8 Common Tax Mistakes You Should Avoid
We are in the middle of another tax season, and things are heating up! There are more than 350 possible deductions on your federal return alone, and there are certainly a lot of questions coming in. This is an overwhelming task for most people, and even a lot of tax professionals miss some of these deductions and/or deduct items on the incorrect schedules of the tax return. In fact, a 2014 study conducted by the Government Accountability Office found that only 11% of returns filed took all the deductions they were entitled to. Ouch!
Mistake #1 – Missing Self-Employment Deductions. Self-Employed/1099 people make the biggest mistakes in missing deductions and choosing the incorrect filing statuses for their business income and expenses. This is an area that costs these taxpayers a huge amount of money each year, and it is often an area that I can easily win business because the value (cash back to the client) I can create is a large multiple of the fees I charge (and thus, a very nice return on investment for the client).
Mistake #2 – Not reviewing the sales tax upgrade deduction. Especially for people in states that pay no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming). You can deduct the larger of your sales taxes paid (which, by the way, you don’t even need receipts for) or your state income taxes paid. People that make major purchases during the year, like cars, computers, home improvements often times have a much larger deduction to take because of the sales taxes they paid, but they neglect to do so.
Mistake #3 – Overlooking the Obamacare paperwork. This is more of a compliance issue, but errors cost money and time. You may have to go back and amend or respond to annoying IRS letters if you don’t do it correctly. Oh, and often times if you do it correctly, you will get some additional tax credits, so, this can save you money if done right.
Mistake #4 – Not looking at past year returns. Always let your tax professional, or ask them to, look at prior year returns. In my personal experience, I usually find something.
Mistake #5 – Letting a loser ROTH conversion stand. If you made a ROTH conversion in 2015, and it lost money, you can get a do-over by recharacterizing it before October 17, 2016. Once the assets are back in a traditional IRA, you can reconvert them into a ROTH again after 30 days if that’s still to your advantage. This gives you the chance to reset the value and then convert again.
Mistake #6 – Taking the wrong college write-off. Paying for a dependent’s college costs? Make sure you get your American Opportunity Tax Credit of up to $2,500, the $2,000 lifetime learning credit, or a $4,000 tuition and fees deduction. Remember, tax credits are better than deductions.
Mistake #7 – Not adding up child care. If you work, babysitters, day camps, summer camps, etc. can get you a tax credit that’s worth 20% to 35% of up to $3,000 in expenses for one child or $6,000 for two or more!
Mistake #8 – Not writing off work-related expenses that your employer does not reimburse you for. These are limited in that you can only deduct the total amount of expenses that exceed 2% of your AGI (and you have to be itemizing), but you need to explore this if you spend money on your business that is not reimbursed. For instance, driving mileage that is outside your normal daily commute is often times deductible. When I bring this deduction to a client’s attention, and they have these expenses, we often go back and amend prior years as well to claim a large batch of refunds. This makes them very happy, of course!
Bottom line – this is not an easy time of year nor is the tax code simple to navigate. The reality is that tax planning and preparing tax returns often becomes more art than science, so make sure you are getting all the deductions you are entitled to and don’t make yourself the 89% of people that don’t.
I am very blessed to be endorsed by Dave Ramsey and to have his support. If you are a follower of him, I think you will see he very much agrees that you need to take taxes seriously and most people need help from a pro. If you don’t follow him, you should! His personal finance model is both simple AND very effective!
I am available to answer your questions. Just shoot me an email at email@example.com if you have a question or want to chat.
- Best Practices For Managing Your Business Cash Flow - March 18, 2020
- How to Choose Between Outsourcing and Hiring Financial Employees For Your Business - March 18, 2020
- Deferred Sales Trust Business Broker - May 21, 2018