IRS Red Flags: What to beware of!
Some flags are pretty neat. Some colors are too. You know, like beautiful red, white, and blue of our flag.
But IRS red flags are none of those.
It's a flag that you never want to see waving at you.
Here are some things that you can do to make sure that you don't increase the odds of having that happen.
Large Charitable Contributions
As Christians, this ought to be something that causes us concern.
Why? Because we ought to be so generous that the IRS checks in on us and says, "How is it possible that you're giving that much away?!"
Let's talk about what this means.
What the government is concerned about here and what they will "red flag" you for is when your charitable contributions are considered "excessive" in comparison to your income.
For example, if you make $100,000 a year and your write off $40,000 in charitable deductions, then you may get a red flag and a visit from a friendly auditor. (I'm thinking positive here, folks!)
If, in fact, you were to give this generously, that's not a bad thing, necessarily. It doesn't mean that you WILL be red flagged either. But it does mean that you're more likely to be audited and that the ability to prove your case will be up to you.
Be sure to (no matter what) keep all receipts and document every expenditure that you intend to write off.
Hobby vs Business
One of the best things that you can do (and I believe EVERYONE should do) is to start a home-based business. There are many benefits to this.
However, in the IRS's view, there is a huge difference between a hobby and a business.
If you have a business on the side and don't do it very much, that's okay. You still may qualify for some tax deductions and breaks.
However, don't fool yourself into thinking that everything you use or buy for your hobby is going to pass with flying colors when the IRS shows up.
If you're not sure, consult with a tax professional who is a great teacher and will take the time to help you understand the differences between the two and give you ideas on how to take advantage of the hobby or business to the fullest extent of the law.
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Taking out of your Retirement Accounts
When you have money saved in your retirement accounts (401k, 403b, IRA, etc), it is intended to be for - you guessed it! - retirement!
The government considers this to be at least age 59 1/2 (whoever came up with, by the way?!).
The issue here, then, is that the IRS will (often times) red flag those who have taken money out of accounts like these BEFORE this age and failed to claim it.
For example, let's say that you chose to (probably against your financial advisor or coach's advice) take money out of one of your accounts in order to purchase something that you "just couldn't live without!".
If you did this and failed to report the withdrawal and/or failed to show the income on your taxes, guess what you'll get?
A big, red flag!
Again, not the beautiful, cool kind that you'd like to receive.
In the end, as Christian stewards and managers of God's resources, we are required to, "...pay unto Caesar what is Caesar's and unto God what is God's". If it is possible to get deductions and breaks, then take them.
But beware of the IRS red flags that will wave if you are unwise or undisciplined.