Tax time is annoying and pressure-filled enough when your return is 100% accurate. Make a few mistakes, however, and April can quickly devolve into a nightmarish ordeal. What seems to you like little more than a trivial error can rapidly trigger suspicion (or even fines and audits) from your friends at the IRS. Many a taxpayer has found himself hunched over a desk – head in hands – for days or weeks on end fixing careless tax return errors. Billshrink wants nothing more than to spare our readers such agony, so we put together this list of 12 common tax return mistakes to avoid. So enjoy – but be sure to file with caution!
Incorrect Social Security Number
Before all else, make sure your Social Security number is correctly written on your return. While somewhat rare, there is an outside chance that writing an incorrect Social Security number will cause the IRS to think you did not file a return, triggering a burdensome and wholly unnecessary investigation. Additionally, you will want to make sure that your spouse’s Social Security number is properly included, regardless of whether you file separately or jointly. Finally, it may help to write your Social Security number on each page of your return. This way, if an IRS employee misplaces any given page, your number is there for immediate, hassle-free clarification on all the others.
Not Filing Jointly (If Married)
If you are married, you could spend thousands of unnecessary dollars on income taxes for failing to file jointly with your spouse. As Bargaineering.com demonstrates with their chart of the 2010 federal income tax brackets, couples filing jointly are allowed to qualify for a lower tax bracket even if their income is higher than that bracket’s individual income limit. For instance, while an individual earning $137,000 a year would be subject to 28% taxation, a married couple earning the same amount would only have to pay 25% of that amount toward income taxes – if they file jointly. If a married couple files separately, each spouse will be subject to the same tax rates they would have to be even if they were not married. While there is more to the issue of whether to file jointly than simply the savings, the savings alone make it worthy of serious consideration.
Failure to Claim All Dependents
An all-too-common mistake made on tax returns is failing to claim all of your dependents. Many people believe, for example, that you cannot claim your elderly parents as dependents if they do not live with you. False – you can! If you are supporting another person (be it an adult child up to a certain age, or elderly parents, or relatives), these qualify as dependents and equate to deductions that will all lower your total income tax bill come April. Failure to claim all of your dependents, therefore, will result in a higher than necessary tax bill – which is the last thing anyone wants. Just make sure that all of their Social Security numbers are included, as well as your own. Failure to do so, again, exposes you to the risk of needless investigation later on.
Not Determining if you Qualify for Head of Household Rates
If you are single but have a dependent living with you, you may qualify to be taxed at the lower rates afforded to heads of households by the IRS. If you are a surviving spouse, the same applies. Speak with a qualified tax expert if you believe you fall into either of these categories. As the various comparison charts on SaveWealth.com demonstrate, utilizing the head of household rates can easily translate to saving hundreds of dollars a year on your federal income taxes. In other words, it’s not something you want to brush aside. The higher your yearly income is, the more you can save.
Forgetting to Claim Retirement Account Contributions
Up to a federally specified limit, all your contributions to tax-deferred retirement accounts like IRAs or 401(k)s are exempt from current federal income taxes. If you have contributed to one or both of these accounts, be sure to specify the amount on your federal return. As with every other deduction, the IRS will be in no rush to remind you about the money you could have saved. Nine times out of ten, they will happily take the full amount that you send them without regard for the applicable deductions that you missed. In other words, you’re on your own when it comes to these things, so do your homework.
Failure to Claim Credit For Overpaid Social Security Taxes
People change employers more today than ever, and if you aren’t careful, this can spell trouble – specifically, overpaid Social Security taxes – come April. Luckily, it’s a fairly simple fix. If you worked for more than one employer during a given year, investigate whether you paid more in Social Security taxes than was necessary. If so, determine the amount (perhaps with the help of an accountant or tax preparation software) and claim a credit on your federal income tax return to reflect the amount overpaid. This way, you won’t be on the hook for a higher than necessary tax burden. Again – don’t hold your breath on the IRS bringing this to your attention. It is solely up to you to determine whether and by how much you overpaid, and rectify the matter appropriately.
Failure to Claim Items That Carry Over
An especially frequent mistake (particularly among those who file their own taxes) is failure to claim items that carry over from last year to this year. Examples here include charitable contributions and capital losses exceeding the amount you deducted on last year’s return. Believe it or not, this is more common than you might expect. The IRS seldom allows you to deduct the full value of things like this in a single year. Rather, if you buy a new computer system or building, for instance, you are required to take your deductions over several years until the full extent of it has been claimed. Check with your accountant or tax software to see if any of this applies to you.
Failure to Distinguish Between Real Property Tax & Assessments For Local Benefits
Many taxpayers fail to distinguish between their real local property taxes and assessments for municipal benefits, such as curbside leaf pickup, street repairs, or improvements and fixes that uniquely benefit your property. While your local property taxes are generally deductible on your federal income tax return, assessments for specific municipal benefits are generally not deductible. Consequently, lumping the two together as one massive deduction is likely to land your return under scrutiny, forcing you to go back and change it and perhaps even pay applicable fines and penalties. In short, it’s far better to take a moment and separate these two from the start than find out the hard way after the fact.
Not Signing & Dating Your Return
In true Homer Simpson-esque fashion, a shocking number of taxpayers forget to sign and/or date their returns every year. While this isn’t likely to trigger consequences as grave as some of the other mistakes, it can certainly tie up precious time when you have to prove (down the road) that you did file a return way back when. Remember – the IRS is perpetually backlogged by 2-3 years. That means if you file a nameless return this year, you likely wont hear about it until several years later when a stern agent calls you demanding an explanation. At best, it’ll be a rather quick fix. At worst, you could have to spend hours or days engaged in tedious back-and-forth exchanges about a return you did file, but did not sign.
Not Checking Your Basis in Previously Sold Securities
If you have an investment portfolio, be sure to check what your basis in any securities you sold last year is – especially any holdings you have in mutual funds. Most mutual funds automatically reinvest any capital gains that were generated during the year back into the fund, thereby increasing your “basis” in that fund. The practical effect of this is that it can reduce your gains or increase your losses, either of which influence the amount of investment income you must report on your income tax return. In the same vein, any front end or purchase fees you might have paid are used to calculate (and included in) your cost basis on investments, even though in real terms they equate to less money invested. It’s a drag, but it’s better to have your tax return reflect it than have to correct it later on!
Excessively Large Refunds
It never fails: every year, scores of taxpayers gloat and boast about how huge their tax refund was after they file. What they fail to understand, however, is that a higher than normal refund does not mean they came out ahead. Quite the contrary – it means they lent the amount of the excess to the IRS all year long, free of interest! If you regularly find yourself getting bigger refunds than your comparably-paid peers, friends or family members, it may be that you are having too much money withheld from your wages or salary. The fastest way to remedy the situation is to change how many allowances you claim on form W-4, which will increase your take home pay. Yes, it will equate to a smaller refund, but it will mean you had more of your income available to you when it was more valuable (immediately) than when it was less valuable (later, once the IRS returned it to you in the form of a “refund.”)
Poor Record Keeping
This is one of those suggestion we all nod our heads to, and then blithely ignore until it becomes clear (say, during an audit) that we should have done it. Very simply, you ought to keep hard copies of any and all documents you send in to the IRS – tax returns, memos, addendums, anything that is at all consequential. And we don’t mean stuffing them into a shoebox that gets buried in a closet in your spare bedroom. These records should be kept in pristine shape, and be relatively easy to put your hands on should ever a need arise. Oh, and make sure to use certified mail whenever you mail anything to the IRS. This way, you have indisputable proof that they received the documents in question, which eliminates their ability to throw responsibility back onto you for their mistakes.