With tax season underway, Rick Emerson -- author of "Zombie Economics" -- stopped by with some timely tips. You'll find more information on the "Zombie Economics" website.
With tax season underway, Rick Emerson -- author of "Zombie Economics" -- stopped by with some timely tips.
You'll find more information on the "Zombie Economics" website.
Q: Taxes fill everybody with stress - it's such a nerve-wracking time of year for most people. What's the most important thing people can do to minimize the headache?
A: Instead of putting your taxes off for another day (or week), tackle them head on...now.
In Zombie Economics, we talk about stopping the danger before it gets close to your house. If you wait until the zombies are on your front porch, you're panicked and rushed, and you're likely to miss whatever you aim at.
As with financial matters, the key is actually starting. Make the decision to sit down and begin the process. Gather the appropriate documents, sit down, and start putting things together.
When you delay, it creates additional stress, which, in turn, means you might miss important details...or make mistakes. Once you've begun, the anticipatory dread vanishes, and you realize you're on your way to having it done. It also means you won't be one of those desperate souls trying to get into an overcrowded post office with five minutes to spare.
Q: In Zombie Economics, you say that getting a tax refund might be a bad sign. Why?
A: A refund means you overpaid your taxes to begin with, and gave the government a no-interest loan.
Zombie Economics is about making every dollar count - your money is your arsenal. As part of that, it's time to recalibrate our thinking about tax refunds. We've been trained to view these as a positive, but when you get a tax refund, you've actually lost money in the process. When you withhold too much, you are, in essence, overpaying your taxes, and giving the government a free loan - money that you get back later, but without any interest or any kind of bonus.
The key is to withhold just the right amount. Get a copy of your W-4 from your HR department and look at the number of allowances you're claiming. Then tally up the number of dependents. If the number of dependents is larger than the number of allowances, you might be withholding too much.
Another way to figure this out? Go to IRS.gov, and in the search window, type in "withholding calculator". This will take you to the IRS's web-based withholding calculator - it will let you determine what you should be withholding on your W-4.
And remember: you can change your withholding at any time.
Q: Everyone is terrified of being audited. What sorts of things trigger an audit? What should people do if they get audited?
A: Common mistakes and large deductions can be red flags, so double-check your work and be prepared to show proof.
While the IRS can sometimes appear to be picking its auditing targets at random, there are common triggers - things which can catch the attention of an inspector:
Red Flag: Simple mistakes when entering or submitting your information. If you accidentally add or drop a zero, or put a decimal point in the wrong place, that can be enough to raise a red flag.
The Good News: these can typically be dealt with fairly easily. An honest mistake is usually shown to be that pretty quickly and the matter gets resolved.
Red Flag: If you claim a large amount of business-related expenses...especially if the income from that business seems low in relation to the deduction amount. Claiming a significant amount of charitable deductions can also draw attention.
The Good News: Questions about business or charitable deductions can also be dealt with fairly easily...if you've got proper documentation. It is very important that you be able to re-create these expenses, which means showing proof that the donation happened, or that the business trip really did cost that much. If you can't prove it -and remember, we're talking about things which happened a year earlier- it probably won't be allowed.
A final note: When in doubt, hire a professional. Especially if significant money is on the line. If you don't understand the ins and outs of tax law (and it's mind-bendingly complicated), don't try to handle this yourself.