Tax Planning . . . ALERT

The information contained in this ALERT is not intended to constitute legal, or financial advice.  Decisions with regard to these matters should only be made after consultation with a competent professional.

As the tax deadline gets closer questions on taxes keep pouring in! Here are a couple of recent inquiries and my responses. I hope this New Year has started well for you and your family!!

Will a home office deduction get my tax return audited? No Name or Location Please.

Tax pros tax about “audit red flags,” and there is no question that a deduction for a home office was one a generation ago. But today, not only is the statistical likelihood of a Form 1040 being subjected to a face-to-face audit extraordinarily low, home offices are so much more common that Congress and the Internal Revenue Service have standardized the rules that used to lead to tax disputes. In my opinion, a deduction for a home office does not create any greater likelihood that your return will be scrutinized than any other common business deduction, UNLESS it is unusual in size or in some other way; which by the way, is true for all deductions. Check the rules in IRS Publication 587, Business Use of Your Home, which is available online at www.irs.gov. I also suggest to people that they take photos of their office (as well as the rest of the home) to document how the office was used, just in case it is ever called into question.

I just got a new job and was required to fill out a new Form W-4. But it has left me with much too much money being withheld from my pay. Can I claim more withholding allowance than I actually have to “fix” this? Bob, New York City.

Sure you can. The IRS itself says: “You do not have to use the Form W-4 worksheets if you use a more accurate method of figuring the number of withholding allowances. You are free to use an alternative method rather than the number determined using the Form W-4 worksheets.” See IRS Publication 505, Tax Withholding and Estimated Tax, also available online at www.irs.gov.

Bob, you seem sure you’re on the right track, but as IRS Publication 505 warns, there can be serious ramifications associated with under withholding of taxes. Not only could it easily lead to interest and penalty charges for failure to have had “enough” withheld; it could trigger a future requirement for you to make estimated quarterly payments; and if you ever found yourself accused of criminal tax violations, the IRS could allege the Form W-4 you filed was fraudulent and introduce it in court as evidence against you in a criminal tax case.

How can I find out about tax treaties the US has with other countries? A Soon-to-Be Ex-Patriot . . . but still in Madison, Wisconsin.

We hit the trifecta today with referrals to the IRS’ Website! Go to www.irs.gov, and enter “United States Income Tax Treaties” into the search box.

You will be directed to IRS Publication 901, US Tax Treaties, which provides an overview of all US income tax treaties, how they operate and whom they affect. But in addition to my usual warning, “work with a professional,” there’s an extra nudge with an answer to a question like yours. Tax treaties are technical legal documents, and you should not interpret them on your own (unless you’re a lawyer familiar with international tax issues). Get with a tax professional who is an expert in international taxation. This is a HIGHLY specialized area with which many stateside tax practitioners are unfamiliar.

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