Let's face it, tax season can elevate one's stress levels. Worrying about filing errors, audits, delays, and missed refunds doesn't help. Being aware of common tax mistakes and strategies, such as how to maximize your deductions, is the best way to get through tax season worry-free.
Whether you're rushing to meet the deadline, April 15th for individuals or October 15th if you requested an extension, or just looking for ways to optimize your return, the following information helps with navigating tax season effectively and planning accordingly for next year.
Below we share several common tax mistakes, frequently asked questions about them, and last-minute strategies to help reduce your end-of-year liability.
1. Missing the Tax Filing Deadline
If you are late in filing taxes, the Internal Revenue Service (IRS) imposes a penalty as well as interest on unpaid taxes. If you don't file, the penalty is five percent per month, up to 25 percent of all unpaid taxes. Fortunately, if you have a refund coming, you will not be assessed any late fees.
How long do I have to claim a tax refund?
Keep in mind that you have three years to claim a refund if you are eligible to get your money back. Otherwise, you lose your entitlement to this money and it becomes part of the treasury of the federal government.
What if I need more time to file my taxes?
Individual tax payments are due on April 15th. If, however, you find that you need additional time, you may complete Form 4868 to allow for an extension of your filing date. Keep in mind that this extension is not for your payment date.
Can I arrange a payment plan to pay off my taxes?
One other important thing to consider is that you can set up payment arrangements with the IRS. Paying a partial payment of what you owe in taxes will reduce any late fees. Furthermore, tax relief does exist for those taxpayers who are experiencing fiscal hardship.
2. Common Tax Filing Errors
It's easier than you might think to submit a tax filing error. The following are some of the most common tax filing errors individual taxpayers make.
What are the most common income tax filing errors?
- Incorrect social security number
- Mathematical mistakes
- Claiming the incorrect deduction or credit
- Forgetting to sign the tax return
- Using an outdated tax form
- Personal details don't match IRS records
- Failing to disclose all taxable income
- Not double-checking for errors before submitting
Number eight remedies most of these common mistakes. Be sure to double-check for math and spelling mistakes in your own information and in your SSN.
Claiming the wrong deduction or credit is fairly common. As an example, the Earned Income Tax Credit (EITC) is not eligible if you make too much money. The limits for 2024 are as follows:
Source: IRS.gov
Incorrectly claiming the Child Tax Credit (CTC) is one of the more common tax filing mistakes people tend to make. Often, as a direct result of claiming a child who does not meet the required dependency, residency, or age threshold in order to be eligible for this credit.
Sometimes taxpayers fail to report all taxable income. If any of the following apply to you, you must report it as additional income.
What are common types of supplemental income that need to be reported?
- Freelance work and side gigs
- Cash payments from side jobs
- Investment income
- Rental income
- Cryptocurrency transactions
- Tips from service jobs
- Foreign bank accounts or income
- Nonresident state taxable income
- Money earned from a hobby
- Cancelled debt
What's the best way to avoid making tax filing errors?
One of the most effective ways to avoid a tax filing error is to use reputable tax preparation software, such as one of these:
3. Overlooking Deductions & Credits
A lot of taxpayers miss out on valuable deductions and credits. This can lead to a reduction in your refund or an increase in what you have to pay. You don't want to make this, potentially, costly mistake.
Which deductions and credits should be assessed?
Student Loan Interest Deduction - This allows you to deduct up to $2,500 in interest, even if you don’t itemize your return.
Saver’s Credit - This benefits low- and moderate-income individuals contributing to their retirement savings.
Lifetime Learning Credit (LLC) - This can help cover education costs.
Child and Dependent Care Credit - This assists with daycare expenses.
Home office deduction - If you are self-employed and have a home-based office, you can claim it.
Medical expenses - You can claim medical expenses in excess of 7.5 percent of adjusted gross income (AGI) if you report them on your tax form.
Energy-efficient home improvements - You can qualify for a federal tax credit for making energy-efficient home upgrades too. Upgrades can include installing solar panels, adding low-e windows, and installing a high-efficiency heat and cooling system.
If you suspect there are some deductions or credits being overlooked, a brief meeting with a tax expert can clarify things.
4. Not Lowering Tax Liability Before the Deadline
There are a number of ways to lower your tax liability. Many of these can be conducted up until the tax filing deadline and applied to the previous year.
What are the most common tactics to lower tax liability?
Retirement account contributions - A last-minute strategy to take advantage of is to lower your tax liability by contributing to retirement accounts. Contributions can be made up until April 15th and have them apply to the previous year's taxes.
While 401(k) contributions typically have to be done during the same tax year, others, including a Traditional IRA, Roth IRA, and HSA can be contributed to up until the filing deadline and count towards the previous year's tax liability.
Charitable donation - If you donate to qualified charitable organizations, you can deduct this on an itemized return.
Pay down tax liability - Another tip, if you anticipate owing, is to reduce your penalties by making an estimated tax payment before the deadline.
Income deferment - You may also be able to defer some of your income to the next tax year, if you're trying to lower your taxable income. For example, if you are anticipating an end-of-year bonus, you can ask your employer to wait until the new year to issue it to you.
Be sure to do an annual review of your W-4, adjusting your withholding, to prevent any surprise tax liability next year.
5. Not Making Retirement Contributions
As discussed, you can contribute to a Traditional IRA or Roth IRA until April 15, 2025, for the 2024 tax year and, if eligible, Traditional IRA contributions may also be tax-deductible–reducing your taxable income.
How do Roth IRA contributions work?
Roth IRA contributions grow tax-free, but don’t provide an immediate deduction to take advantage of. For 2024, the contribution limit is $7,000. If you're 50 or older, it's $8,000.
How do SEP IRA contributions work?
If you're self-employed, you can contribute to a SEP IRA or solo 401(k), before filing your taxes, to get additional savings.
How do Health Savings Account contributions work?
Contributing to a Health Savings Account (HSA) can also be done up until the filing deadline, but only if you have a high-deductible health plan (HDHP).
Speak With a Tax Planning Consultant Today
When it comes to paying taxes, the last thing you want to do is pay more than you have to. Similarly, you don't want to underestimate your tax liability either. This is why having a general understanding of how common tax mistakes are made and what you can do to rectify them is important.
Although the tips provided in this article are applicable to many tax filers, we just scratched the surface of taxation laws and IRS requirements. If you have a complicated financial situation, please reach out to speak with a tax planning professional at Benefit & Financial Strategies today.