Someone told me the other day that taxes and interest rates are the pornography of a good financial newspaper.
If that’s the case, then brace yourself for a whole lot of sex in the next few paragraphs.
I admit that doing my taxes is on my list of least favorite things to do, alongside scrubbing a toilet and stuffing myself into a Hong Kong public bus during rush hour on a Friday evening.
But it is one of life’s necessities and a crucial part of your financial planning. It is also one of the few things in life that if you don’t do - and do properly – could land you in jail. Or at the very least, paying a magnificent sum that otherwise could have been used for your retirement.
It’s decidedly difficult to give advice on taxes to people across the world, but there are some universal truths to tax planning that can be applied across borders.
Below is some information you may not find on the Internet. They are the five costliest tax mistakes people make.
Here’s what you can do to avoid them:
1. Bad Record Keeping
By far the biggest way to increase your tax burden is to keep poor records or none at all. By records I mean your receipts for travel, equipment, job searches, donations, tuition, etc. The obvious reason is that in various countries, these expenses can be deducted, thus lowering your tax obligation. The other is that if you are audited, you will have proof of these expenses. Remember that “the burden of proof rests with the tax payer,” says Jennifer Wong, tax partner at KPMG. If you can’t provide the evidence, then you can’t escape the penalty. The flipside is if you find you’ve overpaid on your taxes over the years, you can go back to the authority to reopen your case, provided you have records on hand. Hong Kong allows you to do this on returns of up to six years old.
2. Late Payments
This is a particularly noticeable problem, particular in Hong Kong, where both Hong Kong residents and expatriates deal with different filing deadlines in various countries (ie. Hong Kongers who work frequently in the mainland and must pay taxes there, too). While it is easy to get filing extensions from various governments, you must still pay the taxes you owe on time. If not, you are charged interest, which is such an unnecessary cost you ought to easily avoid. The other thing to remember is chronic late payments tends to raise eyebrows within a tax agency, putting you on their radar. While it’s always flattering to be noticed, you certainly don’t want to be noticed by the IRS or any other tax authority for that matter.
3. Leaving Out Personal Details
I tend to view going to see your tax accountant as the same as going to see your doctor. It’s better to tell too much than too little. The reason is that there are circumstances about your life that can easily reduce your tax burden that you may not have considered. Ms. Wong and other tax partners I interviewed said it was incredible to handle the number of ex-pats who still did not know that in certain circumstances, if they were in the employ of a foreign company, their salaries could partly be exempt from Hong Kong taxes. Others who were recently divorced did not know that the alimony received didn’t have to be taxed. And so on and on. Sometimes it pays to reveal too much information.
4. Overpaying a Tax Accountant
This is tricky as I always say a good accountant is worth every cent paid. However, in this day and age where information is immensely accessible and tax authorities are making it ever easier for you to file returns online, an accountant may be a costly luxury. If your financial situation is rather complicated, by all means, a good and reputable tax accountant ought to be hired, and if you can afford it, one likely from the Big Four accountancy firms. But if you’re in rather simple circumstances, you can easily input your data into a tax-planning software program and file the return online. This is also where keeping good records comes in handy. If you’re unsure whether to go without professional help, do what one friend did. One year he did his taxes both with an accountant and by himself using tax-planning software. The result? He got a bigger tax refund using the software. Now he does all his taxes himself.
5. Overlooking Donations
It always feels good to donate money to a charity or cause that is close to your heart. But you can also receive a tax benefit along with it. In many countries, you can deduct your donations. The problem is many people tend to forget to get the receipt and thus, the donation never appears on a return, says Mona Mak, partner at Deloitte Touche. “It’s the biggest thing people here overlook”. The same goes for membership fees and professional subscriptions. In many countries, those are also deductible, provided you request the receipt. Just remember: in most countries, the donations must be made to organization that has charity status.
Questions? Comments? Drop us a line firstname.lastname@example.org