The IRS released its audit statistics for the 2018 fiscal year, and fewer taxpayers had their returns examined as compared with prior years. However, even though a small percentage of tax returns are being chosen for audit these days, that will be little consolation if yours is one of them.

Latest statistics

Overall, just 0.59% of individual tax returns were audited in 2018, as compared with 0.62% in 2017. This was the lowest percentage of audits conducted since 2002.

However, as in the past, those with very high incomes face greater odds. For example, in 2018, 2.21% of taxpayers with adjusted gross incomes (AGIs) of between $1 million and $5 million were audited (down from 3.52% in 2017).

The richest taxpayers, those with AGIs of $10 million and more, experienced a steep decline in audits. In 2018, 6.66% of their returns were audited, compared with 14.52% in 2017.

IRS audit rates are historically low, according to the latest data, but that’s little consolation if your return is among those selected to be examined. But with proper preparation and planning, you should fare well.

In fiscal year 2019, the IRS audited approximately 0.4% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation — invoices, bills, cancelled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all your records in one place. And it helps to know what might catch the attention of the IRS. 

Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make this itemized deduction less beneficial than you might think.

Limits on the deduction

First, you can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.

Second, and perhaps more significant, your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest,nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included.

However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.

The so-called “kiddie tax” can cause some of a child’s unearned income to be taxed at the parent’s higher marginal federal income tax rates instead of at the usually much lower rates that a child would otherwise pay. For purposes of this federal income tax provision, a “child” can be up to 23 years old. So, the kiddie tax can potentially affect young adults as well as kids.

If you’re self-employed and don’t have withholding from paychecks, you probably have to make estimated tax payments. These payments must be sent to the IRS on a quarterly basis. The fourth 2020 estimated tax payment deadline for individuals is Friday, January 15, 2021. Even if you do have some withholding from paychecks or payments you receive, you may still have to make estimated payments if you receive other types of income such as Social Security, prizes, rent, interest, and dividends.

Pay-as-you-go system

You must make sufficient federal income tax payments long before the April filing deadline through withholding, estimated tax payments, or a combination of the two. If you fail to make the required payments, you may be subject to an underpayment penalty, as well as interest.

In general, you must make estimated tax payments for 2020 if both of these statements apply:

1. You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and
2. You expect withholding and credits to be less than the smaller of 90% of your tax for 2020 or 100% of the tax on your 2019 return — 110% if your 2019 adjusted gross income was more than $150,000 ($75,000 for married couples filing separately).

If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

The qualified business income (QBI) deduction, which became effective in 2018, is a significant tax benefit for many business owners. It allows eligible taxpayers to deduct up to 20% of QBI, not to exceed 20% of taxable income. It can also be claimed for up to 20% of income from qualified real estate investment trust dividends.

Summer is around the corner so you may be thinking about hiring young people at your small business. At the same time, you may have children looking to earn extra spending money. You can save family income and payroll taxes by putting your child on the payroll. It’s a win-win!

Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure:

The April 15 tax filing deadline is right around the corner. However, you might not be ready to file. Sometimes, it’s not possible to gather your tax information by the due date. If you need more time, you should file for an extension on Form 4868.

f you’re lucky enough to be a winner at gambling or the lottery, congratulations! After you celebrate, be ready to deal with the tax consequences of your good fortune.

Winning at gambling

Whether you win at the casino, a bingo hall, or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line on Schedule 1 of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the race track turns into a $110 win, you’ve won $80, not $110.

You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. So you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.

Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.

Many Americans own a vacation home or aspire to purchase one. If you own a second home in a waterfront community, in the mountains or in a resort area, you may want to rent it out for part of the year.

If you’ve recently received a settlement or award from a lawsuit, or you’re expecting one, you may be wondering how the IRS views this money. Will you need to pay taxes on it? The short answer: It depends on the type of damages you received. Understanding the basic rules can help you avoid surprises.

Studies have found that more people are engaging in online gambling and sports betting since the pandemic began. And there are still more traditional ways to gamble and play the lottery. If you’re lucky enough to win, be aware that tax consequences go along with your good fortune.

Review the tax rules

Whether you win online, at a casino, a bingo hall, a fantasy sports event or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the racetrack turns into a $110 win, you’ve won $80, not $110.

You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. Therefore, you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.

If you’re paying back college loans for yourself or your children, you may wonder if you can deduct the interest you pay on the loans. The answer is yes, subject to certain limits. The maximum amount of student loan interest you can deduct each year is $2,500. Unfortunately, the deduction is phased out if your adjusted gross income (AGI) exceeds certain levels, and as explained below, the levels aren’t very high.

The interest must be for a “qualified education loan,” which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain postgraduate programs also qualify. Therefore, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital or health care facility offering postgraduate training can qualify.

It doesn’t matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.

A common question for people planning their estates or inheriting property is: For tax purposes, what’s the “cost” (or “basis”) an individual gets in property that he or she inherits from another? This is an important area and is too often overlooked when families start to put their affairs in order.

Once your 2018 tax return has been successfully filed with the IRS, you may still have some questions. Here are brief answers to three questions that we’re frequently asked at this time of year.

Question #1: What tax records can I throw away now?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2015 and earlier years. (If you filed an extension for your 2015 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

April 18 is the deadline for filing your 2022 tax return. But a couple of other tax deadlines are coming up in April and they’re important for certain taxpayers:

Retirement planning is essential for all families, but it can be especially critical for couples where one spouse earns little to no income. In such cases, a spousal IRA can be an effective and often overlooked tool to help build retirement savings for both partners — even if only one spouse is employed. It’s worth taking a closer look at how these accounts work and what the contribution limits are.

Electric vehicles (EVs) have become increasingly popular. According to Kelley Blue Book estimates, the EV share of the vehicle market in the U.S. was 7.6% in 2023, up from 5.9% in 2022. To incentivize the purchase of EVs, there’s a federal tax credit of up to $7,500 for eligible vehicles.

The tax break for EVs and fuel cell vehicles is called the Clean Vehicle Tax Credit. The current version of the credit was created under the Inflation Reduction Act. Here are answers to some frequently asked questions.

Employee stock options remain a potentially valuable asset for employees who receive them. For example, many Silicon Valley millionaires got rich (or semi-rich) from exercising stock options when they worked for start-up companies or fast-growing enterprises.