3 Big Mistakes to Avoid
American’s favorite time of the year … to hate: tax season. Starting Monday, January 23rd, the IRS will begin accepting tax returns for the 2016 tax year. Here are three of the biggest tax filing mistakes people make.
1) Missing last minute tax-saving opportunities.
- While it’s too late to influence most of the factors that will determine your 2016 tax liability, there are still a few things you can do by the April 18th tax filing deadline. One is to contribute up to $5,500 (or $6,500 if you turned 50 or older last year) to an IRA. If you don’t have a retirement plan through work or do but meet the income limits, you can deduct your contributions to a traditional IRA, which can be invested to grow tax-deferred until withdrawn. There’s a 10% penalty for withdrawals before age 59 ½ but exceptions include qualified education expenses and up to $10k over a lifetime for a first-time home purchase.
- Another type of IRA you can choose is a Roth IRA. The contributions aren’t deductible, but the account can grow to be tax-free after age 59 ½. Unlike a traditional IRA, you can also withdraw the sum of your contributions (but not any earnings) at any time without tax or penalty. If your income is too high to contribute to a Roth IRA, you can contribute to a traditional IRA and then convert it to a Roth IRA.
2) Waiting to file.
- There are several reasons why taxes aren’t something to procrastinate until the last minute. First, you never know when your tax return may end up being more complicated than you thought. You might need additional paperwork or other information or even need to switch from using software to hiring a professional tax preparer. In that case, you’ll want time to find the right person rather than whoever happens to be available during the busiest time of tax season.
- If you get a refund, filing earlier lets you get your money back sooner and put it to work for you. You also often need a tax return if you apply for a mortgage or have a child applying for financial aid. Getting it done early gives you a head start on filing those forms too.
3) Choose the wrong person to file your taxes.
- With a plethora of tax software out there, doing your own taxes is easier than ever. If your adjusted gross income is $64k or less, you can even qualify for free file software here. Just be aware that these free options only cover very basic returns.
- If you don’t qualify, you can still access free fillable tax forms here. However, they just do the math and offer only basic guidance so you have to be able and willing to do your taxes by yourself. Also, all your info is deleted on October 22nd so you won’t have access to it after that unless you save it somewhere else.
- In any case, doing your own taxes isn’t the right choice for everyone. If you own a business or investment real estate, ambiguities in the tax code can make it hard to figure out what income is taxable and what expenses are deductible. Living or working in multiple states or countries, buying and selling investments in taxable accounts, or being a non-US citizen can all make your taxes more complex and time consuming. These are all cases where a tax professional could make sense.
- Of course, there’s a myriad of other tax filing mistakes to avoid like being disorganized or making computational errors, but these are three that can really cost you. Try to take advantage of remaining tax-saving opportunities, get started early, and choose the right person to prepare your taxes. Then maybe tax season won’t seem quite as taxing.