I’m a fool for crime. Not that I like committing it mind you, but I enjoy reading about it and watching it. Movies, books and television shows about crimes and mysteries are one of my biggest interests. When I combine my enjoyment of crime and the timely topic of taxes, I researched tax cheats. The information I found was interesting to me, a crime junkie, so I hope you find some interest in it as well.

tax cheats

Photo Courtesy: sakhorn38 at FreeDigitalPhotos.net

Below are six tax cheats. They are not necessarily the biggest ever, just the ones I found most interesting. They are in no particular order either. In case you were wondering what constitutes a tax cheat, be sure to read Are You Committing Tax Fraud, Tax Evasion or Tax Avoidance? You will find that you fit into one of these categories, hopefully the good one!

Walter Andersen

I said I wasn’t going to list the six biggest, but I have to mention THE biggest. Walter Anderson’s case is the largest tax evasion case in United States history. Anderson is a former telecommunications executive. He began his career at MCI and then founded many start-up telecom businesses and ended up selling these start-ups for large sums of money. The only problem was that he decided to not report all of proceeds from the sales. In 1998, Anderson earned over $126 million, but only reported income of $67,000 of which he paid a whopping $495 in taxes.

He plead guilty in 2006 of hiding $365 million by using off-shore bank accounts, shell companies and various aliases. When he plead guilty he was sentenced to nine years in prison and had to pay $200 million in restitution.

The best part (I guess for him at least) is that a typographical error on the plea agreement from the United States Government allowed Anderson to avoid paying up to $175 million of the restitution he agreed to pay.

Related: Do You Report All Your Income?

Leona Helmsley

Helmsley was a hotel operator that would push personal expenses through to her businesses. She and her husband were doing a good job at getting away with it until one of their contractors refused to sign the paperwork because he knew what they were doing was illegal. The remodeling bill in question came to $8 million, which she and her husband didn’t want to pay. So, the contractors took her to court.

During the court proceedings, the contractors forwarded the illegal bills to the New York Post to show what the Helmsley’s were doing. In the end, Leona Helmsley spent 18 months in prison. Her husband, who had health issues during the time of the trial, was found unfit to stand trial and she had to stand trial alone.

After being released from prison and her husband passing away, Helmsley had a net worth in excess of $5 billion.

Related: Do the Rich Pay More or Less in Taxes?

Pete Rose

Any baseball fan knows of Pete Rose. He holds the record for most hits in a career with 4,256. In 1990 he plead guilty to filing false income tax returns. It turns out Pete didn’t report the money he earned selling autographs, memorabilia, and horse racing winnings. He ended up paying over $365,000 in back taxes and interest as well as a $50,000 fine.

Related: Do You Have to Pay Tax on Gambling Winnings?

Darryl Strawberry

Darryl is also a former baseball professional who became a star with the New York Mets in the 1980’s and it appears he learned from Mr. Rose above with regards to reporting income on his taxes. He too did not report income from selling his autograph. He ended up making a deal with the government and paid $350,000 in back taxes.

Related: What are Your Options When You Owe the IRS Money?

Wesley Snipes

Wesley Snipes and his accountants were all charged with conspiracy to defraud the United States, among other charges. In 1996, he filed an amended return claiming a refund of $4 million and in 1997, filed another amended return claiming a refund of $7.3 million. He based these amended returns on an argument that income is not taxable. The government also claims Snipes never filed a tax return from 1999 through 2004.

In 2006, Snipes claimed he was a non-resident alien and therefore not required to pay income tax. In reality, Snipes was born in the United States and is therefore a United States citizen.

In 2008, Snipes was not found guilty of the conspiracy charge, but was found guilty of not filing income tax returns. In 2011, the Supreme Court refused to hear his case and was sentenced to three years in prison.

Related: How to File Old and Delinquent Tax Returns

Al Capone

Most everyone knows that Capone was a famous mobster in Chicago back in the 1920’s. The gang that Capone was head of made their money using a furniture store as a front. There are estimates that he generated over $100 million per year through various illegal activities.

The interesting part of the story though is that Capone was never convicted of bootlegging or murder. He was found guilty of tax evasion and failing to file a tax return. This occurred because in 1916, the word “lawful” was removed from the 16th Amendment making income earned from illegal means taxable. Criminals like Capone had to decide whether to keep committing the crimes and report the income (basically admitting guilt) or not report the income (committing tax evasion). He chose to not report the income.

While on trial, it was found that Capone was bribing the jury, so a new jury was chosen. He was found guilty, fined and sent to prison for 11 years. Part of his prison time was served at Alcatraz.

Related: How to Report a Tax Cheater

Final Thoughts

Filing a false tax return or not filing a return is a big deal. In addition to having to pay back taxes, interest and penalties, if you are found guilty, you will have to pay hefty fines and could face serious jail time. Because of this, you are better off not trying to cheat the system. I, just like you, don’t like paying taxes. But deciding to not pay or cheat your way out of paying them is not the solution. Learn from the above examples that the IRS will find you sooner or later and it won’t be pretty.

Do you know of other tax cheats not mentioned above?

More Tax Topics

If you maximize your tax refund each year when filing your taxes (and take every tax deduction you are entitled to in doing so), then you actually commit one of the above terms. Before you get scared that you are breaking the law, calm down. One of the options is completely legal and you should be taking advantage of it as the tax deadline nears. But which one is it? Do you know?


Photo Courtesy: Stuart Miles

Tax Fraud

The definition of tax fraud is when a person, corporation or other business entity intentionally avoids paying their true tax liability. Cases of tax fraud are investigated by the Internal Revenue Service Criminal Investigation unit.

Overall, tax fraud is difficult to prove because the government has to show that the taxpayer intentionally defrauded the government out of tax revenue.

Tax Evasion

Tax evasion is when a person, corporation or other business entity willfully and intentionally falsifies information on their tax return in order to limit their tax liability. This includes claiming false deductions, not reporting income and claiming personal expenses as business expenses so that they can be written off. If you are caught evading taxes, you are subject to criminal charges as well as penalties.

In essence, tax evasion is a subset of tax fraud. Many times the government will charge people with tax evasion instead of tax fraud because tax evasion is less difficult to prove.

Tax Avoidance

Tax avoidance is when a person, corporation or other business entity uses legal means to reduce their tax liability. This includes taking all allowable tax deductions and tax credits that you are entitled to. This is perfectly legal, as long as you only take those credits and deductions that you qualify for. Once you cross over into taking a deduction you are not qualified for, you enter the world of tax evasion.

If you contribute any money to a 401(k) plan at work, you are practicing tax avoidance. This is because the contribution comes out of your salary before taxes are applied and as a result, reduces your taxable income.

Statute of Limitations

Let’s say someone you know is committing either tax fraud or tax evasion. What is the law in which the IRS can come after them? Since we are talking about the IRS, there are exceptions to the rule. To begin, the IRS has three years from when you file a tax return to complete the audit process. This includes reviewing your return and coming to an agreement with you to pay additional tax or not.

But, if the IRS finds that you failed to report 25% of your gross income, the three year window opens to six years. Note that taking too many deductions won’t put you into this situation, but not reporting all of your income will. While this does not mean tax evasion is occurring, you can bet that the IRS is seriously looking to see if it is present.

If the IRS suspects you are committing tax fraud, it must prove that, as mentioned above, for every year it is suspected. If proven, there is no statute of limitations and the IRS can go back as far as they want.

One final interesting fact about all of this is for those of you that are married and filling jointly. When you sign you name, you are signing that you agree that what is on the tax return is correct. If your spouse is committing tax evasion and you sign, you can be held liable as well. Therefore, it is important to make sure that your spouse is not trying to game the system. It goes back to the old saying of knowing what you are signing.

Final Thoughts

As you can see, you certainly want to be practicing tax avoidance and not tax evasion or tax fraud. The latter two will find you in jail and owing lots of money to Uncle Sam. Any good accountant will make sure you practice tax avoidance to your legal limit so that you pay the absolute minimum in taxes that is required from you. I hope you found this information helpful.

More on Taxes

With tax season readily underway, we have been covering a lot about the best part of filing taxes – the tax refund. Even though it was taken out of our paychecks through the year or possibly because of a credit for going to school or something else, it is always nice to get that refund back each year. We shared things parents could do with their refund and even some tips for college students to use their refunds wisely. But like with anything else in life, there is always the other side of the situation. And in this case, it is what not to do with your refund this year.


Knowing you are getting a tax refund and an unexpected amount of money back can easily make us do some rash things with this lump sum. But before you spend your refund, here are six things you should not do with your refund that you may be tempted to do.

What Not to Do With Your Tax Refund

  • Don’t count on it.
    First things first, the important thing you shouldn’t do with your refund is count on it. If you are waiting for your refund to arrive to pay rent or your bills, you can end up in trouble. There are tax refund delays again this year. In addition, there are many reasons why you might not get your refund at all this year. If you made a mistake in past years while filing taxes or a mistake this year, you can have it withheld. Mistakes include anything from filling out the wrong information, wrong calculations, or even missing a simple check mark like your filing status. You may also be going without your refund if you have defaulted on student loans or not paid child support. Not to mention there is always the possibility of a check lost in the mail or a mistake getting direct deposited.
  • Don’t think of it as free money.
    Getting a tax refund seems like a bonus or winning a tiny jackpot. But there are two things to keep in mind. First, that money is money you worked for and earned. It was money that was taken out of your paycheck every week or credited to you because you made a large purchase, like a house or attending college, or have children to provide for. So this money isn’t necessarily fun, free money. Second, this can be a chance to do something productive or cost effective with the money. A lot of times people want to use money they receive as a bonus or present immediately for impulse or luxuries. Opt for something more practical, spend your tax refund wisely and the rewards will pay off in the end.
  • Don’t spend money on expensive activities.
    Tax season is stressful, and you can easily be tempted to go out and do something fun to blow off some steam with your tax refund. But just because you want to do something fun, does not mean you have to spend your refund. There are plenty of free or cheap winter activities you can do so you can save your refund instead. Enjoying the outdoors, game nights, finding free admission to museums, and searching for free events are just a few things you can do for no cost. Get creative, and your wallet will thank you.
  • Don’t book an overpriced vacation.
    With a combination of winter blues and stress from taxes, I definitely can’t blame you for wanting to take a vacation or travel for Spring Break. But before you use your entire refund check to go on a pricey vacation, remember there are plenty of ways to save on a vacation. Finding free activities, keeping a budget, and searching for deals and coupons are just a few simple ways to save. Being flexible with where you stay, joining rewards programs, and staying somewhere with free breakfast are just a few simple ways to save on a hotel. If you want to possibly save even more of your refund and get creative, try camping, staying in a hostel, or couch surfing for alternatives to hotels that’ll save you money.
  • Don’t splurge on an expensive dinner.
    You get your refund check, look at your spouse, and say, “hey, let’s treat ourselves to a nice steak.” It’s not that you both don’t deserve it, but it is probably not the best thing to do with that money. You can still go out to a nice dinner without it costing you a whole week or even month’s food budget. You can find restaurant deals and coupons on Groupon, Living Social, and Restaurant.com. Split a few appetizers instead of a meal, or go out for breakfast or lunch instead. Although many people will tell you to skip the wine, beer, or other alcoholic drinks during dinner to save, I believe you can easily still enjoy these things without spending a ton more money. Obviously drinking water is free, but there are still
    ways to enjoy beer and wine on a budget
    . Try a sample before you purchase anything, drink local, and limit your drinks.
  • Don’t go on a shopping spree.
    Seeing a lump sum of money all at once gives many people a feeling of wanting to make a big purchase. Instead of heading to the mall or shopping online, check out your own closet first. It may sounds silly, but clean out your closet and take some time to go through it a little bit. Mix and match accessories and pieces you already have, and you might be surprised with how many “new” outfits you already have without spending a penny. If you really want to add to your wardrobe, buy something for the season we’re leaving. Since it is now approaching spring, winter coats, heavy sweaters, and boots are going to be a fraction of the cost. Sure, you’re going to have to wait to wear it, but you’ll be getting the item at up to 80 percent off the original price.

What are you doing with your refund this year? What are you definitely not doing with it?

More on Tax Refunds

Have you ever wondered whether or not you can sign a tax return for someone else? With the tax deadline nearing, let’s find out. Generally it is the responsibility of the taxpayer to sign their tax return, and if a tax return is not signed it is not considered valid by the IRS. But there are instances which you may need to (and can legally) sign for another taxpayer. This includes if the taxpayer is ill, injured, underage, mentally unfit, in a combat zone, or deceased. Let’s take a look at some of the more common circumstances when you are allowed to sign for someone else.

Signing a Tax Return for a Minor

If your child earned enough money to file an income tax return, bravo to them! It is typically their responsibility to file the tax return (this is according to the IRS; I don’t think there are many eleven year olds out there who would know to do this!), but I am sure they are going to need help. If the child cannot sign his or her return, a parent or guardian can sign the child’s name in the space provided at the bottom of the tax return. Be sure to add: “By (signature), parent (or guardian) for minor child.” If you do sign for them on the tax return, you are able to act on behalf of the child with any dealings with the IRS. Also note that if the child does not pay the taxes due, then the parent may be liable.

Signing a Tax Return for Your Spouse

For a tax return filing status to be considered “joint”, both spouses must sign the return.  However, there may be times when this is not possible. The IRS recognizes the following situations:

  • Spouse dies before signing the return
  • Spouse is away from home (in this case you are responsible for procuring their signature)
  • Injury or disease prevents signing
  • You are the guardian of the spouse
  • Spouse is in a combat zone (see Publication ‘3’, Armed Forces’ Tax Guide).

If any of these situations apply, then check out this information for how to sign the return. In general, you would sign your name in the slot for you, and then you would sign your spouse’s name in the proper place followed by the word “by” (your signature), followed by the word “husband” or “wife.” Then you would attach a statement explaining the situation, including the form number of the return you are filing, the tax year, the reason your spouse cannot sign the return, and that your spouse has agreed to your signing for him or her.

If there are other reasons why your spouse cannot sign, you can only sign the tax return for them if you are their Power of Attorney (a legal document giving you permission to act for your spouse). To sign tax return as power of attorney, you would attach the power of attorney (or a copy of it) to your tax return (use Form 2848, Power of Attorney and Declaration of Representative).

Signing a Tax Return for a Deceased Person

We discussed signing a joint tax return for a spouse that is deceased, but you may be in charge of signing a tax return form for someone else who is deceased. When doing this, you would write “DECEASED,” the deceased person’s name, and the date of death across the top of the tax return. The spouse, the chosen personal representative, or the person in charge of the deceased person’s property must sign the return. Also, you can check the box “Third Party Designee” so that the IRS can discuss the tax return with the person who signs/prepares it.

More Tax Topics

Update: The laws have changed! Please see the New Rules on How to File a Joint Tax Return for Domestic Partners.

The federal government does not recognize domestic partners as being married for either legal or tax purposes. However, some states do recognize domestic partners as being married for legal and tax purposes. Naturally, this has tax consequences on both a state and a federal level.

Domestic partner couples cannot file joint federal tax returns, but rather must fill out 1040s separately. However, if you are in a domestic partnership and you live in a Community Property state, then when you file your separate federal tax return you must also report half of all Community Income in addition to all of your separate income. Let’s take a look at how this works.

IRS Definitions of Separate/Community Property and Separate/Community Income

In May 2010 the IRS came out with a new legal memorandum that changed the way domestic partners must file their federal taxes. Before, the IRS had every domestic partner file taxes separately regardless of state community property laws. Now, state community property laws are taken into consideration in the process. However, not all domestic partners are affected by this change in law. Domestic partners in Community Property states that recognize same-sex marriages or partnerships are affected by this, including registered domestic partners (RDPs) in California, Nevada and Washington, and married same-sex couples in California. Before we look at the form to fill out, let’s look at some IRS definitions:

  • Spouse: For tax purposes, this refers to a person of the opposite sex who is a husband or a wife. For the purposes of the form discussed below, spouse also includes RDPs (California) or same-sex spouse (Washington).
  • Marriage: For the purposes of taxes, the IRS defines a marriage as “a legal union between a man and woman as husband and wife and the word “spouse” refers only to a person of the opposite sex who is a husband or a wife”. It should be noted that in definitions throughout the tax publications/tax forms discussed below, the IRS also includes the phrase “RDP/same-sex marriage depending upon the state you live in” when referring to marriage.
  • Domicile: You may only have one domicile (even if you own more than one home). The IRS views your domicile as your permanent legal home that you intend to use for an indefinite or unlimited period. Also, if you are absent from this home, it is still considered your domicile if you intend to return to it.
  • Community property: This is defined as property that you/your spouse/both acquire during your marriage while you and your spouse are “domiciled” in a community property state. This is also any property that was converted from separate to community property and can no longer be identified as separate property.
  • Separate Property: This is defined as property that was owned by an individual previous to the marriage (or RDP/same-sex marriage depending upon the state you live in), money earned while “domiciled” in a noncommunity property state, property that you/spouse received separately as a gift or inheritance during your marriage, property that you or your spouse bought with separate funds or acquired in exchange for separate property during your marriage, property that you and your spouse agreed to convert from community to separate property (with a valid agreement under state law), or property bought with separate funds (in cases when part was bought with community funds and part with separate funds).
  • Community Income: This is defined as income earned from Community Property, and salaries, wages, and other pay received for the services performed by you/your spouse/both during your marriage (or RDP/same-sex marriage depending upon the state you live in).
  • Separate Income: This is defined as income from separate property.

Allocation of Tax Amounts between Certain Individuals in Community Property States

Publication 555 discusses community property laws that affect how you figure your income for your federal income tax return if you are married, live in a community property state or country, and file separate returns. In the 2011 tax year and prior tax years, domestic partners filed taxes separately but used Publication 555 in order to allocate income and deductions in community property states. With the changes in state laws, the IRS created a new form in order to deal with domestic partner tax filing in Community Property states.

Domestic Partner Tax Filing Form

Form 8958 was created in 2012 for Married Filing Separate Spouses, Same-Sex Spouses, or RDPs with Community Property Rights. Although domestic partners still file as single individuals, you and your partner or spouse in a Community Property State will need to report half the community income on each of your federal income tax returns and attach this form.

Filing taxes can be stressful. It is even more stressful when you have a baby crying in the background, lunches to pack before the school bus leaves, and costumes to make for the school play. But on the upside, parents filing taxes can get some breaks for having kids (like education credits, dependent care credits and child tax credits), so why not use your tax refund to do something great for your kids. Not like caring for them everyday and paying for everything they need isn’t enough, but maybe you want to make an investment other than a new toy or video game for them.

courtesy of efleming

Photo Courtesy: efleming

Ways to Use your Tax Refund

Here are seven unique ideas for parents to spend their refund on their kids this year:

  1. Put it in your savings account (or start one!).
    Having a savings account is important for everyone, but if you have kids, you especially need to be prepared for a rainy day. If you lose your job or if another event happens, you’ll really need to be able to pay your bills and provide food and shelter for the little ones. Not having to argue about money or create stress about money is one of the best things you can do for your child. Putting your tax refund in your savings account is a quick way to bulk it up. Then after you make a monthly or weekly budget for your family, you can decide how much should go in there from now on.
  2. Start a college fund.
    It may seem like a lifetime away whether your kids are infants or in high school, but either way college will be here before you know it. Take your tax refund, and open a savings account for their college tuition. The 529 college savings plans are a popular choice, but do research to figure out what is best for your child and your situation. Review 529 Plans versus UTMA Accounts and A Comparison of College Savings Plans for ways to get started. Putting away a little now will help them avoid massive student loan debt in the not so distant future. But just because you start a college fund, does not mean your kids shouldn’t try to search for scholarships or apply for FAFSA to see if they are eligible for grants. And also ask yourself what you would do with this money if your child decides to take an alternate career path and not head for college.
  3. Enroll your kids in a rewarding activity.
    Even if you are already taking advantage of all the free activities at your child’s school, the local library, your nearby park districts, and other city and community events, there might still be some other activities out there with a higher price tag. Now with a little extra money, you can enroll them. Maybe art classes, a sport your school doesn’t offer, horse back riding lessons, or something unique you normally wouldn’t be able to afford. Besides a fun, unique learning experience, you may discover what your child is passionate about and what their talents are.
  4. Save for a specialized summer camp.
    A notch up from an activity, use your tax refund to sign your kids up for a specialized summer camp. Normal summer camps are great and a lot of fun during the summer, but taking it to the next level to flourish a specific talent, hobby, or interest can be even better. Whatever your child’s interest, chances are there’s a camp for it. Specific sports camps, like basketball, volleyball, swimming, or football, camps for embracing the outdoors, educational camps, science or space camps, and there’s camps for arts, theatre, music, cooking, and dancing. Besides being a fun experience, it’s a good opportunity for your child to meet new friends who have similar interests.
  5. Start a “college visit” fund.
    Many parents have a college fund set up to help pay for their child’s college tuition and other costs, but what about the high costs of applying and visiting? It’s easy to remember tuition, books, and paying for the dorm, but the costs of the application process and the costs of actually setting out to visit one or even multiple universities can easily slip by. Application fees can cost on average $40 or $50 each, depending on the school. Also, in most cases, you and your child will want to visit the school at least once, not to mention additional trips for orientation, interviewing, buying books and supplies, moving into the dorm rooms or an apartment, or meeting with advisors before school starts to plan classes. Whether you’re driving or flying, it’s going to cost you. Plus, you’re paying for overnight accommodations and food if it is far away.
  6. Invest in outside activities and equipment.
    Kids may be requesting iPads, computers, and video games, but try investing in some outdoor play equipment or sporting gear. For younger kids, outdoor play equipment and outdoor toys work well. For older kids, a swimming pool, bicycle, or roller blades are a great choice. These items are smart buys since they provide hours of entertainment. Plus, it’s promoting physical activity and exercise which is a healthy, smart choice for your kids. Another option along those lines is investing in good quality camping gear. Even if you’re new to camping, having a tent and other items allows you to camp overnight places for an affordable trip option.
  7. Put it in the family vacation fund.
    Using a tax refund to give your kids the amazing experience of travel is a rewarding and fun opportunity. As an avid traveler, there are so many benefits for traveling with your children. First, it’s a great bonding experience for a family, and you are creating wonderful memories they will cherish. It’s also an ideal way for them to learn first hand about new areas and different cultures. Whether it’s history, culture, art, geography, or about the environment, there is something to be learned. Even if it is just learning patience while waiting in line at an attraction or trying new foods they normally wouldn’t eat, they’ll be taking back priceless experiences and life lessons.

What are good things parents can do with their tax refund to benefit their kids?

More Tax Topics for Parents

Come tax time, everyone is looking for a way to lower the amount of taxes they owe. It reminds me of an old episode of The Cosby Show where Cliff is trying to justify that every purchase they made for a given year should be considered a tax deduction. He even goes to talk about how he should get more money because of what he has to put up with in regards to his children. It was a great episode. In this post, I am going to highlight seven commonly overlooked tax deductions. Make sure you review the list before filing your taxes so that you don’t miss out on claiming any one of them.


Photo Courtesy: Stuart Miles

Commonly Overlooked Tax Deductions

  1. State Sales Tax.
    Most people thought or still think that this itemized deduction expired. It actually did at the end of 2011. But on January 1, 2013 it was retroactively put back into effect for the 2012 tax year by Congress.

    This deduction allows you to deduct state income taxes paid or state sales taxes you paid, whichever one gives you a larger deduction. If the state you live in does not have a sales tax, then your deduction is limited to sales tax paid. The IRS has a calculator on its website to help you determine how much sales tax you paid, but as of this writing, is still not updated for 2012.

  2. Charitable Deductions.
    Most readers know that you can deduct charitable gifts on your taxes. What I am talking about here are the smaller charitable gifts you made that you might overlook. Think about when you are at the grocery store and the cashier asks if you want to donate $1 to a certain organization. While $1 doesn’t seem like much, when you think about all of the one-off times you made a donation in the year, it could add up to a sizable amount.

    Be sure also to take into account everything related to charity. Did you make a meal for a soup kitchen? If so, the purchasing of the ingredients can be written off. As can mileage if you used your car for charity during the year. You can deduct $0.14 per mile driven plus the cost of tolls and parking.

  3. Job-Hunting Expenses.
    If you areunemployed and looking for work, you can deduct some of the cost of looking for a new job in the same field of work. To be able to claim the deduction, the expenses must total 2% or more of your adjusted gross income. Be sure to review what is and is not allowed to be deducted when it comes to job-hunting expenses. These change all of the time and some that you wouldn’t think are allowed to be deducted can be and others that you think would be allowed are not.

    Note to those looking for their first job, your job-hunting expenses are not allowed as a deduction.

  4. Child Care Credit.
    Depending on your income, you can qualify for expenses you pay for child care while you work. Generally, you can deduct between 20%-35% of what you pay for child care. What makes this even better is that this is a credit and not a deduction. This means you get a dollar-for-dollar match to reduce your income tax as opposed to a deduction which is only worth your underlying tax bracket.
  5. Jury Pay Paid to Employer.
    Many employers still pay you your wages when you are out on jury duty. The only caveat is that when you receive your pay from serving on the jury, you must turn that check over to your employer. Seems innocent enough, but the problem is that you are required to include jury duty pay on your taxes. Because you paid your employer your jury duty check, you can deduct the amount you give to your employer.
  6. Baggage Fees.
    Paying those annoying baggage fees when you fly irritates most everyone. If you are self-employed and are flying for business, be sure to include these fees to your deductible travel expense file.
  7. Reinvested Dividends.
    This one is a little misleading as you cannot really deduct reinvested dividends on your taxes. However, if you do reinvest your dividends, know that each reinvestment increases your cost basis. This reduces your taxable capital gain when you sell shares. If you do not account for the reinvested dividends in your calculations, you will be hit with paying tax twice: first when the dividend was paid to you, and again when you go and sell the investment.

    Beginning in 2012, the IRS requires mutual funds to track the cost basis for you. However, this is only for transactions that occur in 2012 and beyond. Any shares that you bought or reinvested prior to 2012 you have to continue to track on your own. So it is best to make sure that you have correct information regarding your cost basis when it comes to reinvested dividends.

    If you need help with this, be sure to reach out to your mutual fund company. I know for me a few years back I needed cost basis information and my mutual fund company sent me a printout of all of my purchases, sales and reinvested dividends. It was truly a life saver when it came time to file my taxes.

Final Thoughts

With the tax law changing every year and the fact that Congress implements new tax laws at the last minute (and can retroactively make expired laws relevant again) it’s critical to stay on top of the latest tax news. Your best bet is to either hire a CPA that you know stays up on the latest tax news or if you file your taxes yourself using a software program like TurboTax, to make sure that it is always up to date. If you calculate your taxes on your own, make sure to read any tax news so that you are up to date on what you can and cannot deduct. Doing so will ensure that you pay only what you are required to pay.

Are there any other tax deductions that you think most people overlook?

More on Tax Deductions

Typically people spend money in order to pursue their hobby: equipment for a sport, ticket fees to events, materials such as yarn and needles for knitting, seeds for a part-time farm, etc. But some hobbies have the added perk of making you money. You have to be careful with this earned income come tax time because unlike with business income, you cannot claim a loss from this activity or deduct certain expenses (in accordance with Internal Revenue Code Section 183, Activities Not Engaged in for Profit, or the “hobby loss rule”). In 2007, the IRS estimated that $30 billion of tax revenue was lost due to the misunderstanding among taxpayers between business vs hobby.

Definition of Hobby

For clarification, the IRS defines a hobby as an activity that is not pursued for profit, and defines a business as an activity that is carried out with the reasonable expectation of earning a profit.

Business vs Hobby?

First you need to determine if your activity is a business or a hobby. Here are some questions that the IRS gives in order to help you determine whether or not your activity can be considered a hobby:

  • Have you made a profit at this activity for at least 3 out of the last 5 years (including the current year)?
  • Are there indications that you intend to make a profit from the activity (for example, enough time and energy are put into the venture to show that you intend to make a profit)?
  • Do you depend on the income made from your activity?
  • Can you explain losses from this activity?
  • Are you qualified to be doing the activity in a way to be making a profit from it?
  • Do you expect to make money from this activity in the future?

Hobby Tax Deduction Rules

If you answered “no” to several of the questions above, or if you just know for certain that the activity you make money from is a hobby, then there are certain rules for expenses and deductions you need to know. As mentioned above, you are not allowed to deduct most of the expenses you incur from your income earned from a hobby. You also are not allowed to show a tax loss from a hobby (i.e. allowable deductions cannot exceed the gross receipts for the activity). However, you are allowed to take the following deductions (only in the order of these categories; as soon as a loss is shown no other deductions may be taken).

  • You may deduct what taxpayers deduct from certain personal expenses such as home mortgage interest and taxes.
  • Next you can take deductions that don’t result in an adjustment to the basis of property (advertising, insurance premiums and wages).
  • Finally, you can next take deductions that reduce the basis of property, such as depreciation and amortization.

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. For more information on business deductions, check out IRS Publication 535.

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Retirement Plans for Your Business

Tax season is a stressful time. With gathering all the documents, waiting on others who have to supply you with these documents, filling out the forms, figuring everything out, and finally calculating your refund it is no wonder why this time is associated with anxiety about taxes. But the light at the end of the tunnel, is for some of us, we will get a tax refund. But before you splurge your refund on something frivolous, there are some smart ways to spend your tax refund wisely.

Courtesy Andres Rueda

Photo Courtesy: Andres Rueda

Smart Ways to Spend Your Tax Refund

Here are ways to spend your tax refund wisely:

  1. Pay down credit card debt.
    If you have any credit card debt, there is nothing better than being able to throw a large sum into it. This is great since you are able to pay towards the principal balance instead of making a payment that is going largely towards interest. Paying down your credit card is like saving money since you are reducing the amount therefore reducing the amount of interest. You’ll also get a smaller minimum payment out of it. To stretch your dollars even further, consider the 0% no fee balance transfer from Chase to avoid interest on your debt until it is completely paid off.
  2. Put it in savings.
    No matter what your plans and goals are, there’s a good chance it involves having a savings account. Put the money in your account, and don’t touch it. Research what type of savings account is best for the lifestyle you lead and check out the current interest rates.
  3. Create an emergency fund.
    If you don’t have one already, start an emergency fund. Even if you have a great budget, there is always something unexpected that can occur. You might lose your job, your car can break down, you might need to fly to visit a sick relative or friend, home repairs may need to occur, and dozens of other things that happen more often than you think. When one of these horrible things happen, the last thing you want to be worries about is how you’re going to come up with the money. With the help of your tax refund turned emergency fund, you’ll be able to worry about one less thing.
  4. Make some home improvements.
    We’re always putting home improvements on hold because of money, but now is your chance to get them mended. Fixing up your house and making improvements is not only making your home a better place to live, but it is also an investment since it is adding to your value of your home. Whether it’s a large project like building a deck in your yard or replacing your roof, or something small like putting on a fresh coat of paint or getting your carpets cleaned, your tax refund will not be wasted.
  5. Make improvements to your car.
    Just like your house, there is a good chance your car could use some upkeep too. You can visit a mechanic you trust to give you an assessment of your car. You might need new tires or other types of general improvements.
  6. Start a weekend getaway fund.
    A common thing that people want to do with their refunds is to splurge on a vacation. I don’t blame you. If you’re like me, you’re sick of the winter blues and burnt out after taxes. But, a great way to save money on your vacation and stretch out your dollar, is to take a few weekend getaways instead of one big vacation. This is great for many reasons. Driving instead of flying will most likely be cheaper. Spacing out your getaways keeps it exciting and gives you something to look forward to. Vacations are over so fast, and spreading them throughout the year will keep things entertaining and fresh. Also, you’ll have to take less time off work.
  7. Invest in your health.
    When you’re a diligent saver or trying to get out of debt, there are many things that get pushed aside. It’s one thing to sacrifice your fashion or even the excitement of your social life, but it gets a little tricky when you start to sacrifice your health. So with your tax refund, you can invest in something beneficial for your health you normally wouldn’t spend it on. Enroll in a yoga class, buy a gym membership, sign up for fun runs, purchase fitness DVDs, or even invest in work out clothing like running shoes. Stock up on vitamins or visit your doctor for a check-up if you haven’t been in a while.
  8. Save it for next holiday season.
    While we’re still recovering from the financial burden of this past holiday season, it may be a good idea to use your refund for next year. Between buying food and alcohol for parties, presents for our kids, friends, families, and coworkers, entertaining, and holiday events, it is definitely a rough time for the finances. To lessen the burden next year, put your refund in a savings account, forget about it, and then when the holiday season rolls around next year, you’ll be in good shape.
  9. Improve your job skills.
    The job market is a competitive one to say the least. Whether you are looking for a job or just want to keep the one you have, there is always something you can do to build your resume, improve your job skills, and make you even more of a desirable candidate for a job. Think about your profession and brainstorm as to what you think could benefit you. Maybe it’s enrolling in a class to learn a foreign language or taking a course in social media, photography, design, or another topic in your field. It could be registering for weekend seminars in your field or undergoing another type of certification. If you own your own business or work freelance, maybe you need to upgrade your supplies and equipment like a new camera, faster computer, or new cooking supplies. It can be as big as returning to school to get a new degree or as tiny as updating your business cards, but either way, your tax refund can get you started and provide and additional self employed tax deduction.

What are you doing with your tax refund this year? What are the smartest things to do with your refund?

More on Spending Your Tax Refund Wisely

Did you know that if someone else claims you as a dependent on their taxes, you might still need to file a tax return? It all depends on whether or not you meet one or some of the criteria in the five dependency tests — relationship, gross income, support, joint return and citizenship/residency. Let’s take a look and see if you qualify for filing a tax return as a dependent.

What is a Dependent?

A person classified as a dependent cannot claim an exemption; subsequently, the person who claims the dependent can claim this exemption on their tax return. This is a significant amount of tax savings up for grabs, so it’s important to know how the IRS defines a dependent. Aside from this, if you claim yourself, and someone else claims you as a dependent, then the IRS will eventually catch up with both of you—something you want to avoid.

A dependent can be a qualifying child, or a qualifying relative. In a nutshell, for parents to claim a child as a dependent:

  • The child must have lived in their home for more than half the year.
  • The parents must provide at least half of the child’s support.
  • The child must either be under 19 or a full-time student/under 24.

To meet the relationship test, you must be a relative or live in the person’s home for the entire year. To claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children.

When Do Dependents Have to File Taxes?

There are several reasons why you may still need to file a tax return even if you are claimed as a dependent on someone else’s tax return.

Kids will need to file taxes if they meet the income limits.

You also may need to file a tax return if you meet one of the following four conditions:

  • You owe a special tax (see IRS Publication 501 for more information on this)
  • You/spouse if filing jointly received Archer MSA, Medicare Advantage, MSA, or health savings account distributions
  • You had net earnings from self-employment of at least $400
  • You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes.

For specifics, check out IRS Publication 501. For some dependent tips from the IRS, see IRS Six Important FAQs about Dependents.

Tip: If you are a dependent of another person, you cannot claim any dependents on your own return.

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