Every year, you make the same promise to yourself: I’m going to plan ahead and finish my taxes way ahead of schedule. But then you ultimately find yourself in a last-minute scramble that, in turn, increases the probability that you’ll make costly errors on your return.
So now that you’ve only got about three weeks left before April 18 (yes, you’ve got a few extra days this year!), how are those tax returns coming along?
Yeah, we thought so.
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In order to help you make the most efficient use of the time you have left, we asked four seasoned tax pros to share some of the most common mistakes they see taxpayers make while getting ready to file. Not only did they pinpoint careless administrative errors and misunderstandings about IRS rules, they also highlighted missed opportunities to further reduce what you owe Uncle Sam.
So use their insights—and talk with your own financial adviser and accountant—to make sure you’ve crossed all your “t”s and dotted your “i”s before this year’s deadline. Who knows, their insights just might help you boost your tax bottom line.
Mistake 1: Forgetting to Update Your Social Security Information
This may sound fairly obvious, but make sure to double check whether the name on your return and your Social Security card match. This applies not only to the taxpayer but also to a spouse or any dependents.
This tends to happen when people change their name after getting married, says Alan L. Olsen, CPA and managing partner of Greenstein Rogoff Olsen & Co., in Fremont, California. "The tax return goes in the mail and the name on the return doesn't match the name at the Social Security office." So if you haven’t yet applied to the Social Security Administration for an updated card, then the government records won’t match—which may cause unnecessary delays in processing your returns.
On a similar note, another easily avoidable mistake is forgetting to actually sign all your documents. Since the IRS can’t process a document until it has a signature, it will have to send you a letter asking you to sign, creating further delays and a potentially costly headache. "Penalties may be assessed for late filing, if there is a balance due," Olsen adds.
Mistake 2: Not Realizing You Have to Pay Taxes on Time Even if You're Filing an Extension
Individuals can apply for an extension to file their taxes after April 18, giving them until October 16 to get all their ducks in a row. However, "most people who get an extension don't know that their tax is actually still due [on time]," says Steven M. Piascik, president and founder of the CPA firm PIASCIK, headquartered in Glen Allen, Virginia.
In other words, an extension to file doesn’t mean you can put off paying what you owe. Even if you think you won’t owe any taxes, it’s still a good idea to estimate what your tax burden might be to make doubly sure. "If a client mistakenly thinks that they don't owe anything because they've got all these deductions but ends up owing later on, they're likely to have penalties, late fees and interest all due on that amount,” Piascik says.
Mistake 3: Failing to Document your Deductions
Speaking of deductions, you’ve been keeping receipts for all the expenses you’re planning to itemize—right?
If you haven’t, start your hunting and gathering now, because not only might you uncover some costs that could ultimately help cut your tax bill, you’re also making sure you’re covered in the case of an IRS audit. Remember: It’s ultimately the taxpayer, not the tax preparer, who has the obligation of validating all the information that's reported on his or her return.
“This means that you don't just tell your CPA that you spent $5,000 on charitable contributions,” Piascik says. “By law, they have to have the receipt for that in order to claim it as a deduction."
Mistake 4: Deducting Wrong Business Expenses
Job-related expenses can be one of the most confusing areas when it comes to itemizing deductions, says Shane Mason, CFP®, a New York-based financial planner and CPA who works primarily with freelancers. (Sorry, but those morning lattes you need to power through your day don’t count.)
Even with costs that you’d think there would be no argument about, like commuting, it can be hard to decipher what the IRS actually allows for.
"Almost every freelancer I meet with tries to deduct commuting to work—and that's the biggest thing that's non-deductible."
"Almost every freelancer I meet with tries to deduct commuting to work—and that's the biggest thing that's non-deductible," he says. "But if you commute between your first job and a freelance job, the expenses from that are deductible. So if you drive your car from your first job directly to a freelancing gig, those are business miles that you can deduct."
And you don't have to be a freelancer to write off that second leg of miles; the same rule applies for people commuting from a first job to a second job. Confused yet? This helpful chart from the IRS helps break it down.
Another potentially big headache? The home office deduction, which has some fairly strict qualifying criteria. "Make sure you carefully review the rules prior to claiming [it]," Olsen warns. “Claiming the deduction is often a red flag [to the IRS].”
The good news? Starting with the 2013 tax year, the IRS instituted a simpler calculation that allows for a standard deduction of $5 per square foot of your home used for business, up to 300 square feet. It doesn’t lighten up the criteria you have to meet to be able to claim the deduction, but it could help cut down on the paperwork required to calculate it.
Mistake 5: Not Maximizing SEP IRA Contributions
If you own your own business or are self-employed, you may be using a Simplified Employee Pension IRA (SEP IRA) to save for retirement. If you are, then you’ve actually got a longer window than you may think to make contributions to it—which potentially could help you lower your tax bill.
"If you're a self-employed individual, you can make contributions up to the extended due date of your tax returns for the prior tax year," Mason says. That means if you extend your tax returns to October, you can still make contributions by that due date. This is different from contributions to a traditional or Roth IRA, which must be made by the regular tax-filing deadline in April. (FYI: The cap on SEP IRA contributions for 2016 is $53,000.)
"If you have a big tax bill, you could make the contribution and your amount due would actually be a lot lower," adds Mason. "It could also swing you from an amount due to a refund."
RELATED: Ask a CFP: ‘What’s a SEP IRA?’
Mistake 6: Not Realizing That Stock Can Be Donated Directly to Charity
Cutting a check or hauling your old clothes to Goodwill isn’t the only last-minute way to make tax-deductible charitable contributions. According to Crystal Faulkner, a partner with MCM CPAs and Advisors in Cincinnati, donating stock that you've held for more than a year directly to an organization allows you to take a deduction for its full fair market value.
Let’s say, for example, that you wanted to make a pledge of $5,000 to your child’s school. If you sold $5,000 worth of stock in order to make the contribution, you’d have to pay taxes on any gains you realized, then contribute the after-tax proceeds. “But if you instead contribute the security directly to the charity, you are able to deduct the fair market value on the date of the gift as an itemized deduction—and you forever avoid paying tax on the gain,” Faulkner says. “The charity gets more money, and you avoid tax."
Mistake 7: Not Understanding How a Divorce Impacts Your Taxes
Going through a divorce can be financially stressful all around, and that includes the potential impact on your tax returns. This can be the case especially if alimony comes into the equation.
"Alimony is taxed as ordinary income to the recipient, and the paying spouse receives a deduction for alimony paid," says Faulkner. Furthermore, parents need to communicate and agree on who will be entitled to take which child-related tax breaks, as both parents can’t take the same ones.
"Often times, the IRS will see that two people claimed the same dependent, and that is definitely a flag for an audit or further inquiry," says Olsen, adding that the IRS will then look to the divorce decree to see if the terms of the deduction have been outlined.
Mistake 8: Overlooking Educational Tax Breaks
Let’s face it: There’s little you can do about the rising price of higher ed. Luckily, Uncle Sam offers up some relief in the form of education-related tax breaks, which are commonly missed, says Faulkner.
If you have kids in college, you may already be familiar with the American Opportunity Tax Credit, which offers a credit up to $2,500 to help offset qualified expenses for the first four years of higher education, or the tuition and fees deduction, which allows you to deduct up to $4,000 for similar educational costs.
But the Lifetime Learning Credit (LLC), which can be worth up to $2,000, is especially relevant for working professionals who are taking graduate-level courses, training classes or some other type of professional development that gets them further ahead in their career.
The catch? Both the credits and deductions are subject to income restrictions; to qualify for the LLC, for instance, you have to make $65,000 or less for individuals, $131,000 or less if married filing jointly. Plus, you can’t take both the educational credits and deduction.
“You should compare the tuition and fees deduction to the education credits and choose the most beneficial method to reduce your overall state and federal tax bill,” says Faulkner.
This story was updated on March 17, 2017.
This publication is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.
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