The Top 10 Tax Secrets You Need To Know

Leona Helmsley, the so-called Queen of Mean, once boasted that only little people pay taxes. She paid for that remark and the accompanying arrogance that led her to flout tax laws by serving time in prison.

While avoiding taxes you rightfully owe is neither wise nor legal, there’s no need to overpay. Understanding a few tax secrets about how income taxes work can keep you on the right side of the IRS while allowing you to pay as little in taxes as you can legally manage.

1. Not All Income Is Taxed Equally

more-mone-less-taxesIf you work for a paycheck, you pay income taxes on your earnings. You also pay Social Security and Medicare. By contrast, if your income is drawn from investments, you only pay taxes on your capital gains. There are no employment taxes imposed at all. As a result, many wealthy people pay a lower percentage of their income in taxes than middle income and lower income taxpayers. For instance, according to IRS data, the top 0.001% richest people in the United States pay a lower average income tax rate (17.60%) than the top 10%.

Related: How to plan your Taxes & avoid Tax debt.

2. You Can Still Get Energy Efficient Tax Credits

energy efficient Tax-creditSome of the more lucrative credits like the “Cash for Clunkers” program are long gone. But tax credits are still available for homeowners who install energy efficient items such as geothermal heat pumps, solar energy systems, and residential turbines. And if you’re in the market for an all-electric car, you may qualify for a credit of up to $7,500, and that includes the super-fast, luxurious Tesla Model S.

Also, read >  How to Remove an IRS Levy

Related reading: How to pay off back taxes with professional help?

3. You Can Open An IRA For The Previous Tax Year as Late as April 15

egg nest IRA not too late to contributeIf you have any funds to spare, you should add them to your retirement savings. If you open a traditional Individual Retirement Account, you can deduct your contribution directly from your reportable income. Taxpayers under age 50 can claim up to $5,500 annually while taxpayers age 50 and older can deduct up to $6,500 annually under the catch-up provision. Contributions can be made until April 15th and still count toward the previous year’s federal tax return.

Related reading: How to deal with IRS Audits?

4. Same-Sex Married Couples Can File Joint Federal Returns

same sex marriage taxes

The Supreme Court recently ruled that same-sex marriages must be recognized across the entire country. And while some holdout states are still attempting to defy the ruling, the rules are clear when it comes to federal income taxes. Same-sex couples who are legally married can file joint federal income tax returns, which can result in substantial tax savings. Same-sex couples should consult with the departments of revenue in the states where they currently live if they plan to file joint state income tax returns.

5. Claiming The Home Office Deduction Is Easier Than You Think

You may have read or heard that claiming the home office deduction is like asking to be audited. While it is true that claiming the home office deduction can raise red flags, that is only a problem for self-employed workers that abuse it. For honest taxpayers, claiming the home office has never been easier.

home-office deduction

Many taxpayers can qualify by claiming a flat $5 per square foot, up to a maximum deduction of $1,500 (300 feet). The key to claiming a legitimate home office deduction is to remember that space must be devoted exclusively to business. At the same time, it’s not necessary to turn over an entire room of your house to claim the deduction. A desk in a converted closet can qualify – as long as the office is used only for business purposes.

Also, read >  How To Deal with the IRS for Back Taxes if You're a Small Business

6. April 15th Is Not the Drop Dead Filing Deadlineautomatic tax extension

Back in the day, local and national news outlets were guaranteed to run at least one story about long lines of taxpayers rushing to the post office just before midnight on April 15th to beat the federal tax filing deadline. These days, with online tax software and cloud-based programs, such scenes are less frequent.

The truth is that for taxpayers who cannot meet the April 15th deadline, there is no need to panic. The IRS allows a no-questions-asked, six-month extension to file federal income tax returns without penalty. However, that extension does not apply to PAYING what you owe. Nonetheless, the penalty for paying late is much less than the penalty for filing late.

7. The IRS HAS Clamped Down on IRA Rollovers

ira rollover

Under the old rules, taxpayers could roll over their funds from one traditional Individual Retirement Account to another with impunity, as long as the rollover was completed within 60 days. Savvy IRA holders often used the rollovers as short-term tax-free loans; taxpayers with multiple IRAs took advantage of the provision to make multiple loans to themselves.

But a February 2014 Tax Court ruling determined that beginning January 1, 2015, taxpayers would be allowed only one IRA rollover a year without triggering a tax penalty, regardless of how many IRAs they owned.

Related: What is IRS Wage Garnishment & How can you stop it.

8. The Obamacare Tax Penalty Isn’t $95 Anymore

obamacare-penalty

The individual mandate of the Affordable Care Act was designed to ensure compliance with the requirement for individuals and households that can afford health insurance to obtain coverage. The penalty for 2016 is either

  • 2.5% of household income or
  • $695 per adult ($347.5 per child under 18), whichever is greater.

From 2016 onward, the penalty will be indexed to keep up with inflation. Ouch. Take home lesson: get healthcare insurance. Your body and your bank account will thank you.

Also, read >  How To Identify & Avoid Tax Scams

9. Bitcoin Wages Are Taxable Income

bit coin taxesThe Bitcoin phenomenon is a prime example of how the law struggles to keep up with technological advances. As of May 2016, the IRS considers Bitcoin as property, not currency. Nonetheless, wages paid as Bitcoin must be declared on federal income tax returns, and are subject to tax withholding, unemployment tax, and payroll taxes.

Related reading: Owe the IRS in back taxes? Pay them off in easy installment payments with the IRS Installment Agreement.

10. The IRS Is Your Friend (Sort Of)

FRIENDLY IRSIn the old days, the IRS had a well-deserved reputation for being a bully. In at least one case, harassment by the IRS was implicated in the death (by suicide) of a delinquent taxpayer.

More recently, the IRS has made a deliberate effort to cooperate with taxpayers. Cutbacks in the IRS budget have also hampered its collection efforts. The result is that for honest taxpayers, the IRS is much easier to deal with than you might have feared. The key is to respond to communication from the IRS and be honest in your dealings with the agency.

Even considering the change in tone, it still can be daunting — not to mention time-consuming — to deal with the IRS, particularly when you have tax debt. The IRS has programs that can — under certain circumstance — reduce or even cancel tax debt. Tax relief companies can negotiate on your behalf with the IRS but you have to consider whether the potential savings can justify their fees. There is also the fact that many tax relief companies are ineffective and follow questionable marketing and customer service practices. SuperMoney uses expert and customer reviews to rate tax relief companies so you can find reputable businesses with a solid track record of providing high quality customer care.

Related reading: Learn about IRS Offer in Compromise.

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