Being an adult means working and of course, paying taxes. Though filing taxes may seem pretty straight forward, there is always tons of room for error. Your tax return mistakes could be costing you hundreds, possibly thousands of dollars!
Common Tax Return Mistakes
While you want to comply with tax rules and laws, you also don’t want to pay more taxes than necessary. Missing out on money-saving deductions and credits can make all the difference between a good or bad tax return.
Here are five costly tax mistakes that you want to avoid making.
1. Paying for Tax Preparation
Tax professionals and accountants charge clients hundreds of dollars to file their taxes. But why pay for something when you can get it for free? TaxAct, H&R Block, and TurboTax all offer free tax software that allows you to file taxes on your own.
There are also programs available for certain demographics. For example, if you make $54,000 or less a year, have a disability, or speak very limited English, you may be eligible for the Volunteer Income Tax Assistance program. Other similar options include Free File and Tax Counseling for the Elderly (TCE), both sponsored by the IRS.
If you’re unsure about filing your taxes, consider reaching out to a professional. You can find the best financial advisor in Orlando on Carefulcents.com.
2. Choosing the Wrong Filing Status
One of the first questions you’re asked when filing taxes is your filing status. The status you choose determines your tax rate along with your eligibility for certain tax deductions. If you choose the wrong filing status, you risk the possibility of overpaying or underpaying your taxes, both of which can be quite costly.
An incorrect filing status choice often has the biggest impact on married couples. If you choose to file as married filing separately instead of married filing jointly, you may be losing thousands of dollars in tax breaks.
When you file separately, you’re unable to claim all sorts of tax credits and deductions, including:
- Earned income tax credit (EITC)
- American Opportunity Tax Credit
- Lifetime Learning Credit
- Student loan interest deduction
Another common filing mistake is deciding to file as single versus the head of household. Filing single could put you in a higher tax bracket while having a lower income threshold. This means you may lose eligibility for certain credits and deductions.
To ensure you’re choosing the right filing status, check out the IRS tool that asks questions to determine your status.
3. Not Claiming Deductions or Credits
Deductions and credits are available to help tax payers, so take advantage of them! Not doing so could result in a tax return that’s thousands of dollars higher than it really should be.
Deductions reduce your overall tax bill by reducing your taxable income. For example, if you made $85,000 last year but have a $3,000 deduction, your taxable income drops to $82,000. The percentage you save is based on your tax bracket.
Tax credits are a dollar-for-dollar tax reduction. If you would have owed $4,000 in taxes but you claim a $1,500 credit, you will then only owe $2,500. Tax credits save much more than tax deductions.
There are all sorts of deductions and credits that you may be eligible for. Most tax preparation software will determine which of each you qualify for.
4. Incorrectly Choosing Itemizing vs. Standardizing
When filing your tax return, you have the option to claim itemized deductions or the standard deduction. If you choose the standard deduction, you can claim certain deductions such as student loan interest and contributions to an IRA account.
On the other hand, there are certain deductions that you can claim only if you choose to itemize. Common itemized deductions include:
- Local taxes
- Mortgage interest
- Investment interest expenses
- Charitable deductions
- Medical costs
When deciding which option is most beneficial for you, figure out what the standard deduction is for the filing status you choose. Then figure out which itemized deductions you can claim. If your itemized deductions exceed your standard deductions, choose to itemize, or vice versa.
5. Not Taking Advantage of Tax Break Investments
If you have a steady income, you’ll want to use as many tax break options as possible. By now investing in accounts that provide a tax break, you’re causing your taxes to increase. There are all sorts of accounts that serve as tax deductions including a traditional IRA, employer 401(k), health savings accounts (HSA), 529 accounts, and many others.
What’s even nicer is that with some of these accounts, you can enjoy tax-free growth. By contributing to an investment account using tax-deductible dollars, you automatically reduce your taxable income.
If your income allows it, maximize your contributions to get the most benefit.
Tax season is much more enjoyable when you’re filing your taxes properly. While tax season is still months away, it never hurts to be aware of some of the most costly mistakes that people make when filing.
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