Five Costly Errors to Make on your Tax Return
1. Not Filing at All. Life getting a little overwhelming and thinking of not worrying about filing your taxes on time? Not a good idea at all. The IRS can charge you with both a failure to pay penalty and a failure to file penalty. The failure to file penalty is generally worse than the failure to pay penalty so at least file on time and work out a payment plan with the IRS to save on charges. If you are due a refund and do not file, you will forfeit your refund after 3 years from the due date of the return. Always file your taxes on time. There is a 6 month extension if you apply for it before April 15th, this will give you until October 15th to file your taxes. If you owe tax, you will still be charged interest after April 15th, so make an estimated payment with your extension request to avoid the extra charges.
2. Wrong Filing Status: Your filing status is the first item to address when preparing your taxes. A single parent should file as “Head of Household” instead of filing as “Single”. This will result in significant tax savings. Also if you qualify in every regard to deduct your child as a dependent but your divorce degree gives your ex-spouse the right to take the dependent this year, you are still allowed to file as “Head of Household” without the dependent on your return, thus enjoying a more beneficial tax rate. Speaking of divorce, your filing status is determined as your status on the last day of the year. So if you get divorced on December 31, you have been “single” all year according to our tax code. You will file only your separate income and deductions on your return for that year.
3. Missing or Incorrect Information: When you receive a W-2 from your employer, a Form 1099 from the bank, or Form 1098 from your mortgage, the IRS also receives a copy of these forms in your name and will match up dollar amounts to your tax return. Therefore, it is important to enter these items correctly on your return. At minimum, you will be charged interest if your error resulted in less tax paid. At worst, you may be audited and then the IRS will take a look at other items on your return and ask for additional documentation to prove deductions. You are allowed to ask for a transcript of tax reporting items the IRS has received in your name. So if you think you may have misplaced items, you are allowed to see the items the IRS will be comparing to your return before you file. You are not allowed to dispute these items with the IRS. You must go back to the original issuer (the bank) and have them amend the form and resend to the IRS. Good luck there.
4. Missing Tax Credit and Deductions. There are many federal and state tax credits that significantly lower your taxes. You need to be aware of new credits each year and make sure you truly qualify for the amounts you deduct. A few of the credits that you should be familiar with are the Credit for Child Care, Education Credits, Child Credit, Energy Credits, and Earned Income Credit. If you miss deducting these credits, you will pay much more tax than you need to pay. The IRS will not contact you suggesting you missed lowering your tax.
5. Not Taking Advantage of IRA Savings. The tax code allows taxpayers to deduct up to $5,500 for contributions to an IRA, and if you are older than 55 you can deduct up to $6,500. An IRA grows tax free each year, meaning any interest or dividends generated from your IRA are not taxed until your funds are withdrawn in retirement. Your tax rate should be lower at that time resulting in more tax savings. It is important to realize your IRA contribution lowers your taxable income by the amount of the contribution and is not a dollar for dollar savings in actual tax owed. IRAs are a great savings vehicle and lower your taxes at the same time. Everyone should be planning on participating, if they can.
To avoid all these negatives and gain all the advantages of the tax code, have H&S Accounting CPAs and professionals prepare your taxes at a very reasonable rate.
Tim Walch, CPA
H&S Accounting CPAs LLC