Following are some common errors made when filing – or not filing – tax returns.  It is important note that there is at least one – Federal Department of the Treasury, i.e. IRS – and often two (state Departments of Revenue or Taxation) – and sometime local taxing authorities, e.g. New York City.  Herein, all will be regarded as the same.

• IRA rollover.  If you rolled over a traditional IRA, for example if you changed mutual funds, the original mutual fund company must report the liquidation of your account.  However, the new mutual fund company – or however you invested the funds – is not obligated to report that you had re-invested the funds.  In such a case, the IRS thinks you have cashed in your IRA and may send you a notice that they believe you owe the income tax, and perhaps interest and penalties, on the amount the was in fact rolled over.  Do not panic if you receive such a notice, provided: a) you re-invested the fund within the allotted time [60 days], and b) you have documentation that the funds were re-invested in an IRA account.

• Traditional IRA to Roth IRA Conversion.  Various companies have been promoting converting traditional IRAs to Roth IRAs.  Currently, Congress has suspended the 10% penalty for early redemption of a traditional IRA before age 59½.  However, the redemption is treated as ordinary income and is taxable in the year the traditional IRA is redeemed even if re-invested in a Roth IRA. 

• Home office.  Many people try to claim a portion of their home expenses – mortgage interest, utilities, real estate taxes, internet connection, etc. – as business expenses.  There are two important considerations.  First, the portion of the home, equipment and expenses claimed must to be devoted to the exclusive use by the business.  A home computer which is used for both business purposes and checking your personal e-mails, as well as other purposes, does not qualify as a “home office”, even on a pro rated basis.  Second, it is reported that claiming a home office is often a trigger from closer scrutiny by the taxing authority.

• Business use of vehicle.  First, commuting miles do not count as business use even if travel from your home to a business locale which is not your primary business address.  Miles traveled from that address for business purposes do qualify.  Second, travel logs are required to include: date, beginning and ending odometer readings, and destination in order to satisfy the stated IRS criteria. 
  
  Third, the following data are required to complete the vehicle data:
  • Year, make and model
  • Date placed in service
  • Original miles (odometer)
  • Beginning miles, for the year (odometer)
  • Ending miles, for the year (odometer)
  • Miles driven for: business, commuting purposes
    
    
• Gambling Losses.  Gambling losses may only be deducted to the extent of gambling gains reported or claimed as income.  There is no carry forward of gambling losses to subsequent years.  Furthermore, gambling losses may only be deducted on Schedule A or Form 1040 (Itemized Deductions.)  As such, gambling losses are subject to the 2% of AIG “floor.”  That is, if your adjusted gross income (AIG) is $40,000 the first 2%, or $800 of gambling losses is not deductable.

• Charitable Donations.  Many charities claim that both cash and non-cash donations are tax deductible.  In order for donations to have value, the total of all itemized deductions … after limitation are considered … must exceed your standard deduction.  Also, the value of anything received in “exchange” for the donation must be deducted from the donation reported.

• Child and Dependent Care Expense.  Child and dependent care expenses must be incurred directly for the care of the individual and must be incurred so that a parent or guardian can.  Tuition paid for private school, through high school, is not deductable as child and dependent care expense.  Only the portion of such expenses which do not have an educational component – e.g. an after-school program which is primarily recreational – is deductable in this category.  Most “summer camp” expenses may qualify,  “Baby sitting” fees paid for reason other than allowing the parent or guardian to work – e.g. entertainment or running errands – are not deductible.  Furthermore, in order to quality: a) the care giver must not be a relative, and b) the care giver’s name, business address, and EIN or SSN must be reported.
  
  
• Refund Amount. 
  Many taxpayers, especially those who have their tax returns prepared for them, only look at their refund or amount due.  Moreover, they often compare last year’s amount with this year’s.  This comparison is almost always flawed.  First, the amount of tax you pay is on line 60 of Form 1040 (line 37 of Form 1040A, and line 7 “taxable income” of Form 1040EZ.)  Many taxpayers mistakenly believe that if they receive a refund, they have not paid taxes that year.  In fact, line 60 is $2,000 and total payments – e.g W-2 withholdings, EIC, etc. – are $2.500, you paid $2,000 in taxes and lent the government $500 interest free which you will receive as a refund.  Even if you are on a “fixed income” comparing refund of payment due from year to year is misleading.