Just because the calendar has officially turned the page doesn’t mean you can forget about last year just yet: Now’s the time to start thinking about and preparing your 2013 tax returns, which the IRS will begin accepting at the end of this month.
No one enjoys doing taxes, but it’s an important financial task. As you sit down to do it this year, be sure to avoid these common tax mistakes.
1. Using a pen and paper. It’s amazing that in 2013, some 20 percent of filers still fill out their returns the old fashioned way: by hand. Doing so makes you much more likely to introduce math errors or simple mistakes - like forgetting to sign and date a form - that a computer (yours, or your tax preparer’s) would catch. In addition, e-filers get their returns more quickly and are less likely to be victims of ID theft. “You’d have to be a fool not to e-file,” says Mark Steber, chief tax officer at Jaskon Hewitt Tax Service.
2. Choosing the wrong tax preparer. Software like TurboTax is fine if you’re comfortable doing your taxes solo. If you decide to bring in professional help, remember that there’s no licensing requirement for someone to call herself a tax preparer. “We have 800,000 people in this country who prepare returns, and the vast majority of them are unregulated,” says Robert McKenzie, a tax lawyer with Arnstein & Lehr in Chicago.
To be safe, look for someone who’s either a certified public accountant (CPA) or an enrolled agent (EA); both must take ongoing exams to prove their knowledge of the tax code.
3. Waiting too long to get started. Missing the April 15 deadline would obviously be a huge mistake, but experts say you should start preparing your documents well before the end of March. Early filers get their refunds more quickly than laggards; plus, starting early gives you a time cushion if you discover missing documents or need to verify information.
4. Selecting the incorrect filing status. It’s not uncommon for filers to opt for the wrong filing status. “Particularly for single parents, filing as ‘head of household’ instead of single will give you a higher standard deduction and lower your taxes,” says John Vento, a CPA and author of Financial Independence: Getting to Point X.
If you’re married, divorced, or had a child in the past year, don’t forget to update your status as well.
5. Assuming you shouldn’t itemize. Often mortgage-free homeowners or renters assume that since they don’t have a home loan, it’s not worth itemizing. Simply taking the standard deduction, however, can be a costly mistake.
Before making that your default, tally up potential deductions such as state and local taxes, charitable contributions, and medical expenses that exceed 10 percent of your income to see if they’re worth more than that deduction. “There might be some rare cases where itemizing wouldn’t be the best move, but for most people, it’s better to itemize,” says Jackie Perlman, a principal tax researcher for H&R Block.
6. Failing to double-check your work. Computer programs are great at catching math errors, but they won’t know if you’ve transposed the digits on your Social Security number or incorrectly transferred numbers from your W-2. Print out your returns before pressing the “send” button and double-check all of your numbers for human error.
7. Not properly safeguarding your private information. ID thieves loves tax season, and tax-related identity theft is a growing problem. In the first half of this year the IRS reported that identity theft affected 1.6 million taxpayers, more than the number affected in all of 2012. Protect yourself by avoiding shared computers for filing; not emailing your returns to anyone, including your preparer; and filing as early as possible.
8. Forgetting to keep a copy of your returns. If you’ve lost your copies, the IRS will send one to you for $50, so it’s worth holding onto your own copy. You’ll need to keep one on hand for at least three years in case of an audit, but you may also have to produce a copy to a potential mortgage lender or someone else examining your financials. Plus, having last year’s returns on hand makes it much easier to prepare your taxes the following year. “Looking at old returns might jog your memory about an account that you closed this year, or deductions you might be missing,” says Greg Rosica, tax partner with Ernst & Young in the firm’s Tampa, Fla., office.
9. Keeping inadequate records throughout the year. It’s a lot harder to reconstruct deductible expenses at the end of the year than it is to organize your receipts as they come in. Plus, you’ll need documentation supporting any deductions if the IRS ever decides to audit your returns. Mobile apps like Expensify can make keeping receipts a paperless breeze.
In addition to business and medical expenses, keep detailed records of any charitable donations you make. Any donations worth more than $250 requires a letter from the organization that includes a description of the item or the amount of cash, and whether you received anything in return for the contribution. (If you did receive a gift or service, you’ll need to subtract its value from the amount you contributed.) “The IRS is really focused on charitable contributions lately, so you definitely want to have that documentation in order,” says Julius Green, the tax practice leader for the Philadelphia office of accounting firm ParenteBeard.
10. Leaving money on the table at work. Not all important tax decisions get made during filing time. It’s equally important to make sure that you’re withholding the proper amount for taxes at the office, and fully taking advantage of any tax-advantaged benefits, such as 401(k) contributions and flexible spending accounts (for health care, transportation, and dependents). Properly using such benefits can lower your taxable income, save you money, and - in some cases - even move you into a lower tax bracket.
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