, if you get audited, you will have to provide receipts to prove your expenses are what you said they were. Even if you legitimately had an expense and aren’t making it up, you want to make sure you have proof. Take the time throughout the year to collect and save receipts for all of your tax-related expenses.
File a Tax Return (If Required to Do So)
The IRS does not require everyone to file a tax return, but if you are required to file, it is a crime not to do so. There are some so-called tax experts that claim there is no law that requires you to file and pay income taxes. Don’t listen to them. Individuals using this argument have continuously lost in court. What if you owe taxes but don’t have the funds to pay them? You should still file and contact the IRS (1-800-829-1040) to see if you can work out a payment agreement.
As the old saying goes, there are two things certain in life: death and taxes. You may not be able to avoid taxes, but there are certainly many things you can do to lower the amount you have to pay.