Preparing a tax return involves preventing a multitude of potential errors. While some mistakes result in a quick recalculation of your liability, other tax-filing blunders may trigger a full-blown IRS audit. By carefully reviewing your tax return, you will undoubtedly save time and effort while preventing a headache that results in IRS scrutiny and an assessment of interest and penalties. Outlined are several common errors to be aware of when preparing your tax returns.
Filing Too Early
While you should not file late, you do not want to do it prematurely either. Wait until you have received all tax reporting documents, or risk making a mistake that may invariably lead to a processing delay.
Missing or Inaccurate Social Security Number and Bank Account Information
Check that the social security number on your tax return matches the one printed on your social security card. If it does not match, there could be potential trouble with the IRS.
If you are e-filing taxes and using direct deposit, your refund generally comes back in a few weeks. If your banking information is accurate, this is the swiftest and most convenient way to receive your refund. So, verify that all your bank routing and account numbers are valid.
Omitting Dividends and Interest
You should carefully enter any wages, dividends, bank interest, and other income received to ensure you report the correct amounts. Omitting these specific types of taxable income can invariably lead to imposing possible penalties and interest on any additional amount owed not accounted for on the tax return.
Forgetting Early Withdrawals from Retirement Accounts
Early withdrawal from a retirement account usually draws a penalty. Usually, the taxpayer making this type of withdrawal is experiencing financial hardship and may fail to provide this information to their accountants or account for it when preparing their taxes. Furthermore, they forget to properly account for the 10 percent additional tax on early distributions before age 59½. Omitting this information from your return will generate a letter from the IRS stating you owe accrued interest and penalties.
Failing to Properly Deduct Charitable Contributions
Charitable contributions must be tracked and substantiated. Taxpayers often miss out on this deduction because they failed to obtain and maintain proper documentation.
For weekly donations to the church or other religious institutions, regular members are typically provided a year-end statement with the total of their contributions. Discrepancies can occur on these statements; therefore, you should maintain your records.
Many taxpayers mistakenly try to claim the time they donated to a charitable organization, which is not tax deductible. However, out-of-pocket expenses, such as mileage accrued while volunteering, is tax deductible.
Another common charitable donation mistake happens when taxpayers receive a benefit, such as receiving event tickets in exchange for their donation. They often, and mistakenly, try to claim the total amount of the cash contribution without subtracting the fair market value of the tickets.
Overlooking Cryptocurrency Transactions
Transactions in virtual currency, such as Bitcoin, are increasing. Cryptocurrency is considered property for federal income tax purposes. Any capital gain or loss must be acknowledged, subject to any limitations on capital losses. The IRS currently has a compliance campaign focused on these transactions and has ramped up its enforcement efforts.
Forgoing the Most Advantageous Filing Status
Filing status determines your tax rate and allowance, deduction, and exclusion amounts. Sometimes, the best filing status is clear, but not so much in other cases. For example, married couples should determine if it is more beneficial to file separately or jointly. Or, if your spouse recently died or you are recently separated or divorced, and you have children or other dependents, you may be able to file as either married or head of household.
Making Math Mistakes
Math errors are some of the most common mistakes, which range from simple addition and subtraction to more complex calculations. You should always check your math. And better yet, have a tax professional do it for you.
Signing Forms Correctly
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