Here are some important last-minute tax mistakes to avoid, as the April 15th tax deadline is just around the corner. Tax mistakes can be costly either in the form of additional tax, penalties and interest or in a smaller tax refund.
FAILING TO ITEMIZE DEDUCTIONS: Taxpayers should never assume that they cannot itemize deductions on IRS Schedule A. Many taxpayers believe that they will not be able to itemize deductions because they do not own a home or have a mortgage. This is not only incorrect, but may be one of the most expensive tax mistakes to avoid. The standard deduction is $6,100 for single and $12,200 for married filing joint. In some instances alone, unreimbursed employee expenses could exceed the standard deduction amount. Especially when the standard mileage rate is 56.5 cents. For example 10,000 miles would be equal to a deduction of $5,650. Combined with other deductions like state income taxes and charitable contributions could easily exceed the standard deduction amount, even without mortgage interest or real estate taxes. High tax states like New York and California could see nearly $4,000 in state and local taxes on an income as low as $50,000. Trade unions are paying assessments as high as 5 percent in addition to their monthly union dues. All are tax-deductible. Therefore, a union carpenter could pay $3,500 in union dues and assessments on $60,000 in income. Combine other itemized deductions with these unreimbursed work expenses and now this union carpenter may be able to itemize.
KNOWINGLY FILING WITHOUT ALL W-2’S AND 1099’S: This is one of the most common mistakes and another very costly one. The IRS CP-2000 program matches all reported W-2’s and 1099’s with what is reported on the tax return. It usually takes the IRS around 18 months to catch the mistake. The IRS gets better every year at catching these mistakes because of better technology. Therefore, the taxpayer who failed to report the unemployment compensation may receive a CP-2000 Notice in the mail assessing the unpaid tax plus penalties and interest. Or even worse, the taxpayer may never find out that the missing W-2 would have resulted in a higher refund. The IRS is not required to fix mistakes that would result in a higher refund.
NOT FILING BECAUSE OF A BALANCE DUE: One of the biggest tax mistakes to avoid is not filing when a taxpayer owes the IRS money. This mistake will cost taxpayers additional penalties. The taxpayer who has a balance due should file the tax return and attach an Installment Agreement Request, IRS Form 9465. This form can also be filed electronically.
DO NOT OVERLOOK ELIGIBLE TAX CREDITS: The IRS now reports that one out of every five taxpayers fail to claim the Earned Income Credit that are eligible. The Earned Income Tax Credit is a refundable credit that pays anywhere from $3,250 to $6,044 for taxpayers with children. There is also a lower Earned Income Credit for taxpayers who do not have children and are low-income. This is one of many tax mistakes to avoid in dealing with IRS tax credits. Others include the American Opportunity Tax Credit, Child Tax Credit, Child and Dependent Care Credit.
DOUBLE-CHECK ALL NUMBERS: If a taxpayer elects to have their refund received through direct deposit, then the taxpayer should double-check the bank routing and account numbers. If any of these numbers are wrong, the IRS will automatically “flip” the direct deposit into a paper check, thus delaying the refund for up to two more weeks. All numbers on the tax return should be double checked, especially social security numbers and dates of birth. Any error will delay the refund or result in an electronically filed return being rejected.
By John J. Poltonowicz