7 minute read
Taxes are complex. File them incorrectly and you could trigger an audit, or at the very least, a recalculation of your liabilities; which is why most people hire accountants for hundreds of dollars each year. Doing them yourself does not have to be so difficult. Whether you are an individual, small business, or professional tax preparer, there are 6 common mistakes people make in tax preparation to be aware of:
The IRS treats crypto currency as property for income tax returns, meaning any capital gain or loss can and should be recognized and reported in your taxes. A surprising number of people buy and sell Bitcoin, Ethereum, Stellar, and other cryptocurrency without reporting them. In coming years the IRS is likely to increase the enforcement with a greater focus on crypto curry transactions.
While reporting crypto currency transactions is helpful in accounting for capital gains and losses, it could save you from some trouble later. The first page of the 1040 asks: “At any time during 2022, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” This includes crypto currencies. Neglecting to include capital gains and losses from crypto currencies in the 1040 report could lead to trouble later on. Since the IRS is focusing more attention on crypto currencies it is important to start doing this now.
Deducting charitable contributions incorrectly is important to remedy because, despite the popular belief that the IRS will accept claims without proof, donations must be substantiated. Documentation throughout the year for charitable donations is essential in case of an audit.
An occasional mistake made by taxpayers is claiming the time you volunteer at an organization, like building houses with Habitat for Humanity. However, time is not deductible. Instead you should track the mileage accrued on your car while volunteering, travel costs incurred, the cost of any materials you paid for, and other related out-of-pocket expenses. Another common mistake involves the use of year-end statements that include the extent of your contributions throughout the year. For example, if you give money or donate materials to a religious institution throughout the year the year-end statement may not accurately depict all of your contributions. Therefore, it is important to check for potential discrepancies with your records.
Marking your filing status has a significant impact on your tax savings. People often neglect to mark the most appropriate filing status on their taxes. If a spouse recently passed away or if they recently divorced or separated — and they have children or other dependents — then they may file as a “qualifying widow(er),” “head of household,” or even have to select “married filing separate” instead of the typical “single” or joint return filer..
Selecting an accurate filing status and one that will most-benefit you is important to help you save money, time, and effort. A lot of people have filed as “single” instead of “widow(er)” or “head of household” which could have provided more favorable tax treatment. In other instances married couples filed their taxes together instead of separately which may be required for legal purposes or, commonly, when student loans are a factor.
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Misspelled names, incorrect social security numbers, accounting errors, or inaccurate bank account numbers are all viable possibilities when filling out tax documents. While different errors have varying degrees of consequences, they could delay your refund or surprise you with an unexpected bill. One wrong key and the information does not accurately reflect you: inputting $55,765 instead of $65,765 can have significant implications. This is why double checking information on W-2s, 1099, or other documents is essential.
Although less common with today’s many tax filing softwares, occasionally taxpayers or tax preparers organize their forms in the incorrect order, forget to attach their W-2 or 1099, neglect to sign their return, or mail it to the wrong address. These mistakes must be accounted for and fixed. If your forms are in the wrong order when filing a paper return, be sure to check the upper right hand corner for the Attachment Sequence Number. The IRS can reject tax returns if forms are not in the correct order behind the 1040 form.
Other organizational failures include failing to include a check or money order payable to the “United States Treasury,” or worse, forgetting to mail your check. Some taxpayers forget to include their name, address, social security number, or other essential information with their check which could result in lost returns. Remember: is it not only about the information on the return, but what you attach the return and the order in which documents are placed. The IRS is very specific, you should be too.
While electronic filing has significantly reduced these clerical errors, many tax documents must still be submitted manually, so be sure to pay attention to avoid possible penalties and possible interest charges from taxing authorities.
Neglecting to take full deductions or credits is more of a tax planning issue, but it surfaces in filed tax returns. Millions of people fail to take write-offs they are entitled to via state and federal taxes. While some people may be aware of such advantages they may not take advantage of them out of fear of an audit. When taxes are prepared properly, audits are simple processes and should not be feared. For example, claiming home office deductions as a business owner is a great way to save on taxes and is unlikely to cause an audit on its own.
Of course, do not take deductions or credits you are not eligible for and be sure to ask a professional if you are unsure. For example, you are not eligible for the home office deduction if you do not own your own business. However, you are likely eligible for hundreds (even thousands) of tax strategies that can legally reduce your taxes.
Whether it is neglecting to claim deductions or credits you qualify for, miscalculating charitable donations, sending the IRS a disorganized packet, or clerical mistakes on your return, each problem has a solution. . The key is paying attention to detail, checking things twice, and getting organized before tax season begins to save you and your family money
Every tax planner knows that tax planning is the analysis of your life and business to optimize your situation so you can pay less in taxes before the year-end. For some people, tax season starts in January or February, while a large percentage of American society waits until March or April to begin their taxes. Perhaps the biggest mistake people make is adhering to the belief that tax season is a task for the spring. If you start early you can save yourself time, energy, money, and endure a lot less stress. Start your tax planning before December 31st to avoid last-minute tax preparation mistakes and to leave time for creating greater tax savings.
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