Avoid These Top 7 Mistakes for Annual Taxes
by Tracy E. Hill, Ph.D.
It’s almost that time of year again. Many of us are still acquiring tax forms in the mail and it’s nearly the end of February. Yet, it is better to wait until all your tax forms are in-hand before filing; otherwise, you will then have to file an amended return in a few months. Here are the top seven mistakes to avoid when filing your annual taxes with state and federal agencies.
- Filing Under Wrong Status. This seems like a no-brainer but according to Tax Act, many folks have confusion whether they are single, married filing jointly, married filing separately, head of household or qualifying widow(er). Seems easy enough but with many couples separated, on their way to divorce, or the like it can get confusing. Another example, if you’re single but have children you would be considered head of household not single. If you’re unsure you can always try this fifteen-minute tutorial: https://www.irs.gov/help/ita/what-is-my-filing-status.
- Fill Out the Organizer. Your accountant or CPA will most likely send you a tax organizer. The organizer includes last year’s tax information unless you’re using a new accountant then it will be blank. Either way, make sure you answer every single question. The more complete your answers, the more accurate your tax filing will be and perhaps you’ll end up with a bigger refund.
- Don’t Wait Until the Last Minute. Whether you’re filling out your tax organizer or filing your taxes, it’s important not to wait until the last minute. Your accountant needs time to make sense of all your information and you are not their only client! The longer you wait, the greater the chance that you will then have to file an extension with the IRS and again, wait longer for a potential refund. And most likely, your accountant will not be happy with you. This year, the tax year deadline has been pushed back to April 18th. If you miss this deadline and don’t file an extension, it will cost you an additional penalty of 5% of your unpaid tax.
- Who Claims the Kiddos. In order to get the child tax credit now, it is based on age alone. It used to be based on ‘dependency’ for a child or relative that lived with you and “you provided more than half of their support” according to Rodney Reynolds. However, that tax deduction was phased out around 2018. The new tax laws offer a tax credit if you have children under the age of 18. You are entitled to claim a tax credit for each kiddo at $3,600 per child. And don’t forget the 50% childcare credit if that applies as well in addition to the education tax credits if those apply.
- File for Free. If you earn $73,000 or less and have a simple W2 or 1099 it may be more cost effective and easier to simply file for free with the IRS: https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free. This is a great tool for young adults who have their first job or new to the workforce. The other option is TurboTax. We love TurboTax because it helps you understand the whole process while it takes you step by step through the tax tangle web. Many young folks have no clue where their hard earned money goes and how taxes are applied. TurboTax helps uncomplicate this process.
- Itemized Deductions Still Matter. For those of you in a much higher tax bracket, CPA Reynolds reminds us not to forget to still itemize deductions. Although the deductions are ridiculously exorbitant now, depending on your wealth, they still may make a difference in your tax refund check. “Most people don’t itemize their deductions anymore because the standard deduction is so high now at $12,950 for individuals and double that for married folk” according to CPA, Rodney K. Reynolds. Back in the day you had standard deductions and dependency deductions but all that went away when it upped the standard deductions to equal the standard plus the dependency. If you have no children, that makes it difficult to get to the new minimum deduction but it’s still worth going for it.
- Side Gig Income. If you have a side gig and make money doing it, then you must report that income. Cleaning biz on the side? Reportable. Etsy retailer 5pm – 9pm? Reportable. Airbnb your home? Reportable. Dog walker or scooper? All reportable income. Federal law requires that all income is reported whether you receive a W2, 1099 or not. The last thing you need is a happy customer who reports your side job to the IRS as a 1099 and you fail to report the same income. No need to give the IRS any reason to pull a yellow flag on your account and have you go through a full IRS audit.
The most fail-safe method for filing your taxes correctly each year is to hire a professional. It’s worth every penny to know your taxes are done on time and done right. Wishing you all a large refund check this tax season!
Photo credit by Kelly Sikkema (Boston MA) @inkypixels