Top Income Tax Filing Mistakes
Tax filing season is underway and while you still may not have all of your forms, below are a few of the biggest mistakes I’ve seen in preparing returns this year:
Not keeping records. People generally panic when the IRS inquires about items on their returns. As long as you claimed a legitimate expense and have the records to prove it, then items generally can be cleared up through a well-crafted response complete with copies of your receipts, etc.
It can be impossible to remember every item that was included in a number from two or three years back, especially if you aren’t the spreadsheet type. It’s not enough to say that your preparer put a number on the return, you’ll need to respond with the details.
I can’t say enough about making sure you know what goes on your return and keeping the backup documents for it. When push comes to shove, you are the one that will need to produce evidence, so make sure your records will make sense to you in the future.
Check your withholding. When changing employment, retiring, or beginning a business, many individuals do not check to make sure they are properly withholding or paying enough in quarterly tax estimates to meet required minimums. Our tax system is “pay as you go.” If you don’t pay in your taxes as your earn income, you likely will face penalties and interest.
Not taking an IRA distribution. One of the most popular blogs here at FPA is on inherited IRA accounts, and for good reason. The rules on distributions can be confusing, and we are often in the ‘savings’ stage when inheriting a gift, and do not consider that distributions may be necessary. The penalty for not taking a minimum required distribution on any type of IRA account is not kind (50% of the amount you should have), so make sure you are meeting your minimum distribution requirements.
Not filing. This one isn’t only a problem if you were supposed to file and owed, but you may also miss out if you were owed a refund. Low-income and elderly individuals often miss out on welfare and other credits paid out through the tax system. There are many local programs that offer free filing for low-income and elderly filers; the IRS and AARP have local resources listed on their websites.
And by far the biggest mistake with taxes is…
Not having a plan! You may be eligible for credits, deductions, or other benefits based on your tax picture that may be missed if taxes aren’t a part of your financial plan. Make sure to meet with your advisor on your tax plan every year to cover changes and opportunities.
The preceding blog was originally published by the Financial Planning Association®(FPA®). To view the original blog please visit the FPA Web site.