Are you making common tax mistakes? Watch for these 7 errors
By Mark Yatros
Imagine it's the week before the tax filing deadline, and you're scrambling to gather all your documents, crunch numbers, and fill out your tax return. As beads of sweat form on your forehead, you can't help but wonder if you've made any costly mistakes. What if you’re leaving money on the table?
Let me help calm those fears by explaining the seven most common tax return mistakes and providing practical tips to avoid them. Many of these tips can be employed any time of year, not just before you file.
Filing an accurate and complete tax return helps ensure you're not missing out on valuable deductions and credits. It also safeguards you from the stress and potential consequences of an IRS audit or receiving a tax notice due to errors or omissions.
Please note: If you have questions or concerns about your past returns or your 2023 return, my colleagues and I would be happy to review them. Contact us here or call (269) 218-2100.
Now let's dive into the common tax return mistakes and equip you with the knowledge to avoid these pitfalls
1. Filing Too Early: Why Patience Pays Off
You probably know that you must file your tax return on time (on or around April 15, it can vary slightly each year) or file for an extension. But you don’t want to file too early, either. If you file before you receive all your 1099s and documents that list the interest and dividends you’ve earned, you may be in for a costly surprise because you’ll have underreported your income which means you may owe more tax.
Not only can filing too early result in underreporting your income, but it may also lead to potential penalties and interest charges from the IRS. To avoid such pitfalls, it's crucial to double-check all income sources, including interest earned from savings accounts, dividends received from investments, and any other forms of taxable income.
Pro tip: Wait until all relevant tax forms, such as 1099s, have been received before filing. The IRS requires that all 1099s and other tax forms be sent by January 31.
2. Figuring Credits or Deductions: Don't Leave Money Behind
Just as incorrectly entering names or social security numbers can cost you, making errors in calculating credits or deductions may cause you to miss out on money-saving opportunities. So, it’s wise to double-check your calculations to help you steer clear of costly mistakes.
Also, exploring commonly overlooked credits or deductions such as education expenses, child and dependent care credits, or student loan interest deductions is essential. These often go unnoticed but can significantly reduce your tax liability.
To ensure precise calculations, consider using tax software with features that accurately identify and calculate credits and deductions. These tools can help streamline the process and minimize errors.
Pro tip: Always keep detailed records of your expenses and income. This includes saving receipts, statements, and any supporting documents related to your deductions. Having organized documentation will not only make it easier to calculate your credits and deductions accurately but also provide evidence in case of an IRS audit.
3. Maximize Charitable Giving: Not Understanding Qualified Charitable Distributions
Maximizing the benefits of your charitable giving involves understanding Qualified Charitable Distributions and how they can enhance your tax savings.
The IRS allows you may make charitable donations via an IRA with a Qualified Charitable Distribution (QCD). It’s vital to understand that QCDs must be made only through a direct transfer from your IRA to a charity that meets specific IRS criteria. The bonus of this direct transfer is that the money is not included in your taxable income, which may reduce your taxes.
It's important to note that for a charitable donation to meet QCD requirements – and therefore not be accounted in your taxable income – the contribution must be made directly from your IRA. If you make the withdrawal, put it in a personal account, and then donate the amount, the donation amount will be included in your taxable income.
Pro tip: Before making charitable contributions, verify the qualified status of the organization by using the IRS's Exempt Organizations Select Check tool.
4. Avoid Penalties: Report Early Retirement Withdrawals
It’s vital to correctly report funds withdrawn from a retirement account before age 59½ because there is an additional 10% tax on early distributions (except for certain situations). If you don’t report early withdrawals, you’ll owe the 10% tax plus interest and further penalties.
To navigate the complexities of reporting early retirement withdrawals and better understand their tax implications, consider seeking guidance from a tax advisor. In addition, my team and I can also help you make informed decisions regarding your retirement accounts before or after you withdraw.
Pro tip: Consulting a tax advisor or financial planner before making early withdrawals from your retirement accounts can help you understand the tax implications and potential penalties involved. The Allegiant Wealth Strategies team is happy to assist you with your retirement accounts. For an appointment, contact us here or call (269) 218-2100.
5. Entering Information Inaccurately: Details Matter
As odd as it may seem, simple mistakes when entering your financial information could increase your chances of being audited by the IRS or receiving a tax notice. It’s vital to take the time to carefully review all the information you enter to ensure accuracy and minimize the risk of triggering an audit or receiving penalties.
Make sure:
All names on your return match their social security cards
All social security numbers are correct
You’ve signed your return
Remember, when you sign your tax return, you are testifying that all information you’re submitting is correct, even if a tax professional prepared the return. If your return has a problem, the IRS will take it up with you, not your tax preparer.
Pro tip: Use tax software with built-in error checks or get professional assistance from an experienced tax preparation professional.
6. Missing Out on Tax Deductions: Uncover Hidden Savings
Identifying frequently missed tax deductions can help you uncover valuable savings. Surprisingly, many taxpayers overlook deductions that could significantly reduce their tax liability. Some examples of commonly missed deductions include expenses related to education, home office deductions, and medical expenses.
However, it's important to note that not all expenses automatically qualify for deductions. Each deduction may have specific criteria that must be met. For example, medical expenses must exceed a certain threshold to be deductible. Understanding these criteria is crucial to ensure you meet the requirements and maximize your deductions effectively.
Pro tip: Create a dedicated folder or digital file to store all your tax-related documents, like receipts and statements. Keeping these records organized throughout the year will save you time and stress when it's time to file your taxes.
7. Choose Wisely: Your Tax Filing Status is Significant
Selecting the correct tax filing status can significantly impact your tax liability and potential benefits. Understanding the five different tax filing statuses is essential for making the right choice and optimizing your tax situation. The tax filing statuses are:
Single
Head of household
Married filing jointly
Married filing separately
Qualifying widow(er)
Your tax filing status determines your tax bracket, deductions, and eligibility for various credits. Each filing status has specific requirements and implications that can affect the amount of tax you owe or the refund you receive. So, it's essential to review your circumstances carefully to determine the filing status that aligns with your situation.
Properly selecting your tax filing status can result in substantial tax savings. For example, qualifying for the head of household status instead of single or married filing separately status could provide you with more favorable tax rates and larger deductions.
Pro tip: When in doubt about the appropriate tax filing status for your situation, the IRS can help (really!). The Interactive Tax Assistant can point you in the right direction on this question and more.
Still Wonder if You’re Making Tax Mistakes? Seek Assistance
Because this information is for guidance only, you may benefit from a review of your tax returns.
While our team doesn’t provide tax advice, we can review your 2022 and earlier returns and possibly identify mistakes. This is true even if an accountant prepared your return because we look at your return from a financial investment point of view. If we find a missed opportunity, you can amend your return and get your money back.
To schedule a review, contact us here or call (269) 218-2100.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.