Odds are you’re getting ready to get your taxes done. And while everybody makes mistakes, doing so on your tax return isn’t the time to make them. We’ve compiled a list of the most common tax mistakes and how to avoid them.
1. MISSING THE DEADLINE
The IRS estimates that 20% of taxpayers wait until the week before the deadline to file their income tax returns. #Procrastinators
The problem with waiting until the last minute is if you run into issues completing your forms. Of course, you can always file for an extension (which will give you 6 months or until mid-October). Keep in mind that even if you file an extension, you still must pay any taxes owed by the deadline. If you forget to so, the IRS will charge you interest.
However, procrastinators…I have great news for you again this year. April 15th falls on a Saturday, and because Emancipation Day is celebrated by the IRS on Monday, April 17th, it pushes your due date to April 18th, 2017.
2. FILING THE WRONG STATUS
When it comes to filing your taxes, the IRS gives you five options: single, married filing jointly, married filing separately, head of household, and qualifying widow(er).
Make sure you choose the right one that fits your personal situation because it could make a big difference in your ultimate tax bill. That’s because the IRS applies different income tax rates and awards different standard deductions accordingly.
3. MATH ERRORS
The most common error on tax returns, year after year, is bad math. In 2014, the IRS reported that it caught 2.3 million math errors on 1.7 million tax returns in 2014.
This is not surprising given the notoriously tricky formulas on tax forms i.e. “Add line 8 to line 32 and multiply by .356 if your AGI is greater than $50,000.” If you’re a DIYer, save yourself the headache and use tax preparation software that does the calculations for you. One of my favorites is TaxAct.
When IRS examiners find a discrepancy, they'll let you know and, in many cases, will correct your mistake and refigure your taxes for you. Don't give them the chance. Make sure your math entries are right.
4. CHARITABLE CONTRIBUTIONS: FOLLOW THE RULES
When it comes to donating to charity, make sure you follow the rules…and there’s lots of them. First off, verify that you’re giving to a qualified 501(c)3 tax-exempt organization, the IRS provides a helpful tool to do so.
If your donation is under $250, the IRS will accept a cancelled check, bank statement, or receipt from the charity as documentation. However, if your donation is over $250, you’ll need written acknowledgment from the charity with specific details that can be found on the IRS website.
Be careful that you aren’t exaggerating the fair market value on donated clothing and household items. Keep in mind that tax law requires these items to be in good or better condition or the deduction is disallowed.
5. MISUNDERSTANDING THE STOCK TRANSACTIONAL WASH SALE RULE
So, you bought a few shares of your favorite stock, and then you decide to sell it at a loss. Typically, you can deduct that loss against any other capital gains you made that year to lower your tax liability. But if you decided to buy more shares of that same stock 30 days after selling (or 30 days before selling), then the first sale is disregarded. It’s like you never sold the stock in the first place, and you won’t get the tax benefit. Working with a CERTIFIED FINANCIAL PLANNER™ (hey, that’s me) or your CPA can help provide guidance and prevent these issues.
6. MISSING OUT ON TAX BREAKS
While the IRS isn’t famous for its generosity, there’s several tax credits available. Tax credits for families such as the Earned Income Tax Credit, Child Tax Credit, & Child and Dependent Care Credit can save you a significant chunk of money. For students, there’s the American Opportunity Tax Credit and the Lifetime Learning Credit.
Take the time to calculate your itemized deductions vs the standard deduction. Don’t just assume that because you don’t own a home or if it’s paid off that going with the standard deduction is the best option. There’s numerous deductions available.
About the Author:
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.