Ever asked these questions?

At some point or another, many clients have asked me all of the following questions. I thought it might be helpful to shed some light and absolve the confusion of these topics.

Why am I filing an extension if I'm still getting penalized?

If you owe taxes, the IRS has 2 penalties - one for not paying and one for not filing. Believe it or not, the penalty for not paying is only 0.5% each month, whereas the penalty for not filing your return (or extension) by the due date is 5% each month. Both cap at a max of 25% - the lesson is if you're not going to file by the normal due date, at least request an extension to save yourself 4.5% each month.

What's the point of even filing my taxes? Going back to the previous question, you'll owe more money in the long run if you wait to file. Your tax debt does not disappear, it will follow you until settled or paid. If you're earning income and receiving forms for that income, then it is best to file or they will continue to contact you until the balances are paid.

Is married filing joint better than married filing separate?

In some states, married filing separately is an advantageous filing status as the spouses are able to split their income and assets and file them individually. However, in the 9 community property states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin) it's not the same way. In these states, all of the assets and income are to be claimed equally even if the spouses choose to file a separate return. That being said, it depends on where you lived during the tax year as to whether it will benefit you or not.

If I don't report my cash income, will they find out?

Inevitably, there is not concrete answer on whether the IRS would find out or not. However, claiming the income is the right thing to do and there are benefits such as when you're ready to buy a home - you'll have clean proof and records of your income without hiding things. The other benefit is that claiming your income will help you pay into your social security earnings for when you retire. There is always benefits to doing things above board. Why should I pay someone to do my taxes when I can do them for free? For the same reason that people hire mechanics, doctors, dentists, etc. Professionals do a better job and you can fall back on them if there is more information needed. Besides it's always nice to be able to contact the professional when you have a question about an unforeseen event in life that affects your current tax situation.

Do I really need to keep receipts?

That depends entirely on you as the taxpayer. It would behoove you to keep documentation of records available in case you were ever audited and proof of items was requested. If it cannot be provided, the IRS has every right to disallow the expenses claimed and request additional payment along with interest and penalties applied.

What's the point of owning a home if I still owe at the end of the year?

With the change in tax law for 2018, deducting your home has changed a bit now that the standard deduction has increased. That being said, the state of California still does allow the itemized deductions as it always has and you can still benefit from the write off's even if you do owe. Had the expenses for the home not been deductible, you would have owed a larger amount. Expenses and deductions do not always equate to a refund, there at times where they only reduce the liability. Do you have questions that you'd like to ask regarding your particular situation? You could contact us with the information below. We'd be happy to help.

---