Tax mistakes can cost you dearly. Sometimes, it may mean you owe the IRS, have to pay penalty or late fees, or you may even get audited.
There’s no way to guarantee you won’t make any errors. However, it’s best to be aware of some common and not so common tax mistakes to avoid. Since I truly believe you can learn from other people’s stories and experiences, here are 5 sneaky tax mistakes you should avoid. Keep these in mind as you file your next return.
1. Not Carefully Reviewing Your Tax Forms Before Turning Them In
Most of us e-file so before you click submit, be sure to carefully review your tax forms with a critical eye. Don’t assume that everything is correct because you or your CPA took your time when working on the return.
Add up numbers to make sure they match what’s on your records, and check to make sure your personal details are all correct. Yes, this may be time consuming but it’s worth it.
Logan Allec, a CPA who also blogs at Money Done Right, actually put the wrong bank account number into his tax software when filing for himself.
“This obviously caused an error when the IRS processed my tax return,” Logan stated.
“Rather than receiving my refund promptly via direct deposit, I had to wait weeks for a paper check. I learned to always double check my account number before inputting it in the tax software!”
Brandon Renfro Ph.D., is a retirement planning and wealth management expert who also forgot to add some important information to his taxes.
“I own a few rental properties on which I previously had a net loss,” Brandon said.
“I had forgot about that net loss when planning my taxes for the next year, which means I would have missed the carryforward. Fortunately, I have a CPA prepare my taxes now, and she caught it. I was able to deduct a few thousand dollars that I otherwise would have likely missed.”
2. Forgetting About Deductions
You don’t want to miss out on any tax deductions you may qualify for. Tax deductions can help lower your taxable income which is nice because it means less money has to go to Uncle Sam.
That said, you want to make sure you are aware of all the different deductions you can include when you file along with any recent changes to the terms and maximum amounts you can deduct.
“I’m a landlord and forgot to include several qualified tax deductions to take against taxable income related to my rental,” said Riley Adams, a CPA and Senior Financial Analyst who also runs the site Young and the Invested.
“I forgot to include my short-term rental permit, flood insurance, homeowners’ insurance, property taxes, and associated share of home depreciation against my property.”
Fortunately, Riley was able to fix the return before hitting submit, and this resulted in a tax refund whereas prior, he would have owed money. This is yet another reason why it’s important to carefully review your tax forms before turning them in. Triple checking never hurt anyone.
Mike Pearson, founder of Credit Takeoff, also forgot to make deductions. Skipping out on the charitable donation deduction is unfortunately common, so it’s best to keep record of your contributions and set reminders to include this deduction around tax time.
“In a typical year, my wife and I give away clothes to the Salvation Army, food to our local church, and donations to the Boy Scouts of America, and yet without fail we don’t remember to document our donations, and therefore don’t make the tax deduction. This has cost us several hundred to a few thousand dollars over the years, I’d estimate.”
3. Assuming You’ll Get a Refund (Or Owe Money) Each Year
Let’s not assume when it comes to taxes. Your personal and financial situation is changing all the time. While you may notice some common trends and outcomes when you file taxes each year, the reality is that you may never really know how things are going to end up.
For example, since I’ve been self employed I’ve always owed taxes each year. To my surprise, I received a tax refund this year.
R.J. Weiss, founder of the finance blog, The Ways to Wealth, admitted that one year, he assumed he was going to be receiving a Federal refund.
“Due to my assumption, I didn’t send an estimated payment for my state taxes. Turns out I was wrong and come October when my taxes were filed I ended up owing the state money. As such, I had to pay interest on the late payment. It wasn’t much but I learned my lesson to make sure I calculate both state and Federal tax estimates.”
4. Not Estimating Income Properly
If you run a business or even do contract work on the side, you’ll want to track your income and expenses properly throughout the year.
This can include common mix ups when it comes to determining how much you really made.
Raj Chavda, a blogger who writes at Parenting FI, says she didn’t estimate her S-Corp or real estate income properly one year.
“This increased my tax liability come tax day that I was expecting but shouldn’t have to,” Raj shared.
Drew DuBoff, a Growth Strategist and Outsourcing Expert, also had issues when it came to properly estimating his income and categorizing expenses.
“I received quite a few education/training programs for free at the beginning because of being a virtual assistant and making connections. This resulted in a couple thousand dollars worth of free courses,” Drew said.
“I originally had that reported as income on my profit and loss statement. When I realized I was accidentally inflating my income, I removed them from my statement. However, I had already overpaid on my estimated taxes for the quarter. So, I just adjusted my amount accordingly for the next quarter.”
If you have any questions about what is deductible and what counts as revenue, always double-check with a CPA.
It’s wise that you estimate paying more taxes if you’re self-employed. Keep a large emergency fund to make sure you have enough to cover important business expenses like tax payments.
5. Not Getting a Plan in Place With Your Accountant
I understand that many people don’t want to share in-depth specifics on their personal finances including their income, retirement contributions, how much their home costs, etc.
The one person you should freely share these details with is your accountant. This will help them provide a quality service when filing your taxes. Sometimes it’s easy to forget to share things with your accountant or assume they already know.
Marc Andre, founder of the Vital Dollar, switched to an S Corp tax status from his LLC a few years ago and opened an individual 401(k) at the same time.
“I was told that I would be able to make one lump contribution at the end of the year, which is what I had done previously with a SEP IRA before electing the S Corp tax status. When the end of the year came, my accountant told me that I should have been making contributions earlier in the year. In order to do it at the end of the year I’d have to pay myself a bonus. Then, there’s social security taxes that go along with that bonus.”
Andre learned to have a solid plan with his accountant ahead of time due to this experience so he could avoid bad advice in the future.
Making tax mistakes is possible but it doesn’t have to be inevitable. When you know which tax mistakes to avoid, you’ll be able to plan and prepare for effectively.
Get on the same page with your tax preparer, and make sure you’re carefully checking your tax forms before you turn them in (whether you’re filing on your own or not).
It’s so easy to forget to include important information or paperwork. Make sure you check in at least monthly to get organized and update all your systems that you use to track your finances.
Have you ever made any tax mistakes before?