10 Tax Errors to Avoid When Preparing Your Return
Here are 10 of the most common mistakes people make when preparing and submitting their annual tax returns (in no particular order of importance). With a little research and careful attention, you can avoid turning one of these minor errors into a major mistake on Tax Day.
1) Misplacing or Not Keeping Receipts
The IRS does not allow deductions that aren't backed up by receipts. If you claimed the deduction on your tax filing, you need to make sure you have the receipt or other proof to support the deduction.
Too many taxpayers get it backwards: They wait until the April deadline before they hunt down those slips of paper. You should be continuously compiling receipts all year. Tip: Make sure your receipts are all clear and dated -- meticulous record keeping throughout the year can be a huge time saver come tax time.
2) Using the Wrong Forms and Schedules
Not only will incorrect forms and schedules result in delays in processing your return and any potential refunds, they also prompt greater scrutiny from the IRS. If you get the basic paperwork wrong, it may increase your chances of being audited. To avoid this common error, double check with the forms and publications section of the IRS' Web site to make sure you’re using the proper form for your needs.
3) Failing to Report All Income
Some individuals think that just because they never received a W-2 or 1099 in the mail, they don't have to report the income. Wrong. If your expenses and your income don't match up, the IRS might decide to audit your bank accounts in an attempt to reconcile deposits with reported income.
Unreported income is a serious offense and has severe consequences. Getting caught could result in civil and criminal penalties and fines. In the end, it's not worth the risk.
4) Forgetting to Sign and Date the Return
That's a simple one, right? It's surprising how often individuals forget to sign and date their tax forms. This error can result in delays, which, in turn, can expose you to penalties and interest on any taxes not paid on time. Before you send in your return, stop to take a deep breath. Run through a mental checklist of all the little details, no matter how seemingly easy or trivial. Better yet, take a 30-minute break and do something else. Chances are, those subconscious slips may come to your attention.
5) Claiming the Wrong Filing Status
According to the law, you're either single or you’re married -- you can't choose one or the other if it's not true. If you are indeed legally married, you must file either jointly or "married filing separately."
Claiming the wrong marital status can eliminate your eligibility for several credits and deductions, such as exemptions for dependents and the child tax credit. Here are a few facts, compliments of IRS.gov:
» Your marital status on the last day of the year determines your status for the entire year.
» If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
» Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
» A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
» A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.
» Head of household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
6) Using the Wrong Social Security Numbers
Another surprisingly common mistake is to insert the wrong Social Security numbers, either for the filer(s) or their dependents. Your Social Security number is akin to your national identity; get it wrong, and everything else on your tax form is rendered moot. Be sure to triple check all of your math and numbers, including your Social Security number, address, number of dependents, etc. Even if you're off by one Social Security digit, the IRS will reject your tax form.
7) Claiming Ineligible Dependents
It's impossible these days to fraudulently claim a dependent. When the IRS started requiring Social Security numbers for claimed dependents, millions of "children" suddenly disappeared overnight! You can't fudge this one, though you can inadvertently claim a dependent when they don’t qualify. According to the IRS, to be a taxpayer’s qualifying child, a person must satisfy four criteria:
Relationship - the taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of these.
Residence - has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, kidnapped children, temporary absences, and for children who were born or died during the year.
Age - must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.
Support - did not provide more than one-half of his/her own support for the year.
With a number of tax benefits associated with dependents, it pays to do your research to get this one right.
8) Wrongly Claiming the Earned-Income Credit
However, many confused taxpayers mistakenly claim the credit, when they don’t actually qualify. Simply put, it's a refundable tax credit primarily for individuals and couples with qualifying children (those who meet the criteria of relationship, age and residency).
9) Failing to Report Domestic Workers
We've all read the stories of senators, court justices and other influential people who've run afoul of this tax rule. In fairness, the mistake is often genuinely inadvertent. If you pay a nanny or lawn service over $1,600 per year, you must also pay the appropriate Social Security and Medicare taxes. These relatively small amounts are easy to overlook. But remember, you still have to pay payroll taxes if the expense exceeds the $1,600 threshold: "Under the table" is against the law.
10) Failing to Consider the Alternative Minimum Tax
Congress designed the alternative minimum tax (AMT) to nab taxpayers in high-income brackets who use deductions and credits to erase too much tax liability.
The AMT system can be complicated and controversial. Its elimination of many deductions and credits particularly affect people with large amounts of itemized deductions, people with many children or dependents, people who exercise incentive stock options, and those who pay high state and local taxes or high personal property taxes. Also, because the AMT thresholds have not been frequently adjusted for inflation, more and more middle-income taxpayers are subject to AMT.
To make sure you're not triggering the AMT, consult the AMT estimation calculator on the IRS web site.
[To learn more about AMT, visit our InvestingAnswers Feature: The Alternative Minimum Tax Trap and How to Avoid It.]