THE BOTTOM LINE
Top 10 tax blundersJames R. Armstrong, CPA, and Jodi Permenter, CPAt is the start of a new year and tax season is under way.IMake a New Years resolution that includes avoidingthese common tax-filing mistakes.1. Not talking to the tax preparer until thetax year is overThe beginning of 2012 is the perfect time to talk to a taxpreparer or accountant about taxes. No, not 2011 taxes, butSelf-employed health insurancedeductions, bonus depreciation onequipment, and sales tax deductions forlarge purchases are just a few of thecommonly overlooked ways taxpayers canreduce their federal incomes taxes.2012 taxes! Taxpayers who dont talk to their tax preparersuntil the tax year has ended are probably not taking full ad-vantage of the tax deductions and credits that are available tothem. A tax professional can determine the most efficientway to structure a business, distribute money from that busi-ness, purchase equipment, and save for retirement. There arevery few deductions that can be taken after the end of theyear, so there is little an accountant will be able to do tohelp a client reduce 2012 taxes after the clock strikesmidnight on December 31. For example, if an optometristis planning to acquire new equipment in the near future, atax preparer can help determine whether to buy or lease,when to time the purchase, and whether to take special bo-nus depreciation now offered by U.S. Internal RevenueService (IRS) as part of efforts to stimulate the economy.This year, when speaking to the tax preparer about filing a2011 return, take the opportunity to create a tax plan for 2012.
2. ProcrastinatingTax day is not exactly going to be anyones favorite holi-day, but why delay the inevitable? As Benjamin FranklinJames R. Armstrong, CPA, is a partner in the firm of May & Company,
LLP. Jodi Permenter, CPA, is a member of the professional staff of May
& Company, LLP. The firm consults with optometrists in 30 states, assist-
ing with their tax planning and preparation, QuickBooks support, and
business planning. May & Company was established in 1922 and has of-
fices in Louisiana, Mississippi, and Alabama. The authors can be reached
by e-mail at firstname.lastname@example.org.
1529-1839/$ - see front matter 2012 American Optometric Association. All rdoi:10.1016/j.optm.2011.11.007said, In this world nothing can be said to be certain exceptdeath and taxes. Waiting until the last minute to file or toget information to a tax preparer is never a good idea.Those preparing tax returns themselves are more likely tomake mistakes if they are rushed. Those having their taxesprepared will find their accountants will most likely extendtheir filing date unless they receive all necessary informa-tion promptly. Filing taxes early is beneficial whether thetaxpayer is due a refund or owes additional money to theIRS. Those who qualify for a refund will not receive it untilthey file a return, and that means that their money is tied upwith the IRS instead of earning interest. However, for thosewho owe money, extending the filing date does not extendthe payment date. The IRS requires taxpayers to pay thebalance of their estimated tax liability with any applicationfor extension. Failing to do so, or incorrectly underestimat-ing tax liability, can result in IRS penalties and interest onthe balance due.
3. Forgetting to make an individualretirement account (IRA) contributionby April 15The IRS will allow taxpayers to make 2011 IRA contribu-tions all the way up to April 15, 2012. However, extendingthe filing date for a tax return will not extend this deadline.If taxpayers forget to contribute, they miss out on the taxdeduction for good, so mark the calendar, set a reminder inthe personal digital assistant (PDA), or tie a string around afinger, but do not miss out on this opportunity for taxsavings.
4. Not budgeting for tax paymentsThe first few months of the year can be expensive! Inaddition to all of the bills coming in for gifts and celebra-tions during the holidays, taxpayers have a lot of paymentsdue to Uncle Sam. The last estimated tax payment for theold tax year is due on January 15, and the first quarterlyestimated tax payment for the new tax year is due on April15. As previously noted, any individual retirement account(IRA) contributions are due by April 15. In addition, anybalance of tax owed on a return is due by April 15. All ofthese payments, along with the bill for tax preparation, aredue within the first 4 months of the year, so be sure toinclude these tax payments in the office budget. Payingthem late will cost you; the IRS charges a late paymentpenalty plus interest.ights reserved.
Practice Strategies 575. Not bunching itemized deductionsCarefully timing itemized deductions can ensure a taxpayerreceives the largest tax benefit possible. If itemized deduc-tions are close to the standard deduction every year, timepayments so that 2 years of deductions can be claimed in1 tax year. For example, pay the property tax bill for 2011on January 1 and the bill for 2012 on December 31, 2011,or make 2 years worth of charitable contributions in 1 year.This allows the taxpayer to deduct 2 years worth ofitemized deductions in 1 tax return. In 2011, itemize.Then, in 2012, take the standard deduction. (Some localesmay not allow for prepayment of taxes, so a call to the localtax collectors office may be in order.) Also, deductible ex-penses can be bunched to exceed deduction thresholds setby the IRS. The IRS allows taxpayers to deduct healthcare expenses that exceed 7.5% of adjusted gross income(AGI). Taxpayers may not have that many medical ex-penses in 1 year. However, if they pay 2 years worth ofhealth insurance premiums in 1 year, they may be able toexceed the threshold and deduct them.Patients who know they may need a number of health care
procedures over the coming years may be able to deductassociated expenses by scheduling as many as possible in1 year. Similarly, if health care-related products, supplies, orequipment will be needed over an extended period of time,and expiration dates on those products extend beyond 12months, purchasingmore than a years supply during 1 calen-dar year might allow a taxpayer to exceed the threshold anddeduct the cost. In addition, some miscellaneous itemizeddeductions are subject to a threshold equal to 2% of AGI.Exceed the threshold by paying dues to professional organi-zations, rent for security deposit boxes, and subscriptions tobusiness publications 2 years at a time.
6. Forgetting about non-cash charitablecontributionsMany people forget to claim a deduction for non-cashcharitable contributions on their tax return. Donatingcanned goods to a food drive, toys to underprivilegedchildren, or old clothes to a shelter is considered acharitable contribution and is an itemized deduction on atax return. Do spring cleaning in December and donate allunused items around the house or office to charity. Not onlydoes it feel good to support a great cause, it can feel great toget a tax deduction in April.
7. Forgetting about sales tax on largepurchasesPurchase a car, boat, or airplane this year? How aboutmaterials to renovate or add on to the house? Manypractitioners do not realize that the sales tax on suchpurchases is tax-deductible. The IRS allows taxpayers todeduct either state income tax or state sales tax paid as anitemized deduction. The IRS provides calculations ofestimated sales tax paid based on individual income andstate sales tax rate. However, the IRS allows taxpayers toincrease their calculation by sales tax paid on somespecified items, such as those listed above. This deductionis even more important for those who live in a state withhigh sales tax and either no income tax or a low income tax.
8. Forgetting about last years returnFew taxpayers enjoy the process of preparing to file theirincomes taxes each year. Most would not look forward todigging up and going over their previous years return1 more time. However, it can be worth the effort. Some tax-payers may have carryover capital losses or net operatinglosses that can be used to offset current income. It is aneasy mistake to make, but not claiming carryover lossescan cost a taxpayer thousands of dollars. The potentialtax savings is well worth the few minutes it will take tocheck prior returns.Taxpayers who file their own returns should always
exercise due diligence. Keep meticulous track of all carry-over losses, and be sure to claim them to the full extenteach year. Also, when changing accountants, it is veryimportant to provide them last years return so they dontmiss carryover items.
9. Not claiming the self-employed healthinsurance deductionOptometrists who own a practice will find that purchasinghealth insurance for themselves and their families will notonly reduce federal income tax, but, for 2011, reduce self-employment tax as well. Far too often, business ownersdeduct the cost of health insurance as an itemized deduc-tion. The medical expense deduction is reduced by 7.5% ofadjusted gross income, so if health insurance premiumsarent deducted on the right line of a return, the taxpayerwill be paying too much tax! For 2011, there is a provisionto allow self-employment health insurance to reduce self-employment earnings as well, which will result in addi-tional tax savings. Taxpayers who pay $4,000 for healthinsurance during the year could be paying over $500more in self-employment tax than they should! Foregothe medical expenses itemized deduction and claim theself-employed health insurance deduction instead.
10. Not keeping complete tax recordsDont wait until January 2013 to start putting together taxinformation for 2012. Purchase an accordion folder at thebeginning of each tax year and use it to stay organizedall year long. Not only will it make tax day a little less pain-ful, it will improve the chances of claiming all of the deduc-tions to which you are entitled. When it comes to filingtheir tax returns, most people remember to declare theirmajor expenses, such as in the case of health care-relatedcosts, any emergency room visits, and their health insur-ance premiums. However, they often forget about thesmaller expenses. What about that $50 spent on crutchesor bandages for an injury earlier in the year? The $35 copayfor a dental checkup in August? The $75 check written forthe Japan tsunami relief effort? It is all tax-deductible, and
58 Practice Strategiesit can add up to significant tax savings. However, if tax-payers dont store the information somewhere, they proba-bly wont remember by the time tax day rolls around.Dedicate each section of the accordion folder to1 deduction: medical expenses, charitable contributions,dues to professional organization, expenses for rentalproperties, etc. Then, after W-2s and 1099s are issued inJanuary, just give the whole folder to the accountant!
Outline placeholder1. Not talking to the tax preparer until the tax year is over2. Procrastinating3. Forgetting to make an individual retirement account (IRA) contribution by April 154. Not budgeting for tax payments5. Not bunching itemized deductions6. Forgetting about non-cash charitable contributions7. Forgetting about sales tax on large purchases8. Forgetting about last years return9. Not claiming the self-employed health insurance deduction10. Not keeping complete tax records