Common Tax Mistakes to Avoid
Tax season can be a stressful time of year for many people, especially if you are not familiar with the tax code or the process of filing your taxes. Making mistakes on your tax return can result in penalties, interest, or even an audit by the IRS. To help you avoid these consequences, we have compiled a list of common tax mistakes to avoid.
1. Filing Late or Not Filing At All
One of the most common tax mistakes is failing to file your tax return on time or not filing at all. If you owe taxes and do not file your return, the IRS will assess a failure-to-file penalty that is typically 5% of the unpaid taxes for each month or part of a month that the return is late, up to a maximum of 25% of the unpaid taxes. If you file your return but do not pay the taxes you owe, the IRS will assess a failure-to-pay penalty that is typically 0.5% of the unpaid taxes for each month or part of a month that the taxes are not paid, up to a maximum of 25% of the unpaid taxes.
To avoid these penalties, it is important to file your tax return on time, even if you cannot pay the full amount of taxes owed. The IRS offers payment plans and other options for those who cannot pay their taxes in full by the due date.
2. Incorrectly Reporting Income
Another common tax mistake is incorrectly reporting your income on your tax return. Income can come from a variety of sources, including wages, self-employment income, investment income, and rental income, among others. It is important to report all of your income accurately on your tax return, as failing to do so can result in penalties and interest from the IRS.
If you receive a Form W-2 or 1099 from an employer or other payer, make sure that the information on the form matches the income you received. If you are self-employed, keep detailed records of your income and expenses to ensure that you report your income accurately.
3. Failing to Claim Deductions and Credits
Deductions and credits can help reduce your tax liability and increase your refund. However, many taxpayers fail to claim all of the deductions and credits they are eligible for. Some common deductions and credits include:
- Charitable donations
- Mortgage interest
- State and local taxes
- Education expenses
- Earned Income Tax Credit (EITC)
- Child Tax Credit
It is important to review the tax code and consult with a tax professional to ensure that you are claiming all of the deductions and credits you are eligible for.
4. Filing Using the Wrong Filing Status
Your filing status can impact your tax liability and determine which deductions and credits you are eligible for. There are five filing statuses:
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
Choosing the wrong filing status can result in an incorrect tax liability and potential penalties from the IRS. It is important to review the criteria for each filing status and choose the one that best fits your situation.
5. Forgetting to Sign Your Tax Return
It may seem like a simple oversight, but forgetting to sign your tax return can result in it being rejected or delayed by the IRS. Your signature serves as verification that the information on the return is accurate and complete to the best of your knowledge. If you are filing a joint return, both you and your spouse must sign the return.
Make sure to carefully review your tax return and sign it before mailing or submitting it electronically to the IRS.
6. Failing to Report Foreign Assets and Income
If you have assets or income in foreign countries, it is important to report them on your tax return. The IRS requires taxpayers to report foreign assets and income on a variety of forms, including the Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA) form.
Failure to report foreign assets and income can result in significant penalties and legal consequences, including criminal prosecution. It is important to consult with a tax professional if you have foreign assets or income to ensure that you are reporting them correctly.
7. Incorrectly Calculating Estimated Taxes
If you are self-employed or receive income that is not subject to withholding, you may be required to make quarterly estimated tax payments to the IRS. Calculating the correct amount of estimated taxes can be challenging, and many taxpayers make mistakes that result in penalties and interest.
It is important to review the tax code and consult with a tax professional to ensure that you are calculating your estimated taxes correctly. You can also use the IRS’s online calculator to estimate your tax liability and avoid underpayment penalties.
Avoiding these common tax mistakes can help you avoid penalties, reduce your tax liability, and ensure that your tax return is processed correctly by the IRS. If you are unsure about how to report income, claim deductions and credits, or calculate your taxes, it is important to consult with a tax professional who can provide guidance and support.
Remember, filing your taxes accurately and on time is not only a legal obligation, but it can also help you avoid unnecessary stress and potential financial consequences.