It's that time of year again — tax season.
Filing your taxes can be stressful. It’s easy to feel lost when filing, especially if your tax situation is complicated. It’s easy to miss something or check the wrong box. In fact, thousands of Americans make these common mistakes every year, telling themselves it'll be different next year.
The good news is, these mistakes are entirely avoidable and avoiding them will cut your stress levels in half, as well as help you with getting better at how to manage your money. Avoiding these mistakes is also important to ensure you’re not overpaying or underpaying. Not paying enough in taxes cost you even more if certain fees are tacked on. What are the costliest tax mistakes you need to avoid? Keep reading to find out.
Waiting until the last moment to file
Nobody wants to pay Uncle Sam a penny more than necessary, so don't make the mistake of missing the filing deadline. Missing this year's July 15th tax deadline can result in added costs through a monthly failure-to-pay penalty of 5% of your unpaid tax, according to the IRS. However, if you file your taxes after September 14, 2020, which is 60 days after this year's tax filing deadline, that failure-to-pay penalty increases to $435 or 100% of the unpaid tax.
Each year, millions of taxpayers put off filing until the last minute. Resist the temptation and don’t procrastinate. When it comes to filing, earlier is better because taxpayers due for a refund can receive it early. And who doesn't want that?
As soon as you have all of the documents you need, you should file your taxes. Haven't filed yet? The standard deadline for filing taxes is April 15, though it was extended to July 15 this year due to the COVID-19 pandemic.
Filing the old-fashioned way
The Internet has made filing taxes easier than ever. If you're making the mistake of still filing taxes on paper instead of online, it not only slows down the refund process but it may also lead to more math or spelling errors or even a missed signature. This can slow down the refund process even more. Some of the best tax software and apps such as TurboTax and TaxAct make it very easy to file online.
If your income is $69,000 or less, you're eligible for free tax software called Free File that is offered through a private-public partnership with tax filing companies. You can also file electronically by using Free File fillable forms which are available on the IRS website. The greatest advantage of e-filing is that you will receive an automatic electronic confirmation that the IRS has received your tax return.
Paying the old-fashioned way
Just as filing your taxes has changed with the internet, there’s no need to mail a check anymore to make a payment. You can pay your taxes with a credit card or with a bank transfer. Both these payment methods are simpler and faster. Plus, paying your tax bill with the right credit card can net you some valuable rewards.
For instance, if you want to earn cash back when you pay your tax bill, a card like the Citi Double Cash can net you up to 2% cash back on all purchases: 1% as you buy and 1% as you pay. So if you owe Uncle Sam $2,500 for the year, you'll earn $50 cash back if you use this card to pay your taxes. Getting a decent cashback reward can help make paying your taxes a little bit easier.
Choosing the wrong filing status
If your living arrangements change, whether it’s from having a new child, getting divorced, or if adult children move back home, this can have a major impact on your tax filing status. If you choose the wrong filing status, it can lead to overpaying (or underpaying) your taxes — both of which are costly mistakes.
You have five options for your filing status:
- Married Filing Jointly
- Married Filing Separately
- Head of Household
- Qualifying Widow(er)
Make sure you know what every status entails and choose the one that best fits your personal tax situation. For instance, if this is the first tax-filing season since your divorce and you’re now a single parent, changing your status to "head of household" on your taxes will certainly have an impact on your taxes.
The IRS also provides help to make sure you're filing correctly. Figure out your filing status with the IRS Interactive Tax Assistant found on the IRS website.
Claiming ineligible dependents
It is common for individuals to misinterpret what is meant by “dependent.” For example, you can claim children and relatives as dependents, but you can’t claim your spouse.
A dependent is someone you support financially, usually a child or relative that lives with you. So if you live with your parents and also have your own child, your parents may be able to claim you as a dependent. In that case, you can’t claim your child on your tax return.
Failing to report additional income
We know that all income must be reported to the IRS on our annual tax returns, but do we all do it? Often, individuals report only what they see on their W-2s and 1099s. However, you may have income from other sources that aren’t on these forms. By law, you still have to report it. This includes any and all side hustles you worked throughout the year.
Underreporting income occurs when you fail to let the IRS know how much money you really received in your line of work. Omitting any additional income from your tax forms can result in fees and other penalties from the IRS. This can include additional income from tips, self-employment income, income from rental properties, and so on.
Bottom line on the tax mistakes to avoid
Nowadays, there are a variety of programs that help simplify the tax-filing process. They also do a good job of making sure you’ve covered all your bases depending on what your situation calls for. No matter how you file though, avoiding these five tax mistakes can help ensure you get the most out of your refund or that you aren’t paying more than you should be.
If you have a difficult or unique tax situation and you're unsure of how you should file your taxes, it may be worth talking to a professional for expert advice and peace of mind.