Common Mistakes to Avoid on Your Tax ReturnIncome Taxes
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Filing taxes can be incredibly complicated, and it’s easy to make a mistake that leads to a notice or audit. While some minor errors won’t lead to any significant consequences, it’s important to do everything you can to get it right the first time.
Things are even more complicated since tax laws change almost every year.
This article will cover some of the most common mistakes people make when filing their taxes. We’ll also explain how to avoid these errors and make sure you file correctly.
Keep in mind that specific requirements may vary depending on the forms you’re planning to use.
Failing to Report All Income
Reporting income is relatively simple for people who work a single full-time job and have no other earnings, but other types of income can be tricky. Failing to accurately report all sources of income is one of the most common errors people make on their tax forms.
People often assume that they only need to report their main earnings, but it’s crucial to report all income. There’s also a common misconception that you don’t need to report sources of income that total to under $600.
In fact, earnings need to be reported regardless of size.
Similarly, both earned and unearned income must be reported for tax purposes. The IRS will likely receive documentation of any earned income, so they’ll know if you fail to report it on your own tax forms.
These are just a few examples of the types of income that are easy to overlook when filing taxes:
- Gambling earnings
- Forgiven and canceled debt
- Distributions from retirement accounts
Not Filing Jointly
If you’re married, you can choose between filing taxes separately or jointly as a couple. This might sound insignificant, but filing jointly actually leads to a number of important tax benefits.
It’s almost always better to file jointly whenever possible.
Married couples get twice the standard deduction of single filers, giving you the same deduction regardless of how you file.
Furthermore, joint filers may be eligible for a variety of tax credits that can reduce their tax burden. The child and dependent care credit, for example, is only available to couples who file jointly.
The difference between filing separately and jointly is particularly relevant for couples with very different earnings. Combining both incomes into a single taxable income may help you reduce your effective tax rate.
Of course, filing jointly also makes it much easier to file taxes. If you do your own taxes, you’ll spend far less time preparing a single set of forms.
Similarly, you’ll save a significant amount of money if you file through an online service or with an account.
On the other hand, it may make more sense to file separately if you want to deduct medical expenses. These are only deductible if they account for more than 10 percent of your adjusted gross income, which will likely be substantially higher if you choose to file jointly.
Not Taking Advantage of Tax Credits
Some filers are eligible for additional tax breaks, but a surprising number of people aren’t aware of their potential savings.
Tax credits aren’t always advertised very clearly, so it’s easy to miss out on these benefits. You may qualify for a substantial reduction in your overall tax bill.
American Opportunity Tax Credit
The American Opportunity Tax Credit was created in 2009 to succeed the earlier Hope Credit. Single filers with a modified adjusted gross income of $80,000 or less can access the full credit, while that number rises to $160,000 for couples who file jointly.
Beneficiaries of the American Opportunity Tax Credit can receive as much as $2,500 per year for qualifying purchases. The credit applies to things like supplies and tuition, and you’ll need to be a part- or full-time student in order to access the credit.
Earned Income Tax Credit
The Earned Income Tax Credit, or EITC, is one of the most commonly ignored benefits in the American tax system. It’s intended for people who earn a moderate or low income, and it starts to have less of an impact as you earn more money.
As of the 2019 tax year (filing in 2020), you could receive a credit of up to $6,557 if you’re eligible for the Earned Income Tax Credit.
Like with other tax breaks, your specific credit will depend on a number of factors and could end up as low as $529. That range will rise to $538-$6,660 for the following tax year.
While both single filers and married couples filing jointly can access the credit, it isn’t available to couples who choose to file separately. This is one of the main reasons for couples to file jointly, so it’s worth taking the time to see whether you could qualify for the EITC.
In addition to specific income parameters calculated each year, there are a few other requirements to receive the earned Income Tax Credit.
You can’t report more than $3,600 in investment income, and you have at least some earned income for that tax year. People who file the Foreign Earned Income Exclusion can’t also receive the EITC.
Child and Dependent Care Credit
Childcare is one of the top expenses for many couples, and the Child and Dependent Care Credit can help you pay less in taxes on these costs.
The full credit is worth 35% of childcare expenses. It’s most often used for children, but you can also file for the credit if you take care of a dependent adult.
Unlike many other tax credits, the Child and Dependent Care Credit can be claimed regardless of income. That said, the credit begins to shrink as income increases, so it’s still more valuable to people with low- to moderate incomes.
You can claim a credit of up to $3,000 for one person or $6,000 for multiple people.
The Child and Dependent Care Credit is available to parents who take care of a child who is 12 or below at the end of the tax year. The child must be listed as a dependent on your tax forms.
Similarly, your spouse or another dependent may qualify, but only if they lived with you for more than half of the tax year.
Waiting Too Long
The most common tax mistake is also the simplest—too many people wait until the last minute to file their taxes. It’s important to take this seriously, as you’ll be responsible for interest payments if you fail to file and pay your taxes before the deadline.
If you don’t think you’ll be able to file in time, you can also file for an income tax extension. The IRS will let you file up to six months later, but you’ll still need to pay your estimated taxes by the standard deadline.
You can either file an extension yourself or use an online tax platform.
The tax code is far too complicated for the average person to fully understand, and even small mistakes can lead to significant consequences. It’s much easier to double-check the details now than it will be to correct any problems later on.
Keep these ideas in mind as you work on your taxes for the 2019 tax year.