Here at the Fool, we give out boatloads of tax advice. However, nobody's perfect -- not even our experts. We asked three of our tax experts to confess the worst mistakes they ever made when filing their taxes, and here's what they had to say. They learned valuable lessons from their mistakes, and hopefully you can, too.
The most annoying tax mistake I ever made was filing my tax return as early as I could, only to get updated information from my broker that contradicted what I had cited on my return. For that tax year, I had a lot of money withheld from my paychecks, and I wanted to file quickly to get my refund as soon as possible. Yet what I didn't realize was that brokerage companies, in order to meet February deadlines, often issue their 1099 tax statements before they actually have all the information they need to provide accurate information. As a result, when they get updated information later, they often send out amended 1099s with completely different information. That also changes your tax calculations, and while it's tempting to think you could just let it go, discrepancies between your return and the 1099 filings will raise a big red flag with the IRS.
In the end, I had to file an amended return that resulted in my having to pay some of that refund back to the IRS. Fortunately, I completed that before the April 15 deadline, so I didn't owe any interest or penalties on the newfound tax liability. Nevertheless, since then, I've always held off on filing until the last possible moment to ensure there are no nasty surprises from my broker -- and I've tried to set things up so I pay less during the year instead of having a big refund waiting for me.
My biggest tax blunder happened years ago, the first time I took over my personal tax-preparation duties from my father. I soon regretted my decision to do my taxes by hand. I learned the hard way that many numbers you enter on various lines of various schedules are carried over to other lines on other pages, and when you need to correct a number, you must find every place where it appears and change it there -- and then change any number that incorporates it.
Some people have tax few deductions or credits, so they might fill out a short-form return without too much trouble. But filing taxes can be confusing for many of us, especially if we want to take advantage of all the tax breaks available to us and be sure we're not botching the job. And it's no surprise that filing taxes can be daunting: The tax code has grown more complex over the years and was recently close to 4 million words long -- that's about 13,333 books, each 300 pages in length.
Thus many of us would do best to use tax-preparation software such as TaxCut, TurboTax, or H&R Block's (NYSE:HRB) software. Alternatively, consider hiring a good tax pro. That can cost several hundred dollars, but tax pros will do the heavy lifting for you, they know much more about the tax code and tax strategies than you do, and they can often save you much more than they charge. Choose one carefully, though, by getting references or seeking an enrolled agent, CPA, or tax attorney.
My biggest tax goof was forgetting that while you can make IRA contributions up until April 15 and still count them toward the previous tax year, contributions to 401(k)s and charities must be made by Dec. 31 of that tax year.
IRA contributions and HSA contributions are basically the only two moves you can make after Dec. 31 if you'd like to get the tax benefit for the previous calendar year's taxes. You can contribute up to $5,500 ($6,500 if you're aged 50 or older) to an IRA and claim a tax deduction for it. This year you must contribute by April 15 to get the benefit for tax year 2014. Last year the average American who contributed to an IRA got a $4,580 tax deduction for it.
Those numbers pale in comparison to the current maximum annual contribution of $17,500 allowed in a 401(k). With most employers offering matching programs, it is often better to contribute to a 401(k) than to an IRA. The rule to remember is that you must contribute to a 401(k) by the end of the calendar year.
Most other actions to receive tax deductions and tax credits must also be done before the end of the calendar year. This includes, but is not limited to:
- Selling a stock at a loss in order to claim capital losses
- Giving tax-free gifts up to $14,000
- Contributing to a 529 (depending on the state)
Don't make the same mistake I did. Put a reminder on your calendar now to go through all the various tax deductions and make sure you don't miss any for tax year 2015.