To avoid identity theft, there are a few things to watch for and precautions that you can take:

IRS Phishing Scams

One of the ways that scammers try to gain access to social security numbers is to pretend to be someone working for the IRS. This can be through email, over the phone or via snail mail. A common scam is to say that the IRS needs certain information immediately – often an SSN or even a credit card number. The scammer may say that this information is needed to prevent an audit or to confirm part of a tax return.

The IRS does not send emails to taxpayers for any of these reasons. If you receive an email that makes these claims, it can be forwarded to the IRS for investigation at phishing@irs.gov.

Other Identity Theft Scams

A common way that identity theft begins is with simple pick-pocketing or purse snatching. To avoid having your SSN stolen through these means, never carry your Social Security card with you unless it is absolutely necessary.

Stealing trash is another way to gain your personal information. Thieves steal personal trash and go through it looking for discarded credit card applications, personal paperwork and other documents that can help them to take out credit cards in your name or otherwise use your information for monetary gain. To avoid these problems, invest in a small, inexpensive shredder to shred your junk mail and personal documents. You can also use scissors to cut up every personal document before it is thrown away.

Phone calls and emails are popular ways for thieves to get your personal information. These can be fake telemarketers who are seeking your credit card numbers. They may even impersonate your credit card company and ask you to verify your credit card numbers or your SSN.

Another nefarious way to steal your information is to set up a complete website that looks like an official one. The website may be set up to look like the IRS site or like a credit card site, bank site or other website that requires your financial information. Before entering any personal information into a website, always double check the URL to make sure that a simple misspelling hasn’t led you somewhere unsafe.

Staying Safe

Keeping your information safe requires being vigilant about who gets it and why. Never give out your personal information over the phone unless you are the one who has made the call. Most financial institutions, including the IRS, will not ask you for your SSN or account numbers over the phone. The same is true for email requests.

When filing your tax return electronically, always choose an effective password for the file. The information should not be stored on your hard drive. To stay safe, store the information on a flash drive or burn it onto a CD and keep that as your financial record of the return. Any tax preparer that you use should also take precautions to ensure that your information stays safe and confidential. If you aren’t sure what kind of precautions your preparer takes, don’t be afraid to ask. Your financial future could depend on it.

Related posts:

1. How to Spot a Tax Scam and What to Do Next
2. W-2 Help: What to Know About Your W-2s for Tax Season
3. What If You Didn’t File 2009 Taxes Going Into the 2010 Tax Season?

How to Enter

Entering is simple. All you have to do is go to the BTH Tax Blog Facebook page and click the “Like” button by February 29th.

Contest Rules

• Anyone can enter between the dates of 2/1 – 2/29
• 2 grand prize winners will receive copies of TurboTax Deluxe Edition 2011 (includes free e-filing for both Federal and State tax returns)
• You must “Like” us from your personal Facebook page. Business fan pages are not eligible.
• Winners will be announced on the BTH Tax Blog Facebook page on March 1, 2012

Win or lose, you’ll receive valuable tax saving tips to help ensure that you never overpay on income taxes.

Good luck…and Happy Tax Filing!

Related posts:

1. TurboTax Review: TurboTax 2011 Edition for 2010 Taxes
2. Start Now: Get Organized for Tax Filing in 2010
3. How the IRS Free File System Works: Who Can Use & Where to Find

Tax Preparation Experience

To ensure that you receive the proper assistance, never enlist a non-accountant friend to help. You need a qualified tax professional to help you avoid any costly mistakes on your return. The professional that you choose should have a Preparer Tax Identification Number. This is the federal requirement for professional tax return preparers.

Additionally, it can be helpful to find out whether or not the preparer receives continuing education and is a member of a professional tax preparer organization. These are signs that the preparer is up to date on every aspect of this year’s rules and is knowledgable of the latest ways to file, since being a Registered Tax Return Preparer requires 15 hours of additional training each year. Checking a preparer’s status with the Better Business Bureau is also helpful for finding complaints from past clients.

The Cost of the Return

The cost of preparing a tax return is a major issue for many tax preparers. Some people choose national tax preparation firms with the belief that doing so will be less expensive than hiring an independent preparer. However, this isn’t always the case. It pays to shop around to find someone who charges reasonable rates while also having the professional experience needed to prepare your return. Independent preparers often charge less for their services than accounting firms.

Depending on the complexity of your financial situation, you may need to find a preparer who charges a flat fee rather than an hourly rate. If you anticipate a very simple return, an hourly rate may be a better financial fit.

Regardless of the manner in which a preparer charges for tax services, the rate should never be related to your tax return. This is an illegal practice that can spur the preparer to file a return with too many deductions simply to boost the refund amount. You must also be sure that any refund is sent to you rather than to your preparer.

Choosing a Lawyer to Help File Your Return

While the vast majority of filers don’t need an attorney to prepare their taxes, certain legal complications may make this necessary. If your return will be complicated by foreign trusts, if you faced serious problems with your past returns or if you expect to owe a large amount of taxes, you may need to hire a tax attorney to prepare this year’s tax return for you.

Personal Interactions

When looking for a preparer, it is also important to find one who you interact well with. If you want to keep the same preparer, it is essential for him or her to be responsive to your needs and for the two of you to be comfortable with each other. You will have to divulge a wealth of financial information to your preparer, and if you are uncomfortable with your tax professional, this may be difficult.

The preparer should also be accessible to you when you need to speak to him or her to ensure there are no last-minute surprises that may make your return late.

Related posts:

1. IRS e-file for 2011 Income Tax Filing Now Available
2. Filing a 2011 Tax Extension: 2012 Deadline Dates & How to File
3. Start Now: Get Organized for Tax Filing in 2010

The IRS website provides a great deal of information about the four major ways to electronically file taxes. You can e-file your taxes using any of these options:

• Free File Software
• Free File Fillable Forms
• Commercial Tax Software
• Professional Tax Preparers

Regardless of which process you choose, utilizing e-file can not only save a lot of trees, but can also get the average taxpayer a refund in as little as three weeks.

1. Free File Software

Beginning January 17, 2012, you can use Free File to file your 2011 income tax return. Free File is one of the most popular services simply due to the fact that it is free. There are approximately twenty major software companies within the Free File Alliance that provide no-cost, brand name software to anyone whose adjusted gross income for 2011 was $57,000 or less. This software is available through the IRS website.

If you’ve surpassed the $57,000 limit, there are still many other options available to you.

2. Free File Fillable Forms

Fillable forms are a favorite e-file option for those who are used to filling out the old-style tax forms. These are the exact same forms from the 1040 series (1040, 1040A, 1040EZ) in a convenient, electronic format. There are no income restrictions for using fillable forms. Just like the days of using paper forms, you fill out the electronic form and return it to the IRS; however, instead of mailing it out, which means having to wait for weeks to find out whether or not you made an error, you can simply transmit your data electronically and receive a confirmation number letting you know that the IRS has received your information almost immediately.

Like the Free File software, the Free File fillable forms needed to file your 2011 income tax return also became available on January 17, 2012.

3. Tax Filing Software

Another option that has grown in popularity in recent years is the use of “over-the-counter” tax filing software. This commercially available software can be found at thousands of local retailers nationwide, or through certain online shopping portals. The software is purchased and installed, then used to guide the taxpayer through the process by asking various questions. When the user has finished the walk-through, he can review the information for accuracy and then submit the filing to the IRS with a single click. Using secure channels, the IRS processes the information and returns a tracking number right away, and a refund check or direct deposit can be processed in less than half the time than it used to take.

4. Professional Tax Preparer

The final – and usually easiest – way to e-file your taxes is to visit a local tax professional. Almost all tax accountants and CPAs use e-file to speed up their clients’ returns, and many are required by law to do so. This can sometimes be the most expensive option of the four listed here, as you will be paying to have an actual human prepare your taxes. However, for many this is the most familiar and stress-free option, since having an expert handle the details of your return will likely provide you with the greatest peace of mind.

Related posts:

1. How the IRS Free File System Works: Who Can Use & Where to Find
2. Tax Filing Deadline for 2010 Taxes is April 18th, 2011
3. Filing a 2011 Tax Extension: 2012 Deadline Dates & How to File

The information on Form 1099 is also reported to the IRS so that the information can be matched to the individual’s tax return and ensure that the income is being reported properly.

If you don’t issue 1099s, you will pay noncompliance penalties to the IRS.

Who Needs a 1099-MISC Form?

While there is more than one type of 1099 form – since it is used for a wide variety of transaction reporting – small business owners generally use the 1099-MISC form to report payments made to non-employees doing work for them.

The guidelines for who must receive a 1099-MISC form are as follows:

• payments in excess of $600 or more in a year made to contract workers, consultants, freelancers, health and medical providers
• payments to attorneys of any dollar amount
• payments to fishing boat crew members in any dollar amount
• payments made to individuals who are subject to backup withholding rules
• royalty payments, substitute dividends, tax-exempt interest payments of $10 or more in a year
• sales greater than $5,000 in a year of consumer products sold for resale (direct sales consultants, for example)

When are 1099-MISC Forms Due?

If you are required to issue a Form 1099 to a contractor or other individual, you must send it on or before January 31st of the year following the tax year in which you paid the individual; and you must report the information to the IRS by February 28th. Also file Form 1096 with the IRS to summarize all 1099-MISC forms.

Some states require copies of 1099 forms, so check with your state to see what the requirements are and the due dates.

What Happens if You File 1099-MISC Forms Beyond the Due Dates?

Filing 1099-MISC forms beyond the due date generates steep IRS fines, so be sure to get them in on time.

If you file the 1099-MISC up to 30 days beyond the return due date, you’ll pay $15 per 1099 with a maximum fine of $25,000 per business.

If you file between April 1st and August 1st of the year in which the 1099 was due, you will pay $30 per 1099, up to a maximum fine of $50,000.

If you file or make corrections after August 1st, the fine is $50 per 1099 and a maximum fine of $100,000.

Related posts:

1. IRS Form 8300: Q&A on Reporting Cash Payments Over $10K
2. Taxes & Alimony: IRS Requirements for Reporting Alimony Payments
3. Healthcare Bill Disaster: Send 1099s to Everyone

Here is a look at all that you need to know about filing for a tax extension, along with any special filing circumstances that you may qualify for:

What is a Tax Extension?

A tax extension buys you extra time to prepare and file your tax return. When you file for an extension, it is typical for the the IRS to automatically grant you an additional six months to file your return. If you file for a tax extension for the 2011 tax year, your new due date will be October 15, 2012.

It is critical to understand that while you can get an extension on preparing and filing your tax return, you cannot get an extension for paying your tax bill. If you think that you are going to owe the IRS money, you will need to estimate the amount due and send it in with your application for an extension. If you fail to pay your tax bill by April 17^th then you will be subject to penalties and fees.

How Do I Go About Filing for an Extension?

Filing for an extension is fairly simple. You will need to fill out IRS Form 4868 in order to qualify. The form asks for your name, address, social security number for you and your spouse, if applicable and an estimate on your tax liability.

You can either e-file for your extension or you can print out the form from the IRS website and mail it in. If you do owe tax dollars, you can make your payment electronically with an e-file application or if you are mailing in your application you can include with it a check covering your payment due.

Extensions for U.S. Taxpayers Living Outside of the Country

If you are currently a US citizen or resident alien and living outside the country, you may qualify for additional extensions, including an automatic two month extension that you do not need to apply for. You may also qualify for the traditional six month extension and an extension on paying your tax bill if you owe the IRS money. If you do file for an extension to pay, it is important to note that you will have to pay interest on the amount due from the original due date.

Extensions for Military Members

If you are an active member of the military and living outside the US, you automatically qualify for a two month filing extension and no action is needed on your part to receive it. Additionally, if you are in the armed services and are currently or have recently been located in a combat zone, you are also eligible for special tax filing extensions as follows:

• You do not need to file your taxes for the time period you are stationed in a combat zone. Once your tour is up, you will have the number of days served in the combat zone prior to the tax deadline plus an additional 180 days to prepare and file your return. For example, if you were stationed in a combat zone on April 1, 2012, when your combat tour is over you will have 197 days to file and pay your 2011 taxes.
• If you are injured while in a combat zone and are hospitalized due to such injuries, you do not need to file any tax returns until your hospitalization has ended with the maximum allowed time being 5 years plus 180 days.

All military extensions that are granted for combat zone employments and hospitalizations also allow for an extension on paying your tax bill with no interest or penalties due.

Related posts:

1. 2010 Tax Filing Extension: Instructions & Forms to File IRS Extension
2. How to File for a 2009 Tax Filing Extension
3. What If I Didn’t File My Taxes or Request an Extension to File?

Bonus Income is the Same as Regular Income

As far as the IRS is concerned, bonus income is the same as your regular income. Any bonus income that you receive is added to your W-2 income, and is calculated in the total income you report to the IRS on your federal tax return forms. Employers often treat bonus income differently in terms of how they withhold taxes from the payment – which is why some people have the mistaken believe that a bonus will increase their taxes.

While a year-end bonus may technically put you into a higher tax bracket, you must realize that since you are taxed on an incremental basis, you won’t be taxed at a higher rate for all of your earnings last year. So, for example, if you look at the 2011 tax brackets and your filing status is single, you’ll see that the 10% tax bracket is up to $8,500 in earnings. This means that if you earn $8,500, your tax rate is 10%, and if you earn more than that – say $30K – you will be placed into the 15% tax bracket, meaning that you still pay 10% on the earnings up to $8.5K and then you pay 15% on the earnings from $8.5K to $30K. Therefore, your actually tax rate is not 15%, but rather a combination of the different rates that for the tax brackets that you fall into throughout the year.

So, yes, it is possible that your year-end or holiday bonus can push you into a higher tax bracket, but it does not mean that you will pay more money on the income that you earned earlier in the year.

How Employers Handle Bonus Income

Another reason why people think that they will be taxed at a higher rate on the bonuses that they receive is because more money may be withheld by the employer for taxes. However, it is all dependent upon the employee’s final income at the end of the year. A person who makes 90% of his income in bonuses compared to someone who makes 10% of his income in bonuses and earns the same amount of money with the same filing statuses and deductions will still actually pay the same taxes.

Regardless of which of the following three methods for withholding federal taxes from bonus income an employer uses, your bonus income and regular pay are added together and reported the same on your income tax return. If you overpay taxes, you receive a refund; if you underpay, you will owe more money when you file:

1) The bonus can be included in the employee’s paycheck. The sum of the regular paycheck and the bonus payment are added together, and the standard withholding is calculated. The amount of tax already withheld from the regular income payment is subtracted, and the difference is withheld from the bonus.

2) The employer can elect to withhold 25% federal income taxes from the bonus, and 35% for any bonuses over $1 million.

3) The bonus can be included in the employee’s paycheck with no difference between the two types of income, and taxes are calculated based on the total amount of the pay and bonus combined.

It may seem like your bonus check is being taxed more money than you are used to – and even cause you to fear receiving a bonus. While you may see more money withheld from your bonus pay than you are used to seeing from your regular paycheck, keep in mind that it will all even out when you file your income taxes.

Exceptions for Hedge Fund and Investment Managers

Hedge fund managers and other investment managers who receive bonuses are considered to receive “carried interest.” So if an investment manager receives a bonus from investment gains, they are taxed at long-term capital gains rate of 15%, which is generally lower than their marginal tax rates that the rest of their income is taxed on.

Related posts:

1. Understanding the Child Tax Rate for Your Children’s Investment Income
2. 2010 is the Year to Die: Understanding Changes to the Estate Tax
3. Mitt Romney Releases Tax Returns: 14% Tax Rate & $21M in Income

Let’s take a look at what the AMT is, why you need to be aware of it, and how it can be triggered.

Why is there an Alternative Minimum Tax?

The alternative minimum tax was added to the tax code in 1969, and its present form was created in 1982. It is an alternate system of calculating the income tax that you owe, in which many credits and deductions are phased out when your income is very high. The AMT’s purpose is to ensure that everyone pays a certain minimum amount of income tax – essentially making sure that high-income taxpayers cannot manipulate the tax code through excessive use of deductions and credits such that they pay very little or no tax on a large amount of income.

Originally, this system was intended to only affect individuals or couples with very high incomes, but since it was not indexed to inflation, that amount hasn’t gone up over time. Congress adds a “patch” to the AMT system every few years to increase the exemption amount, but the value of many credits and deductions have gone up over the years as well. Without these patches, it is estimated that 80% of taxpayers who make between $80,000 and $200,000 would owe extra taxes under the AMT system. Over the years, more and more middle-income taxpayers, especially those with multiple children or those who live in states with high incomes taxes, are required to pay the amount they owe under the AMT system instead of the normal income tax system.

What Exactly is the Alternative Minimum Tax?

The AMT is not an additional tax, but actually an entirely separate system of determining how much income tax you owe each year. Your tax program (or accountant) will usually calculate your taxes due in both the regular tax system and the AMT system simultaneously, and you’ll pay whichever calculation is higher. Under the AMT system, your taxable income is subject to a flat tax rate, either 26% or 28% – which is actually lower than the top income tax rate. And, unlike the regular tax system, a much larger amount of your income is exempt from taxation right from the start.

In 2011, the exemption amounts are $48,450 for single or head of household taxpayers, $74,450 for married filing jointly, and $37,225 for married filing separately. (For 2012, the exemption amounts decrease to $33,750 for single or head of household taxpayers, $45,000 for married filing jointly, and only $22,500 for married filing separately.) After you take the exemption that you qualify for based on your filing status, many of your deductions – such as personal exemptions – will be added back to your taxable income. When you calculate the AMT (using IRS Form 6251 – click here for form instructions) you’ll take your original AGI from your Form 1040, add a bunch of deductions back to your income (see below), subtract your exemption, and then calculate the flat tax on what’s left. You then compare that tax liability to what was calculated under the regular tax system, and pay whichever is higher. In general, taxpayers who pay the amount calculated by the AMT pay $2,000 or more in taxes than they would have if they paid the amount calculated by using the regular tax rules.

In general, the AMT system will calculate a higher tax than the regular tax system if you make a lot of money or have a lot of deductions. But if you have lower income or don’t take a lot of deductions, you’ll pay more tax with the regular income tax system, and you’ll be required to pay whichever amount is higher. There is no specific income number at which you’ll start being required to pay AMT, since it depends on your total income, your filing status, your dependents and other deductions.

Tax Deductions Affected by the AMT

There are several common types of deductions that you can’t take under the AMT system. These include:

State Income Tax

Under the normal income tax rules, you’re able to deduct the income taxes you paid to your state, but under AMT rules, you can’t. If you live in a state like New York or California which has very high income taxes, you might not realize just how much of a deduction you’re getting from taking those taxes out of your income, but the AMT rules add them back in.

Dependency Exemptions

For each person (including yourself and your spouse) that you support, you’re generally entitled to deduct $3,650 from your taxable income. Under the AMT system, you can’t take those deductions. If you have multiple children, you’ll lose an even bigger chunk – for example, if you are married with two children, you’d be taxed on an extra $14,600 ($3,650 x 4) under the AMT tax rules than you would be under the regular income tax system. If you have four children, you’d be taxed on an extra $21,900.

Itemized Deductions

The AMT does allow you to take itemized deductions (thanks to another patch from Congress) but not all of the entries on the itemized deductions list can be used. Medical expenses – where normally you’d be able to add the amount that’s higher than 7.5% of your AGI to your itemized deduction – aren’t allowed to be deducted under the AMT system. You also aren’t able to deduct miscellaneous itemized deductions (which includes things like unreimbursed business expenses or tax preparation fees) under the AMT rules.

Interest Paid On a Home Equity Line

You’re still able to deduct the interest paid on your primary home’s mortgage under the AMT rules, but when calculating under the AMT system you won’t be able to deduct the interest that you paid on the home equity line attached to your principal home.

Will I have to Pay the AMT?

Often, the only thing that people want to know about the alternative minimum tax is whether or not they will have to pay it? Unfortunately, there is no clear answer to that. Whether you will have to pay this higher amount of tax depends on how many tax breaks you’re taking in the above categories, as well as miscellaneous other deductions that aren’t allowed.

If you have a high income and are significantly reducing your taxable income using the above deductions, taking those out would significantly increase the amount of income that you would have to pay taxes on. Therefore, when you calculate your income using the AMT rules as well as the normal tax system rules, you’ll probably come out owing more taxes under the AMT rules. When you calculate your tax liability using both the regular income tax system and the AMT system, you’re required to pay whichever number is higher. It is very difficult to get out of paying the higher taxes under the AMT system, simply because the AMT system was designed to be difficult to get out of.

It’s important to calculate your tax liability under the AMT system each year because if you find out later (hopefully not during an audit) that you really did need to pay that higher amount, you’ll have fees and penalties on top of that extra tax amount. Most tax programs will calculate it for you if you ask, or may do it automatically if your income is very high. If you don’t get a definite message from your tax program or your accountant as towhether or not you might have to pay the higher amount, it’s definitely worth it to ask and save yourself from a hefty tax bill in the future.

Related posts:

1. Alternative Minimum Tax 2010: What it is, Tips, History & Details
2. Filing a 2011 Tax Extension: 2012 Deadline Dates & How to File
3. What is the 2012 IRS Standard Mileage Tax Deduction Rate?

By keeping track of your business expense documents, you can add them to your itemized deduction, which will increase your tax refund. These expenses are included in the miscellaneous itemized deductions at the bottom of your Schedule A.

Any amount exceeding 2% of your adjusted gross income (AGI) can be added to your itemized deduction amount. Even small amounts can add up fairly quickly over the course of the year, and there may be more deductible expenses than you realize.

What’s Deductible?

Although most people buy supplies or other items that they use at work, these purchases must meet a few different requirements in order to be considered eligible for this deduction:

1. You must have paid for the purchase during the current year. For example, if you order a new desk in December 2011 but don’t receive it until January 2012, the purchase will go on your 2011 taxes.
2. The purchase must necessary for your to carry out your duties as an employee. Something that you purchase for home that you only sometimes also use for work is not considered required for your duties at work.
3. The item must be ordinary and necessary for your line of work, so it must be something that most other people who do your same job could reasonably use.

Travel Expenses

The most common unreimbursed employee expense is travel. The costs associated with travel are rising, so if you are required to travel on business, it can quickly become expensive. However, you can deduct most of the costs of business-related travel. In order for the travel to be classified as tax-deductible, you must actually be asked by your employer to travel to another location.

If you are driving your own car, you can deduct 50 cents per mile, and you can deduct the entire cost of your train, bus or airplane ticket. (Remember that you can also deduct 50 cents per mile for driving your car to the airport where you caught the flight.) Taxi, car service, bus or airport shuttle fees are also fully deductible. The costs of shipping necessary items – such as samples or a tradeshow setup – are included, as are your hotel expenses. Meals are included, but there are limits on the amount that you can deduct, since presumably you would need to eat anyway. Visit the IRS Website for details.

Commuting Expenses

One frequently overlooked expense is commuting mileage. Although coming from home to the office does not qualify for a tax deduction, you can certainly deduct the miles that you drive your car from the office to other places on business, such as making deliveries, service calls, or sales calls. Especially if you do a lot of driving during the day, this can really add up. The standard mileage rate for 2011 is 51 cents per mile when you are driving your own car. Alternately, you can deduct the actual cost of gas and oil that your car required to get from place to place. This is definitely an area where keeping a log book is worthwhile, since even a few miles here and there will add up nicely at the end of the year.

Those who normally work from a home office get special treatment for their commuting miles. If your home is your normal workplace, you can also deduct the miles that you rack up going out on business calls, including times that you might meet with other company employees at a company location.

Also, if you normally work at one location but are temporarily assigned to another location that is farther from home than the old one, you can deduct the extra mileage. For example, if your normal place of work is 10 miles from home, and you’re temporarily assigned to work at a location that is 15 miles from home, you can deduct $15.3 per day in commuting costs. (That’s 15 miles there and 15 miles home, at 51 cents per mile.)

However you commute, you’ll want to keep a good log book of your mileage, as well as keeping your receipts if you choose to deduct the actual cost of gas. If you’re audited and you can’t provide these records, the IRS is likely to toss out your commuting costs.

Other Tax-Deductible Expenses

Examples of additional tax-deductible employee expenses that you might incur include:

• A phone, fax or Internet connection required to do your job
• A computer or phone required for your job (although it may have to be depreciated)
• Business cards
• The cost of required medical examinations
• Dues for professional societies, including business leagues or chambers of commerce, if it is helpful in your line of work
• Office furniture for a home office (even if you can’t take the home office deduction)
• The cost of a passport you were required to obtain for a business trip
• Employment-related classes, certifications, or other education, including the cost of books
• Job search expenses if you are staying within your field
• Legal fees related to your job, or keeping your job
• Any license fees, regulatory fees, or other taxes related to doing your job
• Insurance premiums, including business liability or malpractice premiums
• Subscriptions to professional publications such as trade journals related to your line of work
• Supplies, tools, postage, or other office necessities used in your work
• Uniforms required for your job, plus the cost of repairing and cleaning them

If you work primarily from home, you may also qualify to take the home office deduction. This deduction is more valuable than the unreimbursed employee expense deduction, so you should lump as many expenses as applicable onto the home office deduction worksheet.

Reimbursed Expenses

You cannot “double dip” and take tax deduction for something that you were reimbursed for (since your employer will also be taking a deduction for the cost as a business expense on their own taxes.) But on the flip side, you also should not have the reimbursements added to your W-2 as wages. If this is occurring, you should check with your company’s HR department. Your company is likely to have policies regulating what you can and cannot receive reimbursement for, so if you purchase something that falls outside of these policies but meets the guidelines below, you should save that receipt. Even though it was not considered reimbursable by your company, it still qualifies as a business expense on your part and can be deducted.

Some companies will give their employees an allowance or advance of money so that they can pay their expenses out of that money instead of paying out of pocket and getting reimbursed. In order for this plan to be accepted by the IRS, it must only permit purchases you made as an employee, you must be required to account for your purchases within a reasonable time frame, and you must return any money that you didn’t spend. If the IRS deems your company’s prepayment method to not meet these guidelines, the money they gave you will be treated as income, and you will have to deduct all of those expenses as unreimbursed business expenses on Schedule A.

Related posts:

1. 2011 Tax Deductible Medical Expenses: Eligibility and Limits
2. Tax Scam: Abuse of the Home Based Business
3. 2010 Year End Business Tax Planning: Ways to Pay Less

Even though most people will never be audited during their lifetime, there are certain tax filing categories that the IRS targets more frequently than others. If you fall into one of those categories, you will want to be extra careful when filing your tax return.

While it is important for everyone to be truthful, keep good records and back up documentation when reporting taxable income, tax credits and tax deductions to the IRS, it is even more critical for those who are prone to being audited.

Who is Most Prone to Being Audited?

Out of all tax returns there is about a 1% chance of receiving an audit. If you segment out tax returns by income level and type of business (Corporation, self-employed, partnership, individual, etc), you will see that some people are much more likely than others to be audited. If you fall into one of the following categories, you will need to be on high alert for a potential IRS tax audit:

Self-Employed Individuals: If you are self-employed and you report your income to the IRS on a Schedule C form or a Schedule E form, you are considered a prime target for an audit. Those who are self-employed generally have multiple tax deductions and the IRS will want to know that all of the deductions that you claim are legitimate. If you claim a net loss – especially if you claim one for multiple years in a row – your chances of being audited increase even greater.

High-Income Taxpayers: If your income is in the millions, beware. The number of IRS audits on millionaires – particularly those earning more than $5 million per year – is on the rise. Even individuals earning over $200K a year are more likely to receive an audit. (Numbers below are based off of 2008 audit rates, which typically don’t change much from year to year.)

• Income $100K-199K = Average risk for audit (about 1% chance)
• Income $200K-499K = 2 times more likely to get audited
• Income $500K-999K = 3 times more likely to get audited
• Income $1M-4.99M = 4 times more likely to get audited
• Income $5M-9.99M = 6.5 times more likely to get audited
• Income $10M+ = 10 times more likely to get audited

Small Business Owners: If you own a small business, you are another likely audit target of the IRS. Small businesses are often targeted for audits due to errors in filing. If you are a small business owner, your best bet is to hire a tax preparer who specializes in small business taxes to prepare and file your tax return on your behalf.

Itemized Returns: Itemized returns are much more likely to be chosen for an audit compared to those returns that use the standard deduction. When you itemize, you leave more room for error. Additionally, the IRS is well aware that many taxpayers exaggerate their tax deductions.

Businesses that Operate on Cash: If you run a business that takes in mainly cash you are another prime target for an IRS audit. It is, of course, easier to not report income if your business primarily deals in cash and the IRS works to prevent this from happening. If you run a cash business your best defense is to keep precise and accurate records to back up your income claims and to verify tax write-offs.

Tips to Help You Avoid a Tax Audit

Here are some tips that just might save you from a tax audit:

• Make sure that all of the information on your tax return is accurate. This means double-checking your math, making sure that you’ve accurately listed your social security number, ensuring that you have claimed the correct number of dependents, filing under the correct status, and so on.
• Be sure to report all of your income. If, for example, you are a contractor who has received multiple 1099s, be sure to total your income accurately and do not leave any earnings out.
• Be careful about reporting business losses, especially for multiple years in a row.
• Do not claim credits and deductions that you are not eligible for.

If you are at risk of being audited by the IRS or if you are unsure as to whether or not you may be at risk or how to file your taxes, it is always recommended that you seek the guidance of an expert tax professional.

Related posts:

1. When Can I Stop Worrying About Getting Audited?
2. Common IRS Audit Red Flags