Tax season is never fun, but many Americans seem to be griping about doing their taxes this year more than others. Although the IRS expected to process up to 155 million individual taxpayer returns last year, more consumers are finding out that this year’s refund probably won’t yield as substantial a refund as in previous years — that is, if you get any refund at all. What’s more, there are all sorts of new rules that went into effect this year that might significantly change the way you file or the deductions you’re able to include. To ensure that you won’t be subject to an audit later on or that you don’t miss out on a valid opportunity to owe less to the government, you’ll want to avoid making the following major mistakes when filing your taxes this year.
You may be able to claim deductions for certain expenses, essentially decreasing the amount of taxes you’ll owe this year. But if you claim too many deductions or don’t have the proof to back up those expenses, you could be asking for trouble. When you claim deductions, you should have documentation that backs up those claims. The IRS may look into the matter further if the deduction seems too high for the income you’ve reported or doesn’t seem realistic. Self-employed individuals need to be especially careful about the deductions they claim. You can’t claim a home office deduction if you work out of your living room, nor can you claim a vacation as a business trip. While you can and should take advantage of deduction opportunities that are available to you, you’ll need to maintain proof that those deductions are legitimate. Be sure not to round your numbers too much or take a favorable guess about how much you spent on certain business investments. The IRS can audit a business tax return within three years of filing and may collect back taxes owed for up to 10 years.
Most taxpayers end up taking the standard deduction, which is a set amount set by the IRS every year for eligible expenses. It’s certainly the easier option, as it doesn’t force you to track expenses or conduct any calculations. But in some cases, opting for itemized deductions may actually be better. Itemized deductions have more limitations placed on them (for example, you may need to meet a certain threshold for the percentage of income those expenses represent). This year, the standard deduction doubled, which may make it twice as hard for you to meet those eligibility requirements for itemization. But if you made a lot of charitable contributions this year or paid off a huge portion of your mortgage, it may be more financially beneficial for you to itemize. Ultimately, the right choice comes down to each filer’s individual situation, but you shouldn’t automatically dismiss the idea of itemization without looking into the matter further.
Failing to Report All Income
Although Americans fail to pay $458 billion in taxes every year, you are actually required to report all income you make. Regardless of whether you’re paid hourly, you have a salary, or you earn money from a side hustle — it all needs to be included on your tax return. Of course, the income you report should match what’s on your W2 form, if you’re an official employee. Keep in mind that any time you earn more than $600 as an independent or contract employee, you’ll receive a 1099 form summarizing your income. A copy of that form will also be sent along to the IRS, so they’ll already know about that money you’ve made. In other words, not reporting that income officially can be problematic later on. In addition, you’re also required to report income below that $600 threshold; even if you don’t receive a 1099 form, you should still include it as income on your taxes. Don’t assume that just because you were paid cash for a simple job that you don’t need to report those earnings. For the sake of transparency and to prevent a future audit, you should include all money you’ve made during the last year.
We’re all only human and it’s natural that innocent mistakes happen. That said, the IRS isn’t all that forgiving an agency, even when these errors are unintentional. Small calculation mistakes, imposing numbers on your Social Security number, failing to sign and date your return, choosing the wrong filing status, or even filing too early(before you have all your necessary paperwork) could leave you vulnerable to penalties from the IRS. Of course, waiting too late to file (or not filing at all) can have huge financial ramifications. If you don’t get your return in by the deadline and unless you file for an extension, you’ll end up owing much more than you originally calculated. In other words, you’ll want to go over your tax return with a fine toothed comb before you file. It’s also recommended that you consult with a tax professional to ensure that you don’t make any preventable mistakes and that you’re doing everything by the book.
We all know that filing your taxes is no walk in the park. But you’ll be able to reduce your stress levels by giving yourself plenty of time to file and by avoiding these aforementioned mistakes.