8 Tax Pitfalls To Avoid
The IRS prefers that taxpayers file their taxes correctly, but many taxpayers often make mistakes. This article discusses eight common pitfalls that can cost you money or leave you owing more than you should.
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The tax code is not easy to understand and has many rules that change every year. Hiring a tax preparer may be the solution, but keep in mind they can also make mistakes. To avoid these pitfalls, see this article for solutions on how to handle your taxes effectively and efficiently.
8 Tax Pitfalls To Avoid
Poor record-keeping.
The simplest way to avoid a tax mistake is to keep good records. You should keep track of all your income and expenses in one place to know where your money is going. Ensure all the people who provide you services are listed in your records, including accountants, bookkeepers, and tutors. If you keep paper records, keep them in a safe place and make sure they are organized.
Incorrect filing status.
If you get married or divorced during the year, you must change your tax filing status. Ensure you have the right form and fill it out correctly, or you may owe more than you intended. Everyone is supposed to make sure that they are paying the right amount of taxes, and if you are confused or unsure of the correct filing status to use, you can always consult with an accountant.
Paying estimated taxes late or not at all.
Estimated tax is when you pay your taxes before the end of the year. It is to make sure you do not owe any taxes for the previous year or that you do not get a penalty for being late. The IRS requires taxpayers who earn income from self-employment, commissions, interest, dividends, rent, alimony, and prizes to pay estimated taxes. If you do not pay your estimated taxes on time or do not pay at all during the year, you will be charged a penalty by the IRS.
Not taking advantage of tax breaks.
Many tax breaks can help you reduce your taxes, such as the personal exemption deduction, self-employment tax, and the EITC. If you qualify, you must claim these deductions, but you may need professional advice to determine which ones will be most beneficial for your situation.
Failing to pay self-employment taxes.
The most common mistake people make regarding self-employment tax is not filing. If you have any money coming in from self-employment, you must report it as income on your tax return. The IRS will show as a deduction on Schedule SE, the Self-Employment Tax Return. You must also pay Social Security and Medicare taxes on this income.
Failing to estimate for large changes in income.
The more taxable income you have, the more likely you will owe a large amount of money come tax time. If you have a big increase or decrease in your income – as opposed to keeping it about the same each year – then keep a closer eye on your finances so that you don't end up surprised by an amount that is much more/less than what is required. People should try tracking their expenses the year before and then go over their final numbers with an accountant to see how they can lower them for the following year if they want to keep their taxes low or even get money back.
Receiving the wrong type of tax form.
Some people may fail to get the right type of tax form by filling out the wrong one in error or accidentally submitting an extra one they didn't need. It's important to be sure that you have the right tax form because if you don't, the IRS will not accept it, and they will ask you to re-file, which could result in interest charges.
Incorrectly calculating estimated taxes.
Some people do not comply with their estimated taxes each year. They make silly mistakes such as using the wrong figures for their deductions and overestimating because they assume everything will come out even. It can lead them to pay a large amount of money that they would not have had to pay if they had calculated the correct amount.
Conclusion
If you can avoid these eight pitfalls, you can avoid owing more money than you expected on your taxes. It would help if you also took the time to go over them with an accountant because they may notice other mistakes that you might have missed.
Disclaimer: This article is for informational purposes only and is not intended to be a substitute for professional consultation or advice related to your health or finances. No reference to an identifiable individual or company is intended as an endorsement thereof. Some or all of this article may have been generated using artificial intelligence, and it may contain certain inaccuracies or unreliable information. Readers should not rely on this article for information and should consult with professionals for personal advice.
