Did you know that last year, the IRS rejected about 3.4 million tax returns that were filed electronically? In many of those cases, the return wasn’t rejected because of fraud or some major problem. The issue was simply that the filer had entered the wrong AGI for the previous year’s income tax return.
An incorrect AGI is one of many types of income tax mistakes taxpayers make every year. Read on to discover more common mistakes and learn how to avoid them in your own taxes.
One of the most common tax filing mistakes people is filing late. That April deadline can sneak up on you, but it’s incredibly important that you get your taxes taken care of before that date passes. Filing late can lead to penalties and may make the IRS more likely to audit you.
As soon as you get all your tax forms in, set aside time to file your taxes. It’s also a good idea to gather all your tax forms in one place as they come in so you know what you have and where they are. This can make your filing process easier, as well as making it simpler to track when you’re ready to begin filing.
You might be surprised to learn that another common mistake in tax filing is inputting incorrect personal information. It’s easy to make a typo and misspell a name or put in an incorrect social security number. However, if this information does not match what the IRS has on file, it could mean a lengthy audit process for you.
Before you submit your tax return, carefully double-check that all names are spelled correctly and that all social security numbers are right. If you recently changed your name, make sure your name on your taxes matches your new legal name. It’s also a good idea to check addresses and other personal information to make sure they’re correct.
As your kids get older, there will come a point when you can no longer claim them as dependents on your taxes. Likewise, as your parents get older, you may need to start claiming them as dependents. As these relationships shift, it’s important to make sure that everyone is on the same page with who’s filing as a dependent and who isn’t.
If you list someone as a dependent on your taxes and they file on their own as an independent, you’ll have to submit an amendment on your taxes. You may also get audited if the IRS flags this mistake as potential fraud. Have a conversation with your children and your parents about who will be filing as dependents before you submit your taxes.
Tax forms can be very confusing, especially if you’re not using a product like TurboTax to help guide you through the process. There are a lot of different fields to fill out, and many of them aren’t clearly labeled. It can be easy to get the wrong number on the wrong line when you’re inputting your tax information.
Unfortunately, having information on the wrong line on your tax form could lead to an audit. The IRS knows the amounts that belong in each field, and their scanners will be watching for discrepancies in these fields. Be sure to double-check your forms to make sure everything is on the right line before you submit your return.
When you start your tax preparation, you’ll be asked to enter your adjusted gross income (AGI) from the previous year on your taxes. This is a way for the government to verify your identity and track significant income changes from year to year. And while guesstimating may not seem like a terrible thing, it’s very important that you enter your exact AGI from the previous year.
As we mentioned, the government uses your AGI to confirm your identity, so entering the wrong number can send up a red flag. When you’re gathering your tax documents for this next year, make sure to round up your tax return from last year. Include the exact AGI on that previous return to avoid your return for this year being rejected.
In addition to AGI and personal information, one of the most common incorrect pieces of information on tax returns is your filing status. Your filing status indicates to the government whether you’re single, married, or widowed. There are actually five filing statuses you can choose from: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with a dependent child.
If you’ve never been married, you are currently married, or your divorce is final, picking the right filing status can be fairly straightforward. If you qualify as a widow(er) or you’re separated, but not divorced, things might be more complex. The IRS has a tool that can help you determine the appropriate filing status to use on your taxes.
In the past, entering your income has been as simple as inputting information from your W-2 into your tax forms. But these days, many of us have bonuses, side hustles, and other gigs that provide extra income. Whether or not this money is paid above the table, you are responsible for reporting it on your taxes.
As you get paid throughout the year, keep track of extra income that you may be getting from these side gigs and bonuses. If taxes aren’t being taken out of that money, you may need to file quarterly taxes to avoid any penalties. But even if you don’t do that, be sure to report the full amount of your income on your taxes when you do them in the spring.
When you’re doing your taxes, you have the option of going through an itemized list of deductions or taking the standard deduction. The standard deduction is a shortcut that gives you the “average” deduction most taxpayers will qualify for. So, you might be surprised to learn that taking the standard deduction is one of the most common mistakes people make on their taxes.
In some cases, the standard deduction can help to save you money, but you shouldn’t assume that it will. It’s a good idea to run through your itemized deductions to see which is actually going to generate greater savings. You can always go back and choose to take the standardized deduction later if you discover that will be the most cost-effective for you.
If you do choose to calculate your own deductions, it’s important to double-check your math and make sure you’re managing them correctly. Unsurprisingly, calculating credits and deductions can be a complicated process. Even with help from tax software, it’s easy to make mistakes that can lead to an audit.
The best way to avoid miscalculating your credits and deductions is to keep rigorous records throughout the year. Keep track of how much you spend on childcare, pull mortgage statements, and so on. Many tax prep software programs will also have calculators to help you determine how much you’re eligible for in credits and deductions.
As you’re working through your credits, you may be tempted to skip some write-offs that you may qualify for. For instance, many people may skip the home office deduction because they’ve heard that it can make you more likely to be audited. Not only is this not true, but skipping that deduction could be taking money out of your pocket.
Do take the time to confirm that you’re eligible for all the deductions you’re filing on your taxes. But don’t skip any that you qualify for just because you’ve heard they may make an audit more likely. The IRS doesn’t discriminate based on types of deductions, and you could wind up leaving money that you’re entitled to in the government’s hands.
On the subject of the home office deduction, there are some pitfalls you need to watch out for when filing that deduction. While you are entitled to some deductions for your business, you can’t deduct all the costs associated with those assets. You can only deduct the amount of costs used to keep your business running.
For instance, let’s say you have a home office space that you use forty hours a week. You can deduct electricity, mortgage, and internet costs required to keep that portion of your home running for those forty hours. You cannot, however, deduct the entire cost of your mortgage, utility bills, or internet bills.
Another area it’s easy to overlook money on your tax returns is your charitable contributions. Even if you only give a small amount to charity each year, that money can still knock a little off your tax bill. And you might be surprised to learn what falls under the category of charitable donations.
Of course, tithes and offerings to religious organizations and to nonprofit organizations fall under this category. But donations to organizations like the Salvation Army or non-monetary donations to food banks can also count as charitable donations. Keep track of these throughout the year and tally them up on your taxes at the end of the fiscal year.
The last two years have seen some unusual tax situations that have brought a whole new range of common tax errors. The government stimulus checks and child tax credits do not count as taxable income. However, you are required to report those checks and credits on your taxes if you want to avoid an audit.
If you don’t remember how much you received in stimulus checks, you can look up the amounts on the IRS website. Even though they don’t count as taxable income, you still need to report these on your income tax. And don’t forget your child credit – that could save you a lot on this year’s tax bill.
You might be surprised to learn that some of the most common delays in income tax returns are to do with incorrect bank information. If you’re getting your refund via direct deposit, you’ll need to put in your bank account and routing numbers. Unfortunately, many people mistype these in their tax forms and wind up submitting incorrect information.
It’s a good idea to double-check that both your account number and your bank routing number are correct on your tax forms before you hit submit. If you have checks for this account, you can find the account and routing numbers at the bottom of the checks. If not, look at your online account to find this information.
Last of all, make sure you don’t forget to sign your tax return before you file it. All tax returns have to be signed – even ones that get filed electronically. Neglecting to sign your return will lead to a rejection and a delay in getting your refund.
If you’re filing by mail, you’ll need to physically sign and date your refund before you mail it. If you’re filing online, your tax preparation software should have an electronic signature for you to complete before you file.
Filing taxes can be confusing, to say the least, but there are some common types of income tax mistakes that people make over and over. Most of all, check that all your information is accurate and in the right space before you file. Take all the deductions and credits you’re entitled to, and don’t forget to sign your return before you file.
If you’d like to learn more about different types of income tax mistakes, check out the rest of our site at Polston Tax Resolution and Accounting. We offer more than 100 years of combined tax resolution experience. Set up a free consultation with us today and discover our professional tax resolution services that deliver results.
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