As you are organizing receipts and gather your W-2s and various tax forms to meet the July 15th tax deadline, it’s a good idea to brush up on how you can maximize your tax savings.
Below are seven common mistakes taxpayers make when filing taxes and how you can avoid them.
- Getting a big refund: If you do get a refund each year, it does not exactly cause for celebration. Getting a refund is actually a bad thing. While most think a refund is a generous gift from the government, it is not. It is actually money that you earned throughout the year but didn’t receive until you filed your taxes. Your refund is money that you could have used to pay off debt or saved in an interest-bearing vehicle. Ideally, you should have just enough withheld from your paychecks to break even at the end of the year.
- Claiming the wrong filing status. Your choice of filing status determines almost everything on your tax return and is made at the beginning of the tax filing process. However, most people do not understand the different filing statuses and what options are available to them.
- Missing Tax Deadlines. This year’s deadline was extended to July 15th as a result of the COVID-19 pandemic. Sending in late tax returns is actually the biggest mistake that taxpayers can make. The most common mistake I see taxpayers making is failing to make estimated income tax payments and getting assessed the failure to pay penalties and sometimes the failure to file penalties both by the IRS and their respective state taxing authorities. However, this penalty is waived for taxpayers who owe less than $1,000 in taxes after subtracting their withholdings and credits and for taxpayers who paid at least 90% of the tax owed for the current year or 100% of the tax shown on the previous year’s tax return, whichever amount is smaller.
- Not Claiming All of Your Income. Taxpayers need to report the income earned through their jobs, of course, but although it may not seem like a big deal to leave out some earnings for the year, it is not a good idea to do so. Depending on the amount of missing income and the length of time it takes for the IRS to catch it, not claiming all of one’s income could cause a taxpayer to owe a vast amount in underpayment penalties, late payment penalties, and interest. Although some like to gamble on the chance of never getting caught, it’s a potentially expensive risk to take.
- Missing out on valuable deductions and credits. I always recommend hiring a professional to file your tax returns, but if taxpayers decide to take the DIY route, taxpayers should be fully aware of all the tax credits and deductions available to them. In fact, one in five tax filers who prepare their own returns miss out on an average of $460 in write-offs, which adds up to a whopping $1 billion each year according to H&R Block.
- Relying on outdated write-offs. Taxpayers may be more inclined to spend money assuming the ability to write off the expenses during tax time. However, major tax code changes occur yearly, and many write-offs that taxpayers plan to rely on may no longer exist. Because of the constant change to the tax code, taxpayers can overlook this and spend more money in ways that will no longer benefit them.
- Misunderstanding how an extension works. If you haven’t filed your 2019 tax return, are running short on time, and need to file an extension, this option is available. However, an extension only grants taxpayers more time to submit their tax returns, not more time to pay if tax is owed. If taxpayers file for an extension, taxpayers are supposed to send a payment for what they may possibly owe. Failure to do so will cause taxpayers to owe additional penalties and interest. Therefore, if taxpayers are planning to file an extension, be sure to have some extra cash handy come July 15th even if on does not officially file his/her tax return until October 15.
While these are the 7 common mistakes that I see taxpayers make often, I can offer one solution that will circumvent all 7 mistakes: hire a tax professional.
Southern Tax’s tax preparation services are currently governed by its founder and CEO, Ms. Jasmine Young, a Certified Public Accountant. With the guidance and expertise of a certified professional, Southern Tax can not only help you develop and implement a customized tax strategy for you and your household to ensure that your tax savings are maximized for years to come.