We know why you’re here.
It’s OK – fearing tax season is perfectly reasonable because when it comes to deductions, credits and filing status, there’s a lot to learn – and mess up. (Don’t shoot the messenger! Write to Congress!)
Our goal is to keep you far away from IRS auditors, while making sure that you pay as little as (legally!) possible. We’ve broken down the top mistakes you should avoid point by point–translated from IRS speak–so you can sleep soundly at night.
1. Don’t … Keep Poor Records
Unless you have devastatingly simple finances (no real estate property, one salaried job, simple or no investments, etc.), then you’ll need to keep yourself organized for tax season, so you’re not left scrambling to find documentation or fudging the numbers on your return–that can set you up for an audit!
What to do: Make sure you have easy access to all of these records from the past year:
- Government confirmation of your return and refund from last year. Order a return transcript from the IRS.
- Records of charitable donations, including receipts. Charitable organizations often send out a year-end summary of how much you donated. If yours doesn’t, contact them to request a receipt or use bank statements or cancelled checks.
- Large medical or dental bills
- Records of business or job hunting costs
- Forms from your job(s) showing how much income you’ve made. You can request documentation of your salary from your HR department, if they haven’t sent it to you already. (If you have a full-time job, that will be your W-2. If you freelance, you’ll need 1099s from each client.)
- Purchases, sales and improvements to real estate property
- All actions in your investment and IRA accounts. Most online brokerages will keep records for you–just log in to download your documents.
2. Don’t … Pay for an Accountant You Don’t Need (or Fail to Get One When You Should)
If you have simple finances–you are a salaried employee, and don’t hold complicated or high volume investments, for example–all you need is a couple of hours to do the job yourself through an online filing program. (Bonus: You’ll save yourself a few hundred.) But if your finances are complicated, you risk losing out on deductions and credits that could make paying a professional worth it.
What to do: If you think that you should probably have an accountant, ask friends and family for a referral or visit AICPA.org to search for an accredited accountant. Just be aware that you may be charged more for a rush job.
3. Don’t … Choose the Wrong Filing Status
Your filing status (single, married filing jointly, married filing separately or head of household) determines how you treat many tax decisions, such as what forms you’ll fill out, which deductions and credits you’ll take and how much you will pay (or save) in taxes. Select the wrong status, and it will trigger a cascade of mistakes–maybe even an audit. On top of that, if you decide to file jointly with your spouse, this means you’re responsible for any errors or deliberate falsehoods on your partner’s return, so make sure that you’re comfortable with what it says.
4. Don’t … Declare the Wrong Income
If you’re making tips, it’s tempting to shove that cash into your bank account, and pretend it never happened. But that can easily lead to an audit and penalties, especially when the IRS sees that something isn’t quite adding up in the numbers. (Living on $20,000 in base wage, while working at a bar? Hmmm.) If you’re a freelancer, anything you make over $600 will be declared by the company that you did the work for to the IRS, so you can’t wiggle out of that, either. Finally, if you make interest on investments, your brokerage will inform the IRS of your earnings.
What to do: Keep careful records of all income, including tips and payment for freelance work. Learn more about taxes for freelancers. If you’ve already filed, and want to add in income, file an amended return.
5. Don’t … Neglect to Itemize When You Should
You could take the standard deduction, which is $5,590 ($11,900 for couples filing jointly) for the 2012 tax year. But if you think that your total deductions will amount to more than that, you can itemize or list out all of the deductions that you’re taking. This could add up to thousands in tax savings.
What to do: Take our itemizing quiz. If you’ve already filed, and want to itemize, file an amended return.
6. Don’t … Make a Mistake in Claiming Dependents
This is an especially tricky category for divorced parents or those who take care of relatives. But it’s important because it determines what exemptions you can take, along with other important tax decisions and savings. A dependent is a child who has lived with you for more than half the year, and for whom you provide more than 50 percent of financial support. Or it can be a relative you’re supporting financially who is not earning more than $3,800 in income.
What to do: Get familiar with the definition of a dependent.
7. Don’t … Get Grabby With Deductions
We’re all for claiming what’s rightfully yours. But if you’re saying that you donated a car worth $15,000 to charity, and it’s really a 1995 Honda Accord, or you’re declaring a beach vacation as a business expense, that will set you up for an audit. (Find out what other sketchy deductions will get you audited.)
What to do: Get familiar with the kind of deductions you can take, and what they require.
8. Don’t … File on Paper When You Don’t Have to Do So
E-filing can save trees, time and money for the IRS–and for you. If you use tax software, the forms you need will be built right in, and if you’re owed a refund, you’ll get it faster. However, you must file a paper return if:
- You’re married, but filing a separate return, and you live in a community property state
- You are claiming a dependent who has already been claimed by someone else
- You are filing forms that require paper documentation. For example, the first-time homebuyer credit requires paper filing
What to do: If you need to file a paper return, check out our guide to IRS forms, which will tell you which ones you need for your specific tax situation. Then read our instructions on how to file.
9. Don’t … Forget to Pay on Time–Even if You Got a Filing Extension
If you just won’t be able to file your taxes on time, the IRS understands. (Their reputation for fierceness is a bit overblown.) You can file an extension for the paperwork, which we tell you how to do here. But, if you get an extension, you can’t put off paying the taxes you owe. You must pay what you estimate you owe. If you just don’t have the cash to cover your tax bill, there are plenty of options, ranging from using your credit card (only for low tax bills!) to setting up a payment plan. Find out what to do if you can’t pay.
10. Don’t … Get a Rapid Refund
While refund anticipation loans are on their way out due to a new, stringent set of regulations, if you work with a tax preparer–especially a small one–you still might be offered a rapid or instant refund. (This would appear as an offer to get your refund back the same day. Getting offered to get your refund back faster, as in a week from now, is OK.) Do not take it. This “refund anticipation loan,” as it’s called, is actually a short-term loan—one that likely has a predatory interest rate that will take a big chunk out of your refund. Think $50 or more! Read more about rapid refunds.
This piece originally ran on Learnvest.com .