With April 15 on the horizon, it's time to start thinking about your 2014 federal tax return. While figuring out their deductions and credits and gathering all of their documentation, Americans make some simple and common mistakes that cost them money and lead to audits.
We asked three of our experts for a common tax mistake that is easy to avoid, and here is what they had to say.
Too many taxpayers don't take advantage of all the deductions and credits available to them. This is especially true of taxpayers who take the standard deduction and taxpayers whose incomes are so low they aren't required to file a return.
Intuit's TurboTax publishes a list of its 10 most overlooked tax deductions, some of which could be worth thousands of dollars to those who are eligible.
For example, many people know they can deduct their state income taxes on their federal return. However, most people don't know you have the choice between that and your state sales taxes. This could be huge, particularly if you live in a state with no income tax.
The deduction for moving expenses is another big one. So long as you moved a certain distance from your old home and started a new job after you moved, you should be able to deduct the related expenses.
Further, the Earned Income Tax Credit is overlooked by up top 25% of the taxpayers who are entitled to it, according to the IRS. Many people who qualify simply don't know about the credit or don't file a return because their income is below the requirements. However, the EITC can be worth up to $6,044 to families.
The bottom line is to do your homework and find out which tax deductions and credits you may be entitled to. You wouldn't just give away thousands of dollars out of your wallet, so why give it away when filing your taxes?
One mistake many taxpayers make is neglecting to include every bit of income that is reported on the tax forms they receive from their employers and financial institutions. In some cases, taxpayers file as early as possible and then later get another tax form in the mail. If that amount is small, there's an obvious temptation to simply ignore the additional amount of taxable income, rather than going to the trouble of amending your return. Moreover, some tax forms contain errors, especially when financial institutions are dealing with complicated investments that make accurate tax-reporting tougher. Given how difficult it is to get brokers and banks to issue amended information returns, many taxpayers just make corrections themselves.
The problem with this strategy is that the IRS' computer systems automatically calculate figures based on the data the agency gets from information returns (i.e., the forms that employers and financial institutions send to the IRS) and compares it to what you include on your return. Discrepancies can trigger audits, especially if you do not mention a particular item or type of income on your return. If you have paid the incorrect amount of tax, then you can end up paying interest and penalties as well.
As annoying as it is, it's important to deal with the tax forms you receive. If they need corrections, going to the trouble of getting them fixed at the source can save you a lot more trouble in the future.
One common tax mistake that is easily avoidable is neglecting to keep records and receipts.
If you claim the standard deduction, you should keep your records for three years after you file. If you itemize tax deductions, the IRS recommends that you keep records and receipts supporting your tax deductions for about six years after you file. If you file a fraudulent return, the IRS recommends that you keep all relevant records indefinitely -- but of course, the IRS also suggests that you never file a fraudulent return.
If you are audited and you do not have receipts, that lack of documentation means the IRS will likely disallow the deductions you are unable to support, meaning you could owe thousands in back taxes.
These records and receipts include, but are not limited to:
- Filed tax returns
- Charitable donations. You must keep receipts, make sure they come from qualified tax-exempt charities, and get a qualified appraisal if you are making a noncash donation of more than $5,000. Read more here.
- Mortgage interest payments
- Educational expenses
- Medical and dental expenses
- Nonreimbursed business expenses
- Tax preparation fees
- Any records connected to assets you own and have not yet disposed of in a taxable disposition.
If you haven't already, it's worth taking the time to set up your own system to collect and organize your receipts. Don't wait until the IRS forces you to do so.
Dan Caplinger has no position in any stocks mentioned. Dan Dzombak has no position in any stocks mentioned. Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.