One of the most anxiety-inducing seasons is upon us: tax time. We all know that navigating the US tax system can be a challenging and frustrating process, so that is why one of the most important services that we provide for our clients is tax planning and preparation.
If you prepare your own taxes, you might notice how the tax rules can fluctuate from year to year, meaning that – if you are not consistently following the news – you might not know which tax breaks to claim or what type of oversights to prevent. Although we are only providing this blog for informational purposes only, and not as real-life tax advice, we thought it might be helpful to show you some of the most common tax errors you might want to avoid.
Overlooked Side Income
You are obligated to report any additional income to your normal salary for each tax year. This is a very common area that taxpayers overlook, and can result in an audit for unreported income.
Remember that you do not need to report:
- Hobbies or other activities that do not yield a profit
- Barters for services or property
- Forgone interest from below-market loans
Unrealized Tax Breaks
Tax breaks can manage the taxes you owe or change your liability, which ultimately results in a greater benefit. While deductions are one form of tax breaks, others include tax credits, exemptions, and certain tools designed to manage your tax burden.
You might find it beneficial to investigate these tax breaks:
- Child and Dependent Care Tax Credit
- Reinvested dividends
- Appreciated stock donations
Wrong Filing Status
Your filing status defines your standard deduction and tax brackets, so choosing an incorrect status could greatly impact your taxes. A lot of people choose an incorrect status because their status has changed during the tax year, so make sure that you’ve updated your tax paperwork prior to filing.
There are five different tax filing statuses:
- Marring Filing Jointly
- Married Filing Separately
- Head of Household
- Qualifying Widow(er) with a Dependent Child
Incorrectly Claimed Dependents
The IRS defines a dependent as a qualifying child or relative that taxpayers can claim they are financially responsible for during a tax year.
When claiming a dependent, be sure to remember a few things:
- Dependents must be under the age of 19 – or a full-time student under the age of 24 – at the end of the tax year
- Typically, only one taxpayer can claim a dependent at one time
- The dependent must live with the taxpayer for more than six months of the same year
Not Having Proof of Purchases
Tax paperwork can include anything from pay stubs to receipts, and are extremely important for any situation in which an audit could occur. These documents serve as proof for the claims made on your return, so make sure that you keep them in a handy place while filing your taxes, and then safely store them for the next seven to ten years.
Here are some items you might want to keep to verify your financial records:
- Mileage reports, including parking fees, bus or taxi fares, and tolls
- Life event documents, such as child custody arrangement, divorce or marriage records, death certificates
- Medical and expense records for any home improvements made due to a disability
Although these are only some of the errors that taxpayers encounter during each tax season, we hope that you have found this blog helpful. As always, we are here to help with any questions that you may have about your finances, so feel free to give us a call.