Tax Filing Tips in 2025
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Alright, let's be honest, tax season isn't exactly anyone's favorite time of year. For many, it often feels like a yearly scavenger hunt, sifting through piles of paperwork, trying to remember where they stashed that one crucial document.
I remember one year, I was convinced I'd lost a 1099, leading to a frantic, late-night search that ended with me finding it tucked into a pile of documents I had stored away. These types of experiences have taught me that tax filing is about more than just filling out forms; it's about understanding the nuances, being organized, and avoiding those common pitfalls that can lead to headaches down the line. And trust me, no one wants that dreaded letter from the IRS.
Five Vital Areas to Focus on When Filing Your Taxes This Year
Unreported Income
One of the most frequent errors when filing taxes is the failure to report all income, which can be unintentional. This includes not only salary reported on a W-2 but also income from freelancing, dividends, interest, and rental properties. The IRS utilizes matching software to identify discrepancies between reported and actual income. Unreported income may result in a notice to file an amended return and pay interest on the unpaid tax. Significant discrepancies could lead to penalties.
Mortgage Debt Deductions
Tax deductions for mortgage interest, which are claimed on Schedule A, have been reduced. The limit was recently lowered from $1 million to $750,000, and exceeding this limit could trigger an audit. Schedule A also includes deductions for medical expenses, charitable contributions, and state and local taxes, all of which have their own limits and restrictions. It is crucial to be mindful of these limitations to avoid potential issues with the IRS. For instance, deductions for state and local taxes are now capped at $10,000.
Business Income Losses
The IRS is more likely to scrutinize Schedule C filers who report self-employment income, especially if they claim substantial business deductions or home office expenses. For instance, claiming losses that exceed your reported income may trigger an audit.
State Returns and Residency Requirements
Due to the substantial variance in state income tax rates, ranging from 0% to over 13%, your state of domicile can significantly impact your tax liability. Post-COVID scenarios, such as relocating to a low-tax state, splitting your time between states with varying tax rates, or residing in a different state from where you work, have become more prevalent and could potentially attract increased scrutiny. To support your legal domicile, it is advisable to maintain a record of any documentation required by your state, which may include change-of-address forms, voter registration, and a log of the days spent in each state.
Keeping Meticulous Records
It is critical to retain receipts and documentation that substantiate the details on your tax return. In the event of an audit or inquiry, meticulous records can be crucial in supporting your claims. This is especially important when dealing with complex deductions.
For instance, if you donate appreciated stock to a charity, you can deduct its fair market value at the time of transfer. However, you'll need a tax receipt to document this transaction. Additionally, any non-cash contribution exceeding $5,000 necessitates a written appraisal to determine its value.
Navigating the documentation requirements for intricate transactions like selling a business or filing gift and estate tax returns can be daunting. In such cases, seeking the guidance of a seasoned tax professional is highly advisable.
Click the image above to download the free guide
Action Items
Tax season may never be a walk in the park, but by staying informed, organized, and proactive, you can significantly reduce the stress and potential pitfalls. Remember, meticulously keeping records, understanding the nuances of deductions and income reporting, and seeking professional advice when needed are your best defenses against IRS scrutiny.
Whether you choose to tackle your taxes solo or enlist the help of an experienced professional, taking these steps will empower you to navigate tax season with confidence and peace of mind, knowing you've done your due diligence.
To help you be better prepared this tax season and assist you in navigating the process of gathering documents for filing your taxes, I wanted to share this checklist that covers the key issues to consider, such as:
Documents and information to gather for your sources of income
Documents and information to gather for potential tax deductions
Documents and information to gather for potential tax credits
Other important nuances to consider when preparing to file your taxes
You can download the 2024 Tax Preparation Guide here or click on the image above.
~Alex
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