10 common and costly tax mistakes
If you haven’t done your taxes, the clock is now ticking. Tax day is April 15, and it’s in your financial interest to file soon, especially if you expect a refund.
But as you start filling in those forms, don’t let haste make waste. Mistakes can cost you time, money or both. Here’s a look at some of the most common tax-time screw-ups.
Mistake No. 1: Paying for tax preparation when you can get it free
Would you pay a couple hundred bucks for something you can get for free? Millions of Americans do it every year.
Companies such as TurboTax, H&R Block and TaxAct offer free tax software. Also, depending on your income level, you may qualify for any number of free services. For more, check out “6 Ways to Get Your Taxes Done for Free.”
Mistake No. 2: Getting your Social Security numbers wrong
On its list of common tax mistakes, the IRS puts incorrect and missing Social Security numbers at the top.
Long gone are the days in which you could claim dependents without a Social Security number. Today, every member of your household listed on your return needs to have such a number. Make sure to double-check all of the numbers before submitting your return to ensure there aren’t any transposed or missing digits.
Mistake No. 3: Spelling your name wrong
Sure, you know what your name is. But maybe you’re typing too quickly and hit a wrong key. Or you might be interrupted while filling out the form and start up again later at the wrong spot. There are plenty of scenarios in which people can — and do — misspell their own names on income tax forms. Such a simple error can lead to rejected returns and delayed refunds.
In addition, if you recently married or divorced and haven’t registered a name change with the Social Security Administration, be sure to use your previous name. The name on your forms needs to match the name listed in Social Security records.
Mistake No. 4: Making math errors
This becomes less of a problem if you use software to prepare and file your taxes. The computer will do all the calculations on your behalf, which virtually guarantees you’ll get it right.
However, the computer can’t know whether the numbers you’ve entered are correct. Double-check everything to be sure your return is accurate. It should also go without saying that if you’re still doing a paper return, use a calculator and do the math twice to confirm the results.
Mistake No. 5: Forgetting your John Hancock
There are two places this mistake can trip you up.
This first is by failing to sign a paper return before mailing it. The second is failing to sign your check if you’re sending in a payment. Either one can result in lengthy delays in processing your return.
You can avoid this mistake by filling in and signing your return electronically, and having tax payments directly withdrawn from your bank account. This saves on postage, too.
Mistake No. 6: Selecting the wrong filing status
This mistake may be most common for single parents.
For example, an unmarried parent who has a qualifying dependent and pays more than half the cost of keeping a home may be able to file as a head of household, a status that boosts the standard deduction. In addition, you can be considered unmarried so long as your spouse did not live with you for the last six months of the year.
Mistake No. 7: Missing valuable deductions or credits
It’s not enough to simply use the right form and the right filing status. If you want to maximize your refund, you also need to take advantage of every tax deduction and credit available to you. There are plenty of credits and deductions that have the potential to reduce your tax liability by thousands of dollars.
Your tax software or tax professional should help ensure you don’t miss anything you’re entitled to, but here are a few of the bigger credits and deductions you don’t want to miss:
- American Opportunity Tax Credit: Available to college students of all ages, this credit is based upon college expenses and can provide up to a $2,500 tax reduction per year for four years.
- Earned Income Tax Credit: Offered to low-income families, this credit is refundable, which means the government will send you cash even if you don’t owe any taxes. Sometimes this is overlooked when eligible families have incomes so low they aren’t required to file returns, so they miss out on claiming the credit.
- Child and Dependent Care Credit: If you pay someone else to watch your children while you work, you may be able to claim a credit. According to the IRS: “The total expenses that you may use to calculate the credit may not be more than $3,000 (for one qualifying individual) or $6,000 (for two or more qualifying individuals).”
- IRA contributions: Contributions to Roth IRAs are not deductible. However, depending on your income and whether you have a retirement plan at work, you can deduct contributions to a traditional IRA.
Mistake No. 8: Failing to claim all your income
You might also make the mistake of thinking you don’t need to claim income unless you receive a W-2 or 1099 form. However, you’re supposed to claim all income for the year, including side jobs, gambling winnings and just about any money you have made in any other way.
Cheating Uncle Sam may seem like a victimless crime, but you’ll feel victimized if you’re ever audited and such omissions are discovered.
Mistake No. 9: Sending your return through the mail
If you insist on being old-school and sending your return through the U.S. mail, you’re making the final mistake on our list.
Filing through the mail is a mistake for many reasons. First, if you’re filing a paper return, you increase the chances of making one of the other mistakes listed above. Using software means lower odds of missing Social Security numbers, forgetting to sign your return and making math errors.
In addition, a good software program will help you root out deductions and credits you might otherwise miss. It should also guide you to the right filing status.
Filing electronically means you could have your refund cash in hand much sooner. If you’re not already e-filing, it’s time to get on this bandwagon.
Mistake No. 10: Not updating your W-4 withholding form
This mistake is most common for single parents.
For example, an unmarried parent who has a qualifying dependent and pays more than half the cost of keeping a home may be able to file as head of household, boosting the standard deduction.