Five Common Tax Filing Mistakes

It's never too early to be thinking about doing your income taxes this year. (My personal strategy is to get everything together in January -- some forms don't come until the end of the month -- then get a summary to my accountant by mid-February. This way, they can work on my return before the masses hit in March and April.) As such, I'll be posting on the topic of taxes (and preparing them) all the way until April 15 (off and on, of course -- I'm not turning this into Free Money Taxes). ;-)

Obviously, when you do your taxes you want to make sure they are accurate. One key step in doing this is to avoid common problems associated with completing tax returns. Here's a piece from H&R Block’s National Tax Advice Day site that details five mistakes made when filing income taxes:

Mistake #1: Failing to Claim Above-the-Line Deductions & Credits

Sometimes taxpayers don’t realize that they qualify for tax credits and deductions that can help lower taxable income. As a result, they can miss out on potentially significant savings. The Earned Income Tax Credit, Child Care Tax Credit, various education tax deductions and IRA-contribution deductions are all available even if the taxpayer doesn’t itemize. Once the allowable items have been identified, it’s important to calculate and enter the credit and deduction amounts correctly on the return.

Mistake #2: Not Itemizing Deductions

Some people automatically take the standard deduction instead of looking closely to see if it’s more advantageous to itemize. According to the General Accounting Office (GAO), more than two million taxpayers use the standard deduction even though they could save more in taxes by itemizing. For example, nearly one million people fail to itemize mortgage interest. This results in an overpayment of more than $470 million in taxes, according to a 2002 GAO report.

In addition to mortgage interest, taxpayers should consider itemizing the following deductions:

• Medical expenses (health insurance premiums, prescriptions and other qualified medical expenses)
• State and local income tax and personal property tax
• Charitable contributions (to churches and other non-profit organizations)
• Out-of-pocket job expenses not reimbursed by employers

Mistake #3: Missing Out on Last-Minute Tax Breaks

Taxpayers have until April 15th of the following year to make a tax deductible contribution to a traditional IRA. For tax year 2005, the maximum IRA contribution that can be deducted is $4,000 ($4,500 if you’re at least 50 years old). Not only do contributions help taxpayers save on taxes today, but they also move them closer to a comfortable retirement. So if you’re looking for a last-minute tax tip, opening a traditional IRA is an attractive move between year-end and April 15th. (Note: The maximum contribution amount for 2006 and 2007 is also $4,000; in 2008, the maximum will increase to $5,000 and will be adjusted for inflation thereafter.)

Mistake #4: Omitting Key Documents

Taxpayers must remember to attach to their returns copies of supporting documents, such as W-2s, 1099s, various schedules and forms and any other relevant information to validate reported income. Otherwise, there may be a delay in processing their return if the IRS requests clarification.

In addition, the IRS may modify a refund if they can’t verify the amount of taxes paid through withholding. For example, if a W-2 is not attached and the return indicates there is a refund, the IRS can simply reduce the refund by the amount of withholding not verified. So take an extra minute to be sure all supporting paperwork is attached to the return.

Mistake #5: Making Simple Errors

According to the Internal Revenue Service, numerical errors (such as miscalculations or typographical errors) and incorrect Social Security numbers are the two most common mistakes on tax returns. These simple errors often lead to delays, notices from the IRS and other problems that can be avoided by taking a few minutes to double-check all the numbers. Here are a few key points to pay attention to:

• Check that the correct marital status and number of exemptions is entered.
• Make sure the correct Social Security number is entered and that each Social Security number corresponds with the respective taxpayer and any dependents.
• Verify all income that is reported. Make sure the total amount is entered and that numbers aren’t transposed.
• Double-check calculations to ensure that refund amounts are entered accurately. If a tax payment is due, be sure to enter the correct amount in the proper place and attach a check to the return.
• Finally, sign and date the return, affix the correct postage and mail by midnight on April 15th to avoid any penalties.

Convenient, Accurate Filing

On average, taxpayers overpay Uncle Sam each year by about $400 per return due to missed tax breaks and savings incentives. It may, therefore, make sense to seek the assistance of a tax professional to ensure you claim every tax break you’re entitled to receive. In addition, most tax preparers e-file returns to the IRS, which is another safety net to ensure the accuracy of your return and reduce the time it takes for you to receive any refund you’re due. For more information about the ease and convenience of electronic tax filing and more useful tax advice, visit www.NationalTaxAdviceDay.com. 

My thoughts:

1. Not itemizing results in "an overpayment of more than $470 million in taxes, according to a 2002 GAO report." Ouch! This is why I itemize.

2. I second the IRA comments. If you don't have one, start one this year. If you do have one, add more to it this year.

3. Double and even triple check your return before you send it in to make sure all the proper documents are included. Making a mistake can land you into a bureaucratic mess with the IRS -- which is a place none of us went to go.

4. "Taxpayers overpay Uncle Sam each year by about $400 per return due to missed tax breaks and savings incentives." This alone is one reason you should consider having a professional do your taxes.

5. I pay $500 for my accountant to do my taxes. Here's why I use a paid professional:

• They'll probably save me more than what I pay simply because they know more about the tax law than I do.
• It saves me 30-40 hours worth of work. Even if my time was only worth $10 per hour (it's worth a lot more), it would still be worth it.
• My taxes are complicated and have a few legal considerations that need to be followed closely. I feel better having a professional looking over the information.

H&R Block.  Do it yourself or have us do it.  It's never been easier.

Comments

[Tax2020]

Alot of good points made in the article. Now a days the way to go with tax filing seems to be via online usually using some e-filing program.

[Hbrumskine]

Yea thoses are alot of the common mistakes made.

[Bill]

For those with simpler situations, paying for TurboTax or TaxCut is definitely the way to go. The people I know that do taxes on the side all use them, even though they know how. The "interview" process works well and triggers the required thoughts.

[Zack]

There is a free version of TurboTax available online if you have an AGI under $50k. I know a lot of folks who pay for TurboTax who could file for free with the site.

This article is incomplete and thus misleading. The reality is there are additional tax credits for small children (why did you specify a couple "with small children"? their ages don't matter so long as they're minors), childcare (Obama made childcare subsidies for IL under Welfare Reform much higher than Clinton allotted, tg- one of many reasons I voted for him) and elderly dependents. More average Americans than ever are taking in their elders for help with utterly unaffordable childcare (talk about a...