Tax Mistakes To Be Avoided
The average taxpayer spends 23 hours on their tax return, and 80 percent of them will hire a professional or use tax software – even though 64 percent of them will not owe any taxes. Taxes are becoming more and more complicated, increasing the chances of making mistakes on a tax return. There are more than a dozen educational credits, six definitions of a child, and 16 different types of tax-beneficial investment and savings plans! Here are the most common tax return mistakes to avoid so you don’t overpay or get in trouble.
* Charitable Giving: If you give cash to your church, charity or other nonprofit organizations, make sure you follow IRS guidelines. The IRS is cracking down on bogus deductions, so see a tax professional for more information. The organization must have the IRS tax-exempt status, donations documented and proper IRS forms used when it applies. If you give in-kind donations such as clothing or furniture, make sure to keep detailed track of the donated value. The IRS now requires that all donated items be in good or better condition. You must report the value to the IRS, not the charity.
* Dividend and Interest Reinvestments: With your mutual funds or stock reinvest dividends, you are essentially buying new shares. Every time this happens, this adds to your tax base when you calculate the gain. Some investment companies will provide you with the exact amount of dividends and interest, but double-check to make sure you don’t overpay and calculate the gain properly.
* Unused Gains from Previous Years: You can deduct up to $3,000 in investment losses to offset investment gains. If you have more than $3,000 in losses in one year, you can carry them over to future years. Some charitable deductions also can be carried over based on the property type and your income. Make sure you claim all unused deductions!
* Excess Roth Contributions: Roth contributions begin to phase out when your income is $110,000 to $125,000 (if you are single) and $173,000 to $183,000 (for joint filers). Excess contributions are penalized at 6 percent, so make sure you double-check your Roth contribution amount if your income falls in those ranges. See artofthinkingsmart.com for more information.
* Medical Deductions: The portion an employee pays toward health insurance premiums is deductible. This also includes any Medicare payment deducted from Social Security and transportation costs for doctor visits. You can deduct 23 cents for every mile driven for medical purposes.
* Social Security Number: Putting the wrong number on your personal return or the wrong number for your dependents is a huge red flag for the IRS. The IRS attempts to match reported income to the tax return, so also make sure the right Social Security number is on your W2, 1099s and other tax documents.
If you have made mistakes on previous returns, you can file an amended return to correct the problem. The IRS will refund the difference if you paid more than you should have. You also should amend returns if you owe more money than you paid.