We are always surprised at how complicated the tax-filing process in the U.S. every spring. Every spring we reluctantly snuggle up with Form 1040 and a glass of Scotch. Option 1: Hire a tax professional to ensure that our return is error-free. We hope you enjoy!Find enough deductions to cover the cost of hiring her. Option two: Use online tax-prep software, which won’t relieve all of our tax angst but will at least digitally hand-hold, eliminate some guesswork, and flag math mistakes or missing information. Option three: Do it yourself and make costly mistakes.
Even if you’re quite confident in your tax-filing abilities—maybe your 1040 looks pretty similar from one year to the next—you can still benefit from the wisdom of number-crunching, tax-code-quoting pros. Especially because 2021’s filing is going to be a bit different than usual, thanks to residual pandemic-related tweaks to the tax code, and for many of us, changes to where and how we make money. As we begin to actively dread Tax Day 2022, we asked 15 tax professionals to share the most common mistakes they spot on tax returns year in and year out—plus slip-ups to avoid this year in particular Here’s what they had to say, and what you should keep in mind as you put your head down and plow through the paperwork like the everyday American hero that you are.
Failing at postage—and other silliness.
Everybody experiences momentary brain lapses. Some more than others because of the pandemic. However, mental lags can be costly when it comes time to file a tax return. Dr. Lei Hing, CPA, associate professor of accounting, Niagara University in Lewiston (NY), says that the most common errors and miscalculations in tax returns include misspelled names and incorrect social security numbers. “For paper filings, unsigned or undated forms and inadequate postage are also common mistakes,” she says. You definitely don’t want to pay late fees on your taxes because you guesstimated your number of stamps.
Typo in your bank routing number.
Experts say this is the most common error. “Double- and even triple-check your bank account numbers on your tax form,” says financial expert Ashley Feinstein Gerstley, founder of The Fiscal Femme and a partner with pay-over-time solution Affirm. “This is where the IRS will take money for taxes or pay you.” Get it even one digit wrong, and you could be dealing with looong delays. I’ve made this mistake and it’s a headache,” Gerstley says.
Dropping your return in a mailbox
Perhaps you’ve noticed that the postal service isn’t wildly reliable these days. Even if you usually mail your tax return out of habit, this just isn’t a great year to kick it old-school with your tax correspondence. “Do not file paper returns,” says Shiloh Jackson, CPA and founder of ComplYant in Los Angeles—putting it quite bluntly for us. “The IRS is extremely backed up in return processing, and a paper filing could go unnoticed for two years. Instead, e-file. The IRS even offers free resources to help you do it.” Plus, as mentioned earlier, online filing software is great for catching mistakes.
Don’t count all your income.
Just because you don’t receive a tax form for money you earned doesn’t mean it never happened. “Technically, even if you did not receive a 1099, but you earned income as an independent contractor, that amount is supposed to be reported,” says Angela Anderson, an Atlanta, GA-based CPA and a tax expert with JustAnswer. “Also note that it is likely that if you did receive a 1099, the IRS and applicable state taxing agencies did as well. So, you want to be sure to claim ALL income received.”
The wrong filing status.
“One of the first steps in completing your tax return is determining your filing status, and many married couples overlook the potential advantages of filing separately,” says Armine Alajian, CPA and founder of the Alajian Group in Los Angeles. “It’s always possible that you may receive a larger refund if you file separately, so taking the extra time to calculate your taxes both ways could mean extra money in both of your pockets.”
You may have thought you were too late to invest in a retirement fund.
Money you stash in a retirement account is shielded from taxes until the time when you withdraw it, so it pays to contribute as much as you’re able before you file taxes each year—and it’s NotIt is too late to do this for 2021. “Many people make the mistake of thinking that you can only contribute to retirement accounts in the current year, but the IRS actually allows four extra months to make those contributions,” explains Reva Shakkottai, a CFA based in Manhattan Beach, CA. “You can still make a retirement account contribution until April 15, 2022. The contribution limit for IRAs and Roth IRAs for 2021 is $6,000, or $7,000 if you’re 50 and older.”
You received an extension and you are unable to send payment.
People often think getting an extension means they’re home free—at least for the next six months. Unfortunately, that’s not entirely true. “An extension gives you extra time to file your tax return but not extra time to pay the balance due,” explains Monique McGrant, vice president of McGrant Tax & Bookkeeping in Charlotte, NC. “The balance due must be paid on or before April 18th this year.” You need to estimate how much money to send, as accurately as possible. “If more taxes are due when you file your return, you will also have to pay penalties and interest,” McGrant explains. If you need an extension on the payment, you can apply to the IRS for a payment plan.
Lost track of stray 10099s.
Don’t just tally up paper ones that arrive in the mail—make a list of the companies and banks you should be getting 1099s from (refer to last year’s tax return to help remind yourself). “Many investment firms no longer send paper tax documents,” notes Kim Dula, CPA and managing partner at Friedman LLP in Philadelphia, PA. “Taxpayers then forget about this income and it doesn’t get reported on the return.” Basically, it’s on you to check your junk email account and/or remember to login into your banking websites in order to download all the necessary tax documents. “Another common mistake is that people rush to get their return filed, and then a forgotten 1099 gets delivered, reporting income from that side job they had earlier in the year,” Dula says. “Now the taxpayer is faced with the decision to wait for a notice or amend the return. My advice to you is to organize and really think about your tax years. Ensure that you have accounted for every bank account, investment account and item of earned income that can impact your return.”
Forgetting about “fun” income.
“I see a lot of clients who don’t include important data, like from crypto accounts, NFTs, or sports gambling because they don’t receive a tax document,” says Lindsey Swanson, CFP and founder of Stripper Financial Planning, based in Whitethorn, CA. However, income earned in these areas still counts for the year. You should note that gambling winnings are considered income even if there were net losses or gains at the end of the week. Saying “I didn’t know” isn’t a valid excuse in the eyes of the IRS, by the way: “Whether you’re working with a tax professional or DIYing your return, it’s your responsibility to thoroughly analyze the past year and gather your information,” Swanson says.
Not understanding your state’s unique tax rules.
As you’ve surely experienced, the federal 1040 feels like a vacation compared to state tax forms, in most cases. “State returns are complex, particularly if you moved during the year or if you live in one state and work in another,” says Barbara Taibi, partner in the Personal Wealth Advisors Group at EisnerAmper in Iselin, NJ. “Many times, there could be incorrect state withholding on your W-2 because of old or wrong information. This could lead to an overpayment in one state, and you will need to wait to receive a refund and then request a payment from another state. That could mean a lot of money out of pocket until all is settled.” In this case, hiring a certified tax professional familiar with the state(s) in question could save you loads of money and stress.
Employers are not required to pay unemployment taxes.
Yes, taxes are due on any money you receive from untaxed unemployment benefits. “A common problem we run into is people not including unemployment benefits because they’ve heard they’re not taxable. It’s incredibly difficult to tell a taxpayer that after all you have been through, you now owe taxes to the government,” says Paul Miller, CPA, owner of Miller & Company in Little Neck, NY. To avoid this delayed downtime, you can choose to have taxes withheld on unemployment checks.
It is not necessary to ensure that names match.
You should ensure that all paperwork matches if any name changes have occurred in your life. Example: If you got married or divorced and are changing your name but the paperwork hasn’t yet gone through, you need to use your previous name for tax filing. “Failing to include the correct name, as listed with the Social Security Administration (SSA), on your tax return can cause your return to be rejected,” says Trenda Hackett, CPA and technical tax editor at Thomson Reuters Tax and Accounting in Dallas. “Taxpayers who often fall victim to this mistake include those who are newly married or divorced, those that changed their name with the SSA for other reasons, and those who have dependents whose names were changed.”
Experiencing sticker shock when you’re freelance.
Many freelancers, ranging from newbies to chronic procrastinators, don’t actually know how much they’ve earned—and owe—in a year until they start filling in the blanks on tax forms. That can mean there’s not enough cash to cover taxes. “A common mistake I see from freelancers, in general, is that they don’t save for taxes throughout the year,” says Aja Dang, who shares money and tax advice on YouTube. “I learned the hard way to always put a percentage of my income in a separate high-yield savings account for taxes. I save 30% of my paychecks and pay quarterly. This releases a lot of tension during tax season knowing that I’m prepared for it.”
Don’t give yourself credit for giving charity.
Even if you don’t itemize deductions, you can now get tax perks for your generosity—so go ahead and grab that Goodwill receipt. “Not everyone stays up to date with new tax laws, and sometimes these will benefit you. For example, in 2021, the CARES Act made it so you can deduct up to $300 in cash charitable contributions even if you don’t qualify to itemize deductions,” says Kristen Keats, CPA, owner of Sherwood Tax & Accounting in Sherwood, OR.
You may not be able to pay all of your childcare costs.
This year is the year you should really pay attention to how much money your expenses can be reimbursed. It could be a lot of money. “A common mistake is not including ALL costs you pay for childcare, and for 2021, there are many new tax incentives available,” says Gail RosenMartinsville, NJ-based CPA. “For example, the Child Tax Credit increased from $2,000 per qualifying child to $3,600 per child for children ages 5 and under and $3,000 per child for ages 6 through 17, while the tax credit for daycare expenses was raised to $8,000. You can include daycare expenses, summer day camp, and babysitters you pay via W-2.”
More tax advice
Source: Glamour