Wednesday, December 6, 2017

Avoid These 20 Top Tax Mistakes

Top 20 Tax Mistakes

We’ve compiled a list of common tax mistakes to ensure you don’t pay more than you need to on your 2017 returns.

There are more than 1,000 different forms to choose from when filing your 2017 tax return. No wonder it’s easy to make a mistake! But some of the most common errors are deceptively simple. Make sure to sidestep the following pitfalls:

  1. Incorrect names and Social Security numbers. Take a minute to make sure you spell names exactly as they appear on Social Security cards, and don’t transpose numbers. If you recently changed your name but you haven’t had a chance to file an update with the Social Security Administration, you’ll need to use your old name on your return.

  2. Wrong birth dates. It’s tempting to guess at a child’s or spouse’s birthdate, or even to write in one without double checking. But much of the tax code is based on age, and you cast doubt on a claim if the name and birthdate don’t match up.

  3. Tax Relief for Special Cases


    Penalty Abatement for Quarterly Payers

    If you just entered the so-called gig economy and messed up your payments or filing, you may have an out. According to the IRS:

    You may qualify for administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes when due under the Service's First Time Penalty Abatement policy if the following are true:

    • You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
    • You filed all currently required returns or filed an extension of time to file.
    • You have paid, or arranged to pay, any tax due.

    Check your eligibility for a first time penalty abatement here.


    Hurricane Tax Relief

    Those living in areas affected by hurricanes Harvey, Irma or Maria (check here to see if you qualify) get special tax treatment. Taxpayers who had filed for an extension on their 2016 taxes have until Jan. 31, 2018 to turn in their forms. Call the phone number on your late filing or late payment penalty notice from the IRS to correct an error. Taxpayers should be identified automatically based on address, but affected individuals and businesses outside the area can call the IRS disaster hotline at (866) 562-5227 to request tax relief.

    Hurricane victims may also be able to claim a personal casualty loss write-off. However, the law is complicated and you won’t be able to claim the full amount. (Businesses are treated differently and can claim the full write-off.) To find out what you may be eligible to deduct, check IRS Publication 547 (Casualties, Disasters, and Thefts).

  4. Wrong filing status. What if you got married or divorced in 2017? Your status is what is accurate as of December 31, so if you married on New Year’s Eve, you’re married for your tax return. Additionally, you could qualify as head of household if you were single at the end of the year, pony up at least half the cost of running your home and have a child or parent who is a dependent.

  5. Not carrying the one. The IRS found more than 2 million math errors in 2014 returns. Some of these were in taxpayers’ favor. To reduce the chance of mistakes in arithmetic, use tax software or hire a qualified preparer.

  6. Transposing numbers. Your software doesn’t know if you earned $1,600 in interest or $6,100, and it will keep using the wrong information throughout your return if you don’t catch the error.

  7. Funding someone else’s bank account. Direct deposit is the fastest, best way to get your refund. But it can be very difficult to retrieve if you accidentally provide the wrong routing or account number. Check them twice before sending off your return.

  8. Missing forms. Besides a W-2, you may need to include brokerage forms (1099s) for investments, and for 2017, you still need to provide proof of health insurance (1095).

  9. Forgetting online donations to charity. It’s easy to omit charitable deductions if the receipt was emailed. Search your inbox for “gift,” “donation” or “charity” before you file.

  10. Forgetting to sign. The IRS won’t accept a return that is not signed, and they’ll treat it like you haven’t filed. Penalties and fines could follow, and you’ll leave yourself open to an audit.

  11. Not claiming all your income. If you hopped into the gig economy and earned at least $600 as a contractor, or if you earned interest or dividends of at least that much, you’ll get a 1099 and so will the IRS. If you fail to report this income, expect to hear from the IRS.

  12. Forgetting to take Required Minimum Distributions (RMDs). Holders of a traditional IRA or 401(k) must make minimum withdrawals after age 70 and a half. The penalty for not doing so is a hefty 50 percent tax. If you messed up, file a Form 5329 with an explanation and what you’ve done to correct your error. The agency may waive the tax, especially if it’s your first time taking the distributions.

  13. Missing the deadline. If April 18, 2018 blows by and you realize your return is late, file as soon as you can or face up to a 5 percent penalty on the amount due every month, up to 25 percent, until the IRS gets your return. You’ll also owe interest on your outstanding tax burden, usually 0.5 percent per month.

  14. Misunderstanding the extension. The IRS will grant you six months to file your return if you request an extension (Form 4868) by April 18, 2018. Some people assume this gives them another six months to pay taxes owed. Not! Make a payment by the April deadline or face a late-payment penalty.

  15. Sending your return to the wrong address. Many taxpayers still use a paper return, and mailing it to the right processing center is tricky. Returns with payments go to one place, while those without payments go to another. Check for the proper address here.

  16. Watch Out for Tax Scams

    Most tax professionals will help you file accurate returns. Tax preparation services can be essential for older adults with a complex financial situation. But a few are dishonest or inept. Check out the IRS webpage to find tips on how to select a tax preparer and examine their credentials.

    Don’t fall prey to someone who calls or emails and claims to be from the IRS, saying you owe hundreds or thousands of dollars in back taxes. They may pressure you by saying agents are on their way to take you into custody. Whatever their method, they will demand payment via wire transfer or credit card. Hang up the phone or delete the email. The IRS never calls or emails to initiate contact; they always send a letter through the U.S. mail. Report any tax collection scam to the U.S. Department of the Treasury here.

  17. Making a statement with your check. The IRS probably won’t cash that check made out to “International Rat Society” or “Infernal Robbers and Scoundrels.” You may feel better, but your payment will be considered late and you’ll get hit with a penalty. Pay online with IRS Direct Pay and hit the buttons as hard as you want while cussing profusely for free.

  18. Saving money on postage. It’s not a good idea to see if your thick return will be delivered with just one stamp. The U.S. Postal Service sends back mail without adequate postage, possibly making your return late and certainly costing you another couple of stamps. Avoid the whole expense by e-filing, or drive down to your local post office for the correct postage.

  19. Messing up and giving up. If you need to fix your return, you are not alone. Get it done fast with a form 1040X and any corrected schedules or forms, all of which must be mailed. If you now owe more taxes, the IRS will assess interest and penalties from the original due date.

  20. Not filing. You may decide you can’t pay what you owe, so you’ll put off the pain by not filing a tax return. Bad idea. The penalty for failing to file is more than the penalty for not paying. File your return with as much as you can pay, and work out a payment option with the IRS for the rest.

  21. Waiting until the last minute. Some tax preparation services cost more if you request service near the filing deadline. Rushing to get your taxes done can cause you to miss deductions or make mistakes. Why not take advantage of IRS online filing? It’s free if you meet generous income guidelines.

  22. Claiming a deduction you can’t prove. Nasty fines and penalties await if you’re audited and you can’t substantiate the deductions you took. Save copies of your return, plus receipts and any other documentation used to prepare your taxes.

Sources

Common Mistakes When Filing Your Taxes,” DailyFinanceReport.org.

10 Common Tax-Filing Mistakes to Avoid,” AARP.

IRS penalizes more earners for mistakes, underpayment in estimated tax filings,” USA Today.

The Costliest Tax Scams and Mistakes of 2017,” Legal shield.

Avoid These Common Tax Mistakes,” Chugh.com.

11 Big Tax Mistakes to Avoid,” Nerd Wallet.

Penalty Relief Due to First Time Penalty Abatement or Other Administrative Waiver,” IRS.gov.

IRS extends tax relief to Hurricane Maria victims,” Accounting Today.

See if you can write off your Hurricane Harvey and Irma losses on your taxes,” Market Watch.

Blog posting provided by Society of Certified Senior Advisors
www.csa.us