It’s that time of year when tax statements are flooding your mailbox and commercials for TurboTax appear every time you turn on the TV! As you prepare to send in those tax forms to the IRS over the next few months, here are a few tax mistakes that you will definitely want to avoid!
1. Not Staying Organized. It’s amazing how a few missing pieces of paper can end up costing you hundreds if not thousands of dollars on your taxes! It’s imperative that you keep track of all the paperwork that goes along with filing taxes. There’s no need for a complex system if you don’t need one, but at least designate a folder to file away all tax related documents until you need them. Misplacing receipts for charitable donations, documents for mortgage interest or interest on student loans can be a very costly tax mistake. If you are self-employed this is even more important! Find an organizational system that works for you and stick with it, if you don’t it will end up costing you.
2. Getting In Over Your Head. You don’t need to be an expert to be able to file your own taxes. That being said, everyone has their own level of comfort in dealing with the US tax code! If you’re not sure you are completing your taxes correctly, then it may be time to hire a professional. Yes it may cost you a few hundred dollars, but it’s quite possible you will get that back using a tax pro who can find additional deductions and use the tax code to the advantage of your particular situation. The last thing you want to do is make tax mistakes on your return, because the IRS does not take errors lightly (see next section).
3. Lying. Overtly lying on your taxes is far worse than making honest tax mistakes. You need to claim ALL of your income; all the tips, free-lance work, interest and gains on investments, rental property income, or anything else that put money in your pocket over the last year. Don’t claim dependents you don’t have. Don’t count your trip to Hawaii as a business expense. If you are caught lying on your taxes the penalties are harsh; best case scenario is you will pay a fine, worst case scenario is you will end up in jail.
4. Missing the deadline. This one is pretty clear, get your taxes turned in on time! If missing the deadline can’t be avoided, than at least file an extension. Remember however, that filing an extension doesn’t mean you can delay paying your taxes. Your estimated taxes are still due on April 15th, and failure to pay will result in an interest charge every month until they are paid. Give yourself plenty of time to get your taxes filed, then you can avoid this headache altogether!
5. Not adjusting your W4 form. If you work for an employer, than the W4 form is where you document how much money will be withheld from each paycheck for taxes, based on such factors as marital status and number of dependents. If at the end of the year you either owe a substantial amount or are getting a huge return, then you need to adjust the W4. Although it’s great to get a big refund check in April, in reality that’s your money that should remain in your pocket year round! Try this withholding calculator to help you figure out what’s best for your situation, and update your W4 with your employer.
6. Blowing your refund. A tax refund is not a gift from Uncle Sam. It’s your own hard earned money that the IRS held onto for you all year that they are simply returning. Don’t blow it on something frivolous that you will end up regretting. There are many fiscally responsible ways to spend a tax refund that will make the money work for you and leave you in a better financial position in the end. No, it’s not as exciting as an exotic vacation, but avoiding this tax mistake will give you well earned peace of mind!
Grab your papers, pencil, and calculator (or accountant’s phone number) and get to work on those taxes! If you avoid these tax mistakes you should be in great shape come April 15th. Be sure to consult a professional with your tax questions. Good luck, and thanks for reading!
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