The new year brings endless possibility, but it also brings us back around to tax season. It can be a stressful time if you haven’t kept accurate records, or it can go by in a breeze if you’ve done all the critical planning throughout the year. Oftentimes, mistakes can come back to haunt you years later when the IRS comes to collect. Here are six tax filing mistakes to avoid.
Missing Deadlines
At the end of the day, some people will not be able to file their taxes in April. Maybe they don’t have all their documents together, haven’t funded all the necessary plans, or they’ve just procrastinated. That’s all fine if you file for an extension. If you fail to file your taxes and fail to file for an extension, the penalties are severe. If you file even a week late, there is an IRS penalty of 5% of your unpaid taxes. If you end up filing and paying your taxes five months after the due date, you’d owe a 25% penalty, plus interest.
These penalties are similar for failing to pay your taxes. If you’ve got a large tax bill and you are not able to pay when you file, consider avoiding penalties by applying for a payment plan you can afford.
Rounding And Math Errors
Depending on how you file your taxes, you might have access to tools that assist you with identifying math errors. However, if you are calculating by hand or using a calculator, make sure to double-check your work.
My own accountant has also advised me not to round numbers at all when calculating things like itemized deductions. He says perfectly rounded numbers can appear to the IRS as if the numbers are not accurate, which can be a red flag leading to audit.
Overlooking Credits And Deductions
I know there are a lot of boxes to check when it comes to filing taxes. I find that when people speed through their taxes, they miss some opportunities to save money on deductions and credits. If you have a child, have low-to-middle income, have saved for retirement, have made a green purchase, or are paying for college, there could be tax credits you are overlooking.
The deductions that you can take from your taxes will be the greater of your standard deduction or your itemized deductions. Because of the level of the standard deduction, many may opt not to itemize their deductions. Itemizing deductions only applies when your tax deductions will be higher than $13,850 for single filers and $27,700 for joint filers. The people I see itemizing tend to be those with large mortgages, medical bills, student loans, business expenses, or charitable contributions.
Failure To Report All Income And Gains/Losses
In an ideal world, every company who you have taxable gains/income from will send you a tax form stating what will be taxable it you. Many companies do, but not every possible source you receive income or capital gains from will send you a 1099 or W2 at the end of the year. Especially in the gig economy, more and more people have small incomes from multiple sources. This does not mean that you can avoid paying taxes on it or that the IRS won’t eventually find out. I had a friend who made a filing mistake years ago on failure to report a small portion of income. While on the phone with the woman at the IRS, my friend heard a phrase I will never forget. She said, “There are two beings you cannot lie to: the IRS and God.”
For gains reporting, safe rule is if you’ve sold a stock or other asset, there is a taxable event. In 2022, I sold a car I’d gotten two years prior, and it was one of those rare occasions that the used car sold at a profit. I had to pay taxes on that gain. This goes for cryptocurrency transactions, collectibles, and anything else you sell at a profit. Recording your transactions on your taxes is also important when it comes to selling assets at a loss. Let’s say you invested in a stock and that stock completely tanked. If you put in $20,000 and the stock went to $0, you can take that loss and write it against other gains, either this year or in the future. Being able to offset gains with losses could mean the difference between a huge tax bill and owing nothing.
Failure To Keep Records
If you are choosing to itemize your taxes, it is critical to keep accurate records. Let’s say you have business expenses you are writing off, which include corporate dinners, on one credit card you use for both personal and business expenses. It is not good enough to go through and highlight each expense that was for business on your credit card statement at the end of the year. If you were to be audited, your auditor would want to see receipts for the specific business dinners and what purpose they served. The more records you have and the more organized you are, the better. I personally keep secured digital folders with both excel sheets tracking my expenses and soft copies of each receipt.
Not Seeking Professional Help When Needed
I am a big believer in seeking professional help when needed. I wish I had found my accountant earlier in my career and saved myself the annual headache of filing my taxes on my own. If you find filing your taxes to be increasingly difficult, you itemize your deductions, you always end up owing significantly, or you have made a filing mistake in the past, it may be time to consider seeking professional help.
I hope that armed with this information, you can get through tax season easily and spend your energy on things that enrich your life.
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January 14, 2024 at 01:52AM
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6 Tax Filing Mistakes To Avoid This Season - Forbes
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