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Test Your Tax Knowleddge: How Will You Fare This April?

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Tax Knowledge

If you felt like an April fool this 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 Colorado 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 _____ False

2) The 2004 auto mileage deduction will be the same as it was in 2003.

_____ True _____False

3) You must spend all your contributions to a medical or dependent care flexible spending account (FSA) by December 31, 2004, or forfeit the remaining money.

_____ True _____ False

4) If you are a small business owner, you don't have to worry about an audit from the Internal Revenue Service.

_____ True _____ False

5) Canceled checks are sufficient proof of charitable contributions.

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_____ True _____ False

6) If you are covered by medical insurance, you won't qualify for the medical deduction.

_____ True _____ False

Answer key

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 5 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 got 4-5 answers right, it's time to ask your CPA a few questions to help you stay on track during the year. For those with 2-3 correct answers, a visit to your CPA can help, as well as a subscription to a tax newsletter or a tax-planning book to help you understand the basics. If you got less than 2 correct answers, it is time for some serious tax planning advice from a CPA.