Few can fear more in the hearts of taxpayers than the expectation that the IRS will question their tax return. For most people, the chances of exploration are slim.
According to the IRS, of the nearly 148 million individual tax returns filed in 2016, only 0.7 percent (about 1 million) were verified.
What increases your chances more? Make a lot of money. If you earn more than $1 million, the audit fee goes up to 5.8 percent.
“This is a scenario where the less money you make, the better off you are,” said Bill Smith, executive director of the CBIZ MHM National Tax Office in Washington.
The IRS doesn’t reveal exactly why it chooses to monitor the returns you make, but rather the general data after the fact. You can then explore reasons that have nothing to do with recent common control areas.
And even if you’ve made overstated deductions or undeclared income in the past, don’t assume your luck will last forever.
Sometimes the IRS can get information showing a pattern from a red flag taxpayer, ”said April Walker, senior manager of tax practice and ethics at the American Institute of CPAs.
For example, if consecutive years of large charitable contributions come from a taxpayer whose reported income indicates the generosity rate would be unsustainable, it could generate interest from the IRS.
Also, don’t assume that even if your income leaves a low chance of being controlled, you are clean. Any major deductions and income-related credits may be subject to scrutiny or additional documentation may be required.
And regardless of income, there are other things about tax returns that can draw the attention of the tax collector.
Any form you receive that shows an income, such as a job W-2, a 1099-MISC or 1099-K or 1099-INT secondary income that shows a taxable interest of $ 10 or more on a bank account, also goes to the ‘IRS. And if you don’t report any of these gains, the IRS will call you.
“If there’s a discrepancy, it generates an automatic IRS match,” Walker said. “It’s easy for them to notice.”
Even if you do not receive an official income form for your job, you are likely to report it to the IRS: if your income (after expenses) from an additional job is at least $ 400, you must report it and pay.
This is an area where some taxpayers have room to report the costs associated with their business, whether it’s a full-time endeavor or a side hustle.
The IRS says that of the $458 billion in taxes recorded between 2008 and 2010, nearly 60 percent was due to corporate and self-employment income.
“Taxpayers may not have documentation for expenses,” Walker said. “It’s a control area.”
When a mortgage is paid off, the payments are made up almost entirely of interest rather than principal for the first few years. Even later, the interest portion can still be a significant part of your payments. However, you can deduct the interest paid if the loan meets IRS mortgage requirements.
Mortgage loan requirements
For mortgage payments to qualify for the interest deduction, the loan must be secured by your home and the loan proceeds must have been used to purchase, build, or improve your primary residence, as well as another home you own. Also, use for personal purposes.
If you rent your second home to tenants during the year, it is not used for personal purposes and does not qualify for a mortgage interest deduction. However, rental homes will also qualify if you also use them as a home for 15 days or more a year or more than 10% of the days you rent them out to tenants, whichever is greater.
Mortgage balance limits
The IRS sets different limits on the amount of interest you can deduct each year. For tax years before 2018, interest paid up to $ 1 million of acquisition debt is deductible if you specify the deductions. There may be interest on an additional $ 100,000 of deductible debt if certain requirements are met.
From 2018, deductible interest on new loans is limited to principal amounts of $ 750,000. Loans that commence before 16/12/2017, or have a binding contract that expires before 1/4/2018, remain subject to the old rules for the tax years before 2018.
If you’re married filing separately from your spouse, the limit is cut in half. These limits are cumulative for all your mortgage debt on both homes. For example, if you are single and have a mortgage on your main home worth $800,000, as well as a mortgage on your summer home worth $400,000, you would only be able to deduct interest on the first $1 million, even though both loans are below from both. The $1,000,000 limit for tax years before 2018.
Including mortgage points
Mortgage discount points, also known as prepaid interest, are generally fees you pay as you get closer to a lower interest rate on your mortgage. These costs are generally deductible in the year the home is purchased; but if not, you can deduct them proportionally during the return period. For example, if you pay $3,000 in points to get a lower interest rate on your mortgage, you can increase your mortgage interest deduction by $3,000 in the tax year you close on your home.
Claiming the mortgage interest deduction
You cannot claim a mortgage interest deduction unless you specify the deductions. This requires you to use Form 1040 to file your taxes and Appendix A to report detailed expenses. Interest payments and points you pay are combined with all other deductions you claim in Appendix A; which reduces the total of your taxable income on the second page of your tax return.
TurboTax will look for over 350 deductions to get your guaranteed maximum refund. If you have a home, TurboTax Deluxe offers a step-by-step guide to help you make the most of your tax exemption investment.
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