Income Tax Planning For Large Estates

Ways to Avoid a Tax Audit

Staying on the right side of the IRS

While audits are rare, most Americans would probably like to avoid them altogether. The percentage of people who actually are audited is extremely small, according to the Internal Revenue Service, but the number has risen slowly since 2008. If the IRS does decide to audit you, there is little you may do to stop it. You may, however, reduce the odds that you will be singled out for that extra attention in the first place.

Check your figures

One of the most common red flags for auditors – erroneous data entry – is also one of the most preventable. It seems simple enough to follow the advice to “double-check your return,” but surprisingly, people are often too careless regarding their taxes. In some cases, taxpayers make avoidable mistakes by forgetting about income or related forms they’ve received when filing.

A good practice is to wait for all your income reports, bank and investment statements and other applicable financial paperwork to arrive before starting your tax return. Correctly reporting dependents and exemptions, as well as ensuring that the numbers match, is also important. The IRS’s automated system will easily detect discrepancies, and it won’t be obvious whether or not a discrepancy is accidental or on purpose.

TurboTax helps to make sure your tax return is correct by completing thousands of error checks before you file, so you can be sure it’s accurate. It also features an Audit Risk Meter™ that checks your tax return for common audit triggers and shows you whether your risk is high or low. Learn more about how TurboTax helps you reduce your audit risk.

Honesty is the best policy

Perhaps it’s common sense, but being 100% truthful on your tax return is an absolute must to reduce the chances of an audit. Realistically and accurately reporting income, deductions, credits and other figures can help keep an audit at bay.

In general, you should be prepared to look an auditor in the eye and support any number you claimed on your return.

Self-employed filers, for example, should have receipts for every business deduction they claim.

Go vanilla

The largest pool of filers – which consists of individuals or joint filers who earned less than $200,000 but more than the lowest earners – tends to avoid overt scrutiny.

You’re more likely to be audited if you make more than $1 million a year or you’re in a very low income tax bracket. Both categories historically are fertile grounds for fraud and – because of the greater complexity – mistakes in data entry.

E-filing helps

On Jan. 24, 1986, the IRS received its first electronically filed tax return from a preparer. By 1990, taxpayers throughout the country who expected a refund could file electronically. Out of over 154 million individual tax returns received by the IRS in 2017, 135 million were e-filed. The IRS maintains that filing returns electronically can prevent mistakes and lower the odds of an audit.

The error rate for a paper return is 21%.

The error rate for returns filed electronically is 0.5%.

The most common tax problems for 2020

Here are some of the common tax problems of 2020 that we should all be aware of.

1. The individual mandate penalty

Demonstrators outside the Supreme Court in advance of the court’s rulling that the ACA was constitutionalAlmost all of the Tax Code changes stemming from the Tax Cuts and Jobs Act went into effect during 2018. However, a few didn’t become active until this year. The change to the shared responsibility payment is one of these.

The shared responsibility payment, which is commonly referred to as the individual mandate penalty, was previously introduced under the Affordable Care Act. It essentially required people to have some form of health insurance (Obamacare, private or otherwise). If a taxpayer couldn’t prove they had health insurance, they owed a penalty with their taxes.

Starting with the 2020 tax season (fiscal year 2019), there’s no longer a federal penalty. However — and this is where the confusion exists — there are still some state-based penalties. For example, New Jersey, Massachusetts and Washington, D.C., all still have some form of penalty in place. Taxpayers will need to be cautious in this regard and do their research.

2. Changes to retirement contribution limits

Starting with this year, taxpayers are able to stash away more money in tax-advantaged retirement accounts, which could allow individuals to lower their tax burden. Here’s a breakdown of the changes:

The 401(k) base contribution is up to $19,000 (it was $18,500 in 2018);

The 401(k) catch-up contribution remains unchanged at $6,000;

The IRA base contribution (whether Roth or traditional) is up to $6,000 (it was $5,500 in 2018); and,

The IRA catch-up contribution remains unchanged at $1,000.

While these may not seem like major increases, they’re important. The $500 increase in IRA contribution limits is especially noteworthy, as these limits hadn’t budged since 2013.

3. Changes to HSA contribution limits

hsa.jpgIn addition to increasing the amount of money taxpayers can contribute to qualifying retirement plans, health savings accounts are also getting a tiny boost this year. For those with high-deductible policies that qualify under HSA guidelines, the changes are as follows:

Self-only coverage: now $3,500 (up from $3,450 in 2018); and,

Family coverage: now $7,000 (up from $6,900 in 2018).

Again, these slight adjustments won’t make anyone rich, but they are worth noting and could cause some confusion come April 2020.

4. The medical expense deduction threshold

p1910cvfmemac4vv1b76klp1lqd8.jpgThere’s been a lot of back and forth regarding the threshold for deductible medical and dental expenses over the past decade. In 2010, the Affordable Care Act raised the number from 7.5 percent to 10 percent of adjusted gross income. This made it a lot more difficult for people to qualify.

Then came the Tax Cuts and Jobs Act, which brought the threshold back down to 7.5 percent in 2017 and 2018. Unfortunately, it’s returning to 10 percent this year.

What does all of this mean? Basically, if a taxpayer plans on itemizing in 2019, their unreimbursed medical and dental expenses need to exceed 10 percent of their adjusted gross income in order to qualify as a deduction.

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File electronically to avoid most common errors

Filing electronically and choosing direct deposit remains the fastest and safest way to file an accurate income tax return and receive a refund. Filing electronically reduces tax return errors as the tax software does the calculations, flags common errors and prompts taxpayers for missing information.

An inaccurate tax return can delay a refund.

Some common errors to avoid include:

  • Missing or inaccurate Social Security numbers. Enter each name and SSN exactly as printed on the Social Security card.
  • Incorrect filing status. The Interactive Tax Assistant on can help taxpayers choose the correct status. Tax software also helps prevent these mistakes.
  • Math errors. Tax preparation software does all the math automatically. Math errors are common on paper returns.
  • Figuring credits or deductions incorrectly. Taxpayers should follow the instructions carefully, and double check the information they enter when filing electronically. The IRS Interactive Tax Assistant can help determine if a taxpayer is eligible for certain tax credits.
  • Unsigned returns. Both spouses must sign if filing jointly. Taxpayers can avoid this error by filing their return electronically and digitally signing it. Exceptions may apply for military families if a spouse is serving overseas.
  • Filing with an expired individual taxpayer identification number.

In most cases, tax software helps to reduce or eliminate these. Find complete details on all the benefits of filing electronically, including IRS Free File, commercial tax prep software or an authorized e-file provider from the File page on

Reasons to Stop Doing Your Own Taxes

Doing your own taxes really isn’t like changing your own oil.

Even if you enjoy such tasks, getting either one of them wrong as a do-it-yourselfer can be expensive. But as complicated as a car engine may be for a relative novice, an encounter with the tax code offers so many more costly ways for things to go spectacularly awry.

This tax season, consider the danger of human error: namely, your own.

Here are situations that may persuade you to turn the task over to a pro.

1. Small errors lead to expensive tax bills.

Tax software — or the old-fashioned paper forms and calculators — won’t help much when the numbers that human beings use in the first place are flawed.

Finding and entering tax information often isn’t always easy. “That part of the process requires reading comprehension and critical thinking skills, made more complicated by a specialized vocabulary

And mistakes are possible when you do it all yourself. A new client of Minnie Lau, a San Francisco accountant, recently made a misfire in declaring the cost basis of some employer-issued stock, thanks to a fumble involving the interplay between tax software and a brokerage statement. Ms. Lau fixed the return, and the client got $14,000 back.

2. Software can take you on a path of aimless numbers.

Many tax returns are an annual reckoning of elemental life choices: whom, if anyone, you marry; who depends on you; where and how you work; what you’re stashing away for later; the causes that move you.

Talking regularly about all these things with a human being is healthy, especially if anything has changed. And while some tax software makes one-off communication with a pro possible, it isn’t the same as establishing a relationship.

Professionals who truly know you (and prod you) can prevent the errors that may arise when a computer leads you on a mad dash through contextless figures. Scrambling on April 14 to figure out what counts as a donation isn’t ideal.

3. When a family member dies, why add taxes to the burden?

In the year after the death of a life partner, grief alone — the sheer weight of it — could be reason enough to hand the tax task off to a professional.

These include how to treat income before and after the date of death, which tax return any income belongs on, deciphering the tax implications of the will (if any), figuring out what value to set for the cost of inherited assets, and on and on.

4. That word, ‘divorce,’ now applies to you.

Filing taxes after a divorce can get contentious for any number of reasons, not the least of which is that your ex-spouse may get a new accountant with sharp red pencils ready to “correct” your past tax return handiwork.

You could defend that work yourself, to try to head off a demand that the two of you refile all the returns. Or you could hire your own ace to smooth things over and return to your favorite software next year.