A column on personal finance prepared by the Virginia Society of Certified Public Accountants
TEST YOUR FEDERAL INCOME TAX KNOWLEDGE
(March 18, 2004) – If you felt like an April fool this past tax season because you procrastinated, didn’t quite understand the tax laws, or kept poor records, now is the time to prepare yourself for the 2004 tax year. The Virginia Society of CPAs provides the following true and false test to help you gauge your understanding of tax rules impacting your 2004 return:
1.You should file your tax return by April 15 even if you can’t afford to pay your tax bill. [True] or [False] Answer
2. The 2004 auto mileage deduction will be the same as it was in 2003. [True] or [False] Answer
3. You must spend all your contributions to a flexible spending account (FSA) by 12/31/2004, or forfeit the remaining money. [True] or [False] Answer
4. If you are a small business owner, you don’t have to worry about an audit from the Internal Revenue Service. [True] or [False] Answer
5. Canceled checks are sufficient proof of charitable contributions. [True] or [False] Answer
6. If you are covered by medical insurance, you won’t qualify for the medical deduction. [True] or [False] Answer
1. True. Even if you can't pay your tax bill, file your return on time. This way you'll avoid the IRS failure-to-file penalty of five percent per month (up to a maximum of 25 percent) of your balance due. Depending on the size of your outstanding balance, you can arrange an installment plan with the IRS. You can choose the monthly payment amount and the day it will be due. Generally, your installment plan must pay off the tax due within three years. To initiate the agreement, attach Form 9465, Installment Agreement Request, to the front of your tax return.
2. False. Beginning January 1, 2004, the standard mileage rate for deducting business driving is 37.5 cents per mile, up from 36 cents in 2003.
3. True. You may not carry over into the next year any funds set aside in FSAs.
4. False. Self-employed individuals and small businesses are on the list of IRS targeted groups for tax audits. Almost half of the IRS’s planned increase in audit resources in 2004 is scheduled to target self-employed individuals and small business owners.
5. False. The proof you need to support your charitable donations depends on how much and what you donated. Generally, if you made a donation by check for less than $250, a canceled check or a dated receipt from the organization is sufficient proof. However, for donations by check or of clothing or other property that exceeds $250, you must have a receipt from the charity showing the organization’s name, location, the date, and a description of what you donated. (This isn’t required when it is impractical to obtain a receipt, for example, if you’ve left your donation at a collection station.) However, the charity does not have to value the property. When the value of your donation exceeds $500, additional records are required and you must report the contributions on Form 8283 attached to your return.
6. False. Medical expenses are deductible to the extent that they exceed 7.5 percent of your adjusted gross income. Although expenses reimbursed through insurance are not eligible for the deduction, you may claim the cost of premiums and deductibles. Other qualified expenses include fees paid to physicians and dentists and those for contact lenses, dentures, hearings aids and even weight loss programs prescribed by a physician. By keeping track of these and other eligible expenses during the year, you will know whether or not you exceed the 7.5 percent threshold.
How Well Did You Fare?
If you answered all six tax questions correctly, you are on your way to maximizing tax opportunities in 2004 and staying out of trouble with the IRS. For those who incorrectly answered some of the questions it may be time to contact a CPA to help you stay on track during the year.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, firstname.lastname@example.org
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