As we are now within 30 days of the April 18 tax filing deadline (April 15 falls on a weekend and April 17 is a federal holiday), it is important to begin organizing your documents and creating a plan to file your taxes, if you have not done so already. Most individuals and businesses filing taxes will choose between completing this task on their own or seeking the help of a tax professional. We recommend not taking this decision lightly. The tax code has experienced major changes in the past few years and understanding these changes can have a significant impact on your refund or amount owed. Should you choose to complete the task on your own, there are a few common mistakes that you will want to avoid. These mistakes can cost you time, money, and even put you at risk of an IRS audit. Whether you’re a first-time filer or a seasoned pro, it’s important to be aware of these mistakes so you can avoid them and ensure your tax return is accurate and complete.
Click the + to read more about each of these commonly made mistakes.
One of the most common mistakes is filing your tax return late. This can result in penalties and interest charges. If you aren’t able to file your return before the April 18th deadline, you should file for an extension. It’s important to note that if you owe taxes, the extension to file does not extend the time to pay. You’ll still need to pay your estimated tax liability by the regular filing deadline to avoid penalties and interest.
Forgetting to include all income
Forgetting to include all sources of income, such as freelance or self-employment income, interest earned on savings accounts and gambling winnings, can lead to problems with the IRS.
Not claiming all deductions and credits
Even for taxpayers who do not itemize their deductions, there are several common deductions that may be available. These deductions are referred to as “above-the-line” deductions because they can be taken on the first page of your tax return, before determining your adjusted gross income (AGI). Here are a few of the most common above-the-line deductions:
- Educator expenses: Teachers and other educators can deduct up to $350 in out-of-pocket expenses for classroom supplies.
- Student loan interest: Taxpayers who paid interest on qualified student loans can deduct up to $2,500 in interest paid during the year.
- Health savings account (HSA) contributions: Taxpayers who contribute to an HSA can deduct those contributions, up to certain limits.
- Traditional IRA contributions: Taxpayers who are eligible to contribute to a traditional IRA can deduct those contributions, up to certain limits.
- Self-employment expenses: Taxpayers who are self-employed can deduct certain expenses related to their business, such as home office expenses or business-related travel expenses.
- Child and dependent care credit: This is a credit that can be claimed if you paid for child care expenses for a dependent child under the age of 13 or for a disabled dependent of any age. The credit is worth up to 35% of qualifying expenses, up to a maximum of $3,000 for one dependent or $6,000 for two or more dependents. The exact amount of the credit depends on your income, with the credit rate gradually decreasing as income rises.
- Contributions to a 529 College Savings Accounts: While contributions to a 529 account cannot be deducted on your Federal return, they can be deducted on your Wisconsin state tax return if you contribute to a Wisconsin plan (Edvest or Tomorrow’s Scholar). For 2022, you can deduct up to $3,560 per beneficiary per year for married couples filing joint and $1,780 for married filing separate status and divorced parents of a beneficiary. For other states, check out their specific 529 deductibility rules, as they vary by state.
It’s important to note that eligibility for above-the-line deductions can vary based on individual circumstances, and some deductions may be subject to phase-out or other limitations. To determine which deductions you may be eligible for, it’s a good idea to consult with a tax professional or use tax preparation software.
Incorrect cost basis on capital gains
Cost basis refers to the original price you paid for an asset, such as stocks or real estate, and it’s important because it determines the amount of capital gains or losses you have when you sell the asset. If you forget to include your cost basis when reporting capital gains on your tax return, you may end up paying more in taxes than you actually owe. This is because the IRS will assume that your cost basis was zero, and therefore, the entire sale price of the asset will be considered taxable income. To avoid this mistake, make sure you keep accurate records of the purchase price of all assets, including any adjustments to the cost basis such as commissions or fees. Typically you receive a Form 1099-B from your broker or custodian that details all the information you need, but you may also want to keep copies of your trade confirmations or other purchase documents as proof of your cost basis. This is especially important if the asset was inherited, see our post about what assets get a step up in basis at death.
Not properly handling a 401(k) or 403(b) rollover
- Missing the 60-day deadline: If you withdraw money from your 401k and don’t deposit it into another qualified retirement account within 60 days, the withdrawal may be subject to taxes and penalties.
- Failing to complete a direct rollover: When you roll over your 401k, you can either do a direct rollover or an indirect rollover. With a direct rollover, the money is transferred directly from your 401k to your new retirement account, and you never touch the money. With an indirect rollover, you receive a check and have 60 days to deposit it into your new account. If you choose an indirect rollover, be sure to deposit the full amount of the check, including any taxes withheld.
- Rolling over the wrong amount: If you only rollover a portion of your 401k balance, you may be subject to taxes and penalties on the remaining balance. Make sure you understand the tax implications of your rollover and rollover the full amount if possible.
- Not properly reporting the rollover on your tax return: If you don’t report the rollover properly on your tax return, the IRS may think you took a distribution from your 401k and may assess taxes and penalties. It is important to review the 1099R to ensure that the rollover was coded correctly.
Filing income taxes is an annual chore that most people fear and/or dread. It doesn’t need to be painful, but it does require diligence and attention to detail. If you choose to file your own taxes, make sure you set aside enough time to do the job correctly and don’t procrastinate. A closing piece of advice – double check your work and think through your financial year thoroughly to avoid these common mistakes.
You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.