Anytime the IRS wants to chat, most Americans go immediately into panic mode. Unfortunately, a multitude of factors can create tax filing confusion for individuals and business owners. To avoid the IRS tax audit minefield, Maggi Tax wants to make sure you take note of these three red flags.
1. Rental income
With the rise of remote work, people can now come and go as they please. This newfound freedom has allowed many to enter the new world of rental businesses, generally considered passive income. But if your operating expenses exceed the rental income, it may not be deducted against your W-2 income. This common mistake compounds when filers also try to claim deductions on a mixed-use rental property, or a personal residence that is rented part of the year. The more the space is used personally, the fewer deductions it may qualify for. Avoid this red flag by logging the use of the property, keeping all receipts for deduction verification, and never underreporting rental income.
Blockchains, not blockheads. The rapid growth of cryptocurrency inspired a new IRS mandate to collect $30 billion in cryptocurrency over the next decade, declaring that all types of digital currency are now property. Because investors may use several global exchanges that could include almost a dozen digital wallets, tax filers must aggregate all their information on Form 8949. Ensure that you avoid this red flag by listing all taxable trades individually and reporting all crypto income and interest.
3. IRA and 401(k) withdrawals
The last few years have been financially tough for many. If you needed to withdraw early from your IRA or 401(k), here’s what you ought to know. Traditional IRA and 401(k) payouts before 59.5 years old incur a 10% penalty on top of regular income tax. There is a 10% penalty for Roth accounts and some parts of early distributions may be taxable. Avoid this red flag by reporting income from all IRA and 401(k) distributions and include all documentation with your 1040.
Looking for additional tax assistance? For over 30 years, Maggi Tax has guided Tampa Bay residents with all aspects of their financial well-being. Contact us here or call (727) 799-1701 to schedule your appointment today.