With the end of the year approaching, it’s a good time to talk about some tax mistakes that can be very painful. With a tax code as huge and as complex as ours in the United States, there are countless mistakes we can make in preparing and filing our taxes. These are just a few that you might have the misfortune of making.
1. Report all income – This includes the income on W-2s from all of your jobs, as well as income on 1099s that you may have earned as in independent contractor. Did you know that you need to report all of your income even if you don’t receive a 1099? While a company only has to provide a 1099 if they paid you $600 or more, you’re still required to report the income even if it’s less than that. Or if a company forgot to send you a 1099, you still have to report the income.
2. Use a tax preparer – This is especially important if your taxes get complicated. Buying a rental property, moving to a new state, and having investments are all common things that can make your tax filing more difficult than it was before. The tax laws are constantly changing, and it makes sense to work with someone who is on top of those things. (But don’t go to H&R Block or other “big name” tax preparation places.)
3. Be careful with retirement funds – Saving for retirement can provide great tax breaks. A Roth IRA can provide a way to earn money and withdraw it tax-free at the time of retirement. But make sure you actually qualify to make a contribution to an IRA. If you’re converting IRA accounts, be aware of the rules. And think carefully before you take an early distribution from a retirement account, because you’ll lose about 50% of that money to taxes and penalties.
4. Who is your dependent – Taxpayers sometimes try to claim all sorts of people as dependents in order to lower their tax bills. This can get tricky, especially with adult children. The rules for who can claim adult children as dependents can be complex.
5. Report debt forgiveness as income – If a credit card company or mortgage company cancels all or part of your debt, that’s income. The should issue you a 1099, but even if they don’t, you’re still required to report the income. (There are some exceptions to this rule, but those are only for very specific circumstances.)
6. Double check your tax preparer – People use tax preparers because they don’t understand the tax code and don’t know how to fill out the tax forms. Nevertheless, it’s always a good idea to look over your tax forms and ask questions. Look for obvious errors, such as misreported amounts of income. If your tax preparer gives you advice that contradicts your past experience, consider getting a second opinion from another preparer or calling the IRS directly.
7. Don’t get scammed by a tax preparer – If your tax preparer brags about some little-known tax break that’s going to get you a huge refund, be suspicious. If it’s such a great opportunity, why doesn’t anyone know about it? Research claims like this before filing a tax return that includes oddball items that generate credits and refunds.
No matter what, YOU are responsible for your own tax return. Even if you’ve paid a professional, the IRS is going to hold you responsible for any problems. So do your best to avoid these common mistakes!