Yahoo Finance 9 Tax Mistakes You Should Never Make
Since tax rules change slightly every year, as deductions expire or income thresholds for tax credits adjust, staying on top of all the updates can be, well, taxing. As a result, it's easy to err when it comes to filing your forms, and thousands of Americans make these common mistakes every year. Check this list twice to make sure you're not among them:
1. Waiting too long to file.
Anyone who owes money to Uncle Sam has to file and pay taxes by April 15 or risk facing penalties. When it comes to filing, earlier is better, because taxpayers due for a refund can receive it early. About 3 in 4 Americans receive refunds each year, and the average refund is around $3,000. Employers typically send out the necessary forms (W-2s and 1099s) shortly after the start of the new year, and as soon as you have the documents you need, you can file.
2. Filing the old-fashioned way.
Filing taxes on paper instead of online not only slows down the refund process, but it also means you can't as easily check your math, spelling and other simple errors. The cost of filing electronically shouldn't be a barrier; an alliance between the IRS and tax software companies means that anyone earning less than $60,000 can file electronically for free using name-brand software. (Taxpayers of all income levels can file for free through the IRS website IRS.gov.)
3. Forgetting to your update your household status.
Shifting living arrangements, from new children and divorces to adult children moving back home, can have a major impact on tax filing status. Choosing the wrong filing status can lead to overpaying (or underpaying) taxes. Anyone with a complicated situation, such as sharing custody of a child with an ex-spouse, might want to check with a tax professional to make sure to claim the proper status and expenses. One complicated area includes claiming dependents. At some point, young adults start to file their own taxes, and then parents must stop claiming them on their own taxes.
4. Deducting too many, or not enough, business expenses.
Running your own business, even a small one, comes with expenses, many of which can be deducted from revenue generated. But tax experts say some people make the mistake of taking their deductions too far by deducting entertainment costs that aren't really business expenses, too large a portion of home office expenses or expenses from a hobby. The IRS website clearly spells out which deductions are allowed and which aren't. If you're unsure, consult the site directly, or turn to a tax professional.
5. Forgetting to file all the required forms or account for all income sources.
If you earn extra income outside of a full-time job that comes with a W-2, then you probably received a 1099 form for that income. If you receive money through an online payment system like PayPal or cash, then you must take care to report that income on a 1099 form, too.
6. Forgetting to closely track charitable contributions.
As with expenses, taxpayers should keep all receipts and backup documentation when it comes to charity. If you donate in-kind items, like a car, then you should ask for a receipt from the organization.
7. Failing to keep paperwork organized.
Thanks to automated systems and new technology, the IRS can more easily flag taxpayers with anomalies in their filings, such as a sudden drop in income or increase in home office expenses. That makes it more important than ever for taxpayers to keep all documents, receipts and other paperwork. Tracking can be done digitally though a helpful app like Shoeboxed or manually with a paper filing system.
8. Making math errors.
Simple math errors, like a misplaced decimal point, can also flag your return for an IRS audit. If you're crunching the numbers yourself, be sure to check everything twice. Names should also match up, which can be especially tricky for people who recently got married and changed their name.
9. Going off old numbers.
Tax rates, income cutoffs for certain benefits, deductions and exemptions all change almost every year. That means taxpayers can't just copy numbers from last year's form or assume certain deductions have stayed the same. Be sure to check for any updates. If you're using tax reporting software, then these numbers will update for you -- another benefit that comes with taking an online approach.
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