Tax season can be a stressful time for many individuals, especially if they are not adequately prepared. Filing taxes accurately and avoiding critical mistakes is crucial to avoid potential penalties and ensure a smooth process. In this article, we will discuss six common tax filing mistakes to avoid, providing valuable insights and tips to help you navigate tax season with confidence.
1. Missing Deadlines
One of the biggest mistakes individuals make when filing their taxes is missing the deadlines. Failing to file your taxes by the due date can result in severe penalties imposed by the IRS. Even a week of delay can lead to a 5% penalty on your unpaid taxes. If you file and pay your taxes five months after the due date, the penalty can increase to 25%, plus interest.
To avoid these penalties, it is crucial to file for an extension if you are unable to complete your tax return by the deadline. By doing so, you can buy yourself some additional time to gather all the necessary documents and ensure accuracy in your filing. Additionally, if you are unable to pay your tax bill in full, consider applying for a payment plan to avoid further penalties.
2. Rounding and Math Errors
Math errors can easily occur when calculating your taxes, especially if you are doing it manually or using a calculator. It is essential to double-check all your calculations to ensure accuracy. While some tax filing software can assist in detecting math errors, it is still crucial to verify the results.
Interestingly, perfectly rounded numbers can raise red flags with the IRS, as they might appear artificially manipulated. To avoid any potential audits, it is advisable not to round numbers excessively, particularly when dealing with itemized deductions or other financial calculations. Instead, provide precise figures to maintain transparency in your tax filing.
3. Overlooking Credits and Deductions
When rushing through the tax filing process, it is easy to overlook various tax credits and deductions that could potentially save you money. These credits and deductions are available for specific situations such as having a child, earning low-to-middle income, saving for retirement, making eco-friendly purchases, or paying for college.
It is essential to take the time to review all the available credits and deductions that apply to your circumstances. While some individuals may choose to take the standard deduction, which is a fixed amount set by the IRS, itemizing deductions can be advantageous if your deductions exceed the standard deduction threshold. Common itemized deductions include mortgage interest, medical expenses, student loan interest, business expenses, and charitable contributions.
4. Failure to Report All Income and Gains/Losses
Reporting all your income and gains/losses accurately is crucial to avoid potential issues with the IRS. While many companies will issue tax forms such as the 1099 or W2 to report taxable income, not all sources of income may provide such documentation. This is particularly true for individuals involved in the gig economy or those with multiple income streams.
It is important to note that failing to report any income, regardless of how small, can have serious consequences. The IRS has access to various sources of financial information and can easily detect unreported income. To prevent any complications, ensure that you report all income from various sources, including self-employment income, investments, cryptocurrency transactions, and any other taxable gains.
Additionally, accurately recording your gains and losses is essential. Any sale of assets such as stocks, properties, or collectibles is considered a taxable event. If you sell an asset at a profit, you will be required to pay taxes on the gain. On the other hand, selling an asset at a loss can provide an opportunity to offset gains in the current or future tax years.
5. Failure to Keep Records
If you choose to itemize your deductions, it is crucial to keep accurate records of all your expenses. This is especially important for business-related expenses that you intend to write off. Merely highlighting expenses on a credit card statement is not sufficient in the case of an audit. The IRS may require receipts or other supporting documents to verify the legitimacy of your deductions.
To stay organized, consider keeping both digital and physical copies of receipts and other relevant documents. Create secure digital folders where you can store electronic receipts and maintain spreadsheets to track your expenses. By maintaining thorough records, you can ensure compliance with tax regulations and be prepared in the event of an audit.
6. Not Seeking Professional Help When Needed
Filing taxes can be a complex and time-consuming process, and seeking professional help can alleviate the stress and potential errors. If you find yourself struggling with tax filings, regularly owe significant amounts, have previously made errors, or have complex financial situations, it may be wise to consider hiring a tax professional.
A qualified tax professional can provide valuable guidance tailored to your specific needs and help you navigate the complexities of the tax code. They can help you identify potential deductions, optimize your tax situation, and ensure compliance with all relevant regulations. Investing in professional help can save you time, money, and potential headaches associated with tax filing mistakes.
In conclusion, avoiding critical tax filing mistakes is essential to ensure a smooth tax season and avoid penalties from the IRS. By being proactive, keeping accurate records, and seeking professional help when needed, you can navigate the complexities of tax filing with confidence. Remember to stay organized, double-check your calculations, and take advantage of available credits and deductions. By doing so, you can optimize your tax situation and achieve peace of mind during tax season.
This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals, and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article.
Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve, or make any representations as to the accuracy, completeness, or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6194305.1 (1/24)(exp.1/26)