Avoid These Tax Mistakes At All Costs
With the holiday season officially in the past, it's almost time to start filing your annual tax returns. One of the biggest financial mistakes you can make is not doing your taxes on time which can result in a hefty tax fine. You also don't want to rush to do them close to the deadline, as that can only lead to mistakes.
You need to start planning at least five to six months before the deadline to ensure that you get the most out of your taxes. Here are a few big mistakes to avoid when filing your taxes this year.
Not Filing A Return
One of the biggest mistakes you can make is failing to file your tax return if your annual income is more than the standard deduction. The amount of standard deduction varies depending on your marital status. For example, a single person filing has a standard deduction of $12,000 while a married family filing jointly has a deduction of $24,800.
If you don't pay your taxes, it can attract the attention of the IRS who will make you pay the tax bill plus a 5 percent penalty for delayed payment. Also, filing taxes will also help you receive a tax return for the money withheld by the state or federal government.
Paying Your Taxes Late
The IRS recommends that you start planning for your taxes early because a delayed payment can be expensive. While the penalty is not too harsh, you can avoid the payment if you file your taxes by April 15th of each year.
For each month that your taxes are not filed, you will need to pay a penalty of 0.5 percent of the bill which can go as high as 25 percent. In other circumstances, if you pay 90 percent of your bill by April, the remaining 10 percent can be paid by October of that year.
Not Disclosing Your Full Income
Some people who have multiple side hustles believe that they don't need to pay taxes on this income because they don’t receive a 1099 form. However, this isn't true because a company does not need to give you a 1099 form if they pay you less than $600 in a single year.
You still need to pay taxes on this money because the company will be reporting this payment on their tax filing and the government is aware of the income earned. Failure to report this income can result in a hefty fine and an audit by the IRS.
Not Taking Tax Deductions That You're Eligible For
Another important reason why you need to start planning your taxes ahead of time is so you can itemize all your deductions accurately. Each year the government adds new deductions and changes the eligibility criteria on existing deductions.
You can either use tax software or hire an accountant to ensure that you make use of all the tax deductions that are available. Some people choose not to take any deductions because the process may seem complicated, but skipping this step can cost you hundreds of dollars on your tax bill.
Getting Rid Of Tax Documents
While we all know that you need to keep your W-2 and 1099 forms after filing taxes, these are not the only documents that you need to hold onto. You also need to keep a record of any receipts or bank statements that are relevant to your taxes.
These documents are not part of the annual tax filing but you will need them if you get audited by the IRS. You need to have the receipts from your expenses in the last three years or longer. This is also useful for any deductions in the future.
Itemizing Deductions Inaccurately
Anyone who files taxes is eligible for some type of tax deduction or in some cases even itemized deductions. It is recommended that you use itemized deductions if their value is higher than the standard deductions for the year.
If you are using tax software or an accountant, you will not need to worry about itemizing deductions yourself. However, if you are filing your taxes on your own, it is important to take the time to read about each deduction and do the calculations carefully.
Keeping No Record Of Business-Related Expenses
If you are self-employed, one of the biggest advantages when it comes to filing taxes is that you're able to deduct expenses you incur while making money. However, in order to benefit from these deductions, you need to keep a record of all your business-related expenses.
If you claim deductions on expenses that you are not able to back up, it can result in an audit by the IRS. You can keep an Excel sheet and create a system to log all your expenses during the financial year. This will save you a lot of time when it comes to filing your taxes.
Not Taking Advantage Of Savings Plans
There are many savings accounts that can help you save a lot of money in taxes. These accounts have tax-free contributions, meaning that the money is not taxed. Some of these accounts include the 401K or the IRA Roth, which are offered by many companies. You can also put money into a health account (HSA) for your retirement.
Taking advantage of such accounts is a great way to save money on your taxes. Some companies even match the contributions made to your 401K account. This is better than putting your money into a regular interest-based savings account.
Making Errors In Your Calculations
One of the main reasons you need to do your taxes well ahead of the deadline is to get the most out of your deductions and ensure that the calculations are correct. Many people who leave their taxes to the last minute risk messing up the math and entering the wrong numbers.
In order to aid with your tax filing, the IRS offers free online forms and also free software you can use if your income is less than $58,000. Companies like H&R block can also provide free assistance with filing your taxes.
Not Double-Checking Numbers And Signatures
According to the IRS, one of the most common mistakes that people make when filing taxes is entering the wrong social security number or transposing the digits. A small error can cost a lot of time and money to rectify. Additionally, if you are opting for a refund, it is also important to enter the right bank account information.
Once you are done filing your taxes make sure you sign where necessary. Have your spouse do the same if you are filing taxes jointly. Not signing the tax forms makes the information invalid.
Misunderstanding Extension Rules
If you don't think that you will be able to meet the tax deadline, it would be wise to apply for a tax extension so that you don’t need to pay a fine for late payment. However, just because you applied for an extension, it does not mean that you don’t pay by April 15th (the regular tax deadline).
The extension is to file the return, not the tax payment itself. This is one of the biggest misconceptions that people have about tax extensions. Even though your extension is approved, the tax payment needs to be made by April 15th.
Leaving Out The Backup
Filing your taxes is by no means a simple process. Filling in your 1040 and mailing (or eFiling) it to the IRS is just one part of it. Along with this form, you need to attach all the necessary backup to support the numbers in your file.
There are different types of schedules that need to be attached to your taxes, like Schedule A if you itemize deductions, or Schedule D if you are reporting capital gains and losses. The IRS can even put your tax credit on hold until you submit all the necessary paperwork.
Adding The Wrong Details
When filling in the various tax forms, it is essential that you carefully check all the information twice. This is because the IRS uses these details to verify your identity. For example, your social security number is used by the IRS to cross-reference the information received by your employer.
Hence, if this information is wrong, your tax return can be rejected. In addition to this, you also need to enter your full legal name on the tax documents. It can be easy to make a mistake with your name, especially if you don't use your full name every day.
Not Enlisting Help Early Enough
If you have a business or need to pay taxes in multiple states, the tax code becomes more complicated. Hence, it is important to enlist the help of an accountant or a tax advisor a couple of months before the deadline.
Many tax professionals become incredibly busy in January, which means you need to plan ahead if you want to get help on your annual tax return. Hiring a professional can help you avoid any mistakes that could get you in trouble with the IRS.
Not Including Payment Information
When doing your taxes, it is important to keep track of your payments. In certain cases, if the tax payment is not credited, your credit card statement or proof of payment lets the authorities know that you have completed the payment on time.
If you are making a payment with a check, make sure to include your social security number along with which tax bill the payment applies to. In order to avoid any errors or potential delays in payments, the IRS also lets you make payments electronically.
Choosing The Wrong Filing Status
Choosing a tax filing status can be tricky, especially if you are eligible for more than one filing status. You can either file as a single person, married but filing jointly, or married and filing separately. This status is important because it determines the type of deductions you are eligible for.
You can even consult with an accountant or a tax advisor to help you choose the most optimal filing status based on your situation. However, you can get into trouble in IRS if you choose a filing status that you are not qualified for just to lower your taxes.
Missing Deadlines
As a taxpayer, you can get into trouble with the IRS if you fail to meet the April 15th deadline. For businesses, the deadline to pay taxes is March 15th. If you don't think you'll be able to file your tax returns before this, all you need to do is apply for an extension.
It is important to keep a note of all the tax deadlines because failure to pay your taxes on time will result in penalties and interests which can just add on to the amount you owe. You can even use tax software to make the process of filing even quicker.
Let Yourself Be A Victim Of Tax Fraud
There are numerous scams and fraudulent activities associated with tax returns so it is important to remain cautious and protect any of your sensitive information. There are new ways that can leave you less vulnerable to tax fraud.
A fool-proof way to avoid tax scams is to file your taxes early. This will prevent tax scammers from running away with your money. When using any tax filing software, make sure to use an authorized and verified system as you will need to provide a lot of personal information when filling in the forms.
Not Fixing Your Mistakes
If you made a mistake when filing your taxes, you need to fix it as soon as possible. Wrong information on your tax forms can get you into trouble with the IRS and can hurt you financially. In order to fix a mistake, you need to fill in the 1040X form and mail it. You can also fill this electronically.
If the mistake affects other forms or schedules, then you need to attach them to your 1040X form as well. If you find that you owe more taxes with the correction, the IRS can charge you a penalty for the delay.
Not Keeping Up With The News
Each year the government makes numerous changes to the tax code. This could affect the amount of federal and state taxes you need to pay. Some forms that you may have filled out in previous years may be obsolete in the current financial year. Hence, it is important to keep up with any new tax laws that have been introduced.
If you use tax software, then you don't need to worry about this as they are automatically modified to include any new changes. Additionally, there may also be changes to the eligibility for certain standard deductions which can help you save more money on your taxes.
