With a month left before tax returns are due, American taxpayers need to file their returns quickly -- and correctly, if they want to maximize their tax savings and avoid a rejected return or, even worse, an audit. With that in mind, we asked our tax experts to tell us the biggest mistakes people make on their taxes each year. Here's what they had to say.
Though they may seem easily avoidable, simple mathematical and typographical errors cause a lot of tax audits and rejected returns.
One of the easiest ways to mark your return for close scrutiny is to write down information that doesn't match the information on the forms the IRS receives from other sources, such as W-2s from employers. If the numbers don't match up, it's a big red flag.
When you type in your income, deductions, and other dollar amounts on your tax return, double-check your math. For example, if you paid tuition at two colleges and the amounts were $2,100 and $2,400, respectively, and you accidentally input the total as $4,600 because you added quickly in your head, it could catch the attention of the IRS' automated systems when they compare your numbers to the information sent by the colleges.
Make sure you don't rush and input your information wrong. If you earned $3,000 in dividend income this year, don't rush and type in $300. Not only will this almost certainly trigger an audit, but you'll end up owing more taxes once the error is corrected.
Simply put, the best way to avoid errors is to take your time and carefully check all of your calculations and entries. It's easy to miss a small error that could lead to big headaches down the road.
One common mistake people -- particularly investors -- make on their taxes that can lead to an audit is not submitting all their tax forms.
Employers and other income providers send the IRS the same tax forms they send to you, so if you do not submit all those forms to the IRS as well, that can easily trigger an audit. Most people should already have the necessary tax forms for 2014, as W-2s and 1099s must be issued by Feb. 2.
However, if you're invested in a partnership, know that partnerships have until March 15 to send out K-1 forms, which declare income from partnerships.
Regular investors will get K-1s if they own:
- Master limited partnerships, or MLPs, which include pipelines, refineries, and other large, infrastructure-related businesses.
- Other types of partnerships such as limited partnerships, which include many private-equity funds and hedge funds.
- Exchange-traded funds that are organized as limited partnerships. Note that this is uncommon and is generally limited to commodity ETFs and currency ETFs.
If you already submitted your taxes without all the necessary tax forms, you'll have to file an amended tax return or risk an audit.
One particularly harmful mistake people make on their taxes is not to take full advantage of all the deductions and credits they're eligible to take. By doing so, you can miss out on tax savings that would reduce your bill or get you a bigger refund.
Admittedly, if you're only going to get a $5 tax break by spending hours to fill out a specialized form, then it's probably not worth the bother to do so. But many people give up deductions and credits that could add hundreds or even thousands of dollars to their refunds because they fear that they'll get audited. For instance, many experts identify the home office deduction, the Earned Income Tax Credit, and charitable contributions as areas in which the IRS focuses its efforts to detect fraudulent activity. If you deserve those tax breaks, though, you shouldn't let unwarranted fear of an audit prevent you from claiming them.
Instead, what you should do is make sure you have the documentation you need to back up taking those tax breaks on your return. In many cases, all it takes is an awareness of the requirements for claiming a deduction or credit. With charities, you might need written acknowledgement of your donation or even an appraisal for certain large gifts. Whatever the requirements are, though, they're rarely so tough that it justifies giving up the tax break just to avoid them.
The biggest "mistake" people make on their taxes doesn't happen when they file their taxes, but rather when they fill out their Form W-4 with their employer. This is the form that determines how much your employer will withhold from each paycheck for federal income taxes. For example, someone who's married with two kids at home might fill out the form as "single" with zero personal allowances, resulting in higher withholding than their likely tax bracket and deductions should require.
In this case, you will get a refund at the end of the year, but all you've done is give the federal government a no-interest loan, with essentially no real benefit to yourself or family. I know a lot of people use a higher tax withholding as a sort of "forced savings," but there's almost no reason to do it this way. A better idea? Fill out your W4 based on your actual tax situation and have the extra money in your paycheck deposited automatically into a savings or investment account.
Instead of essentially using the government as a zero-interest savings tool, put it to work earning interest for you and your family every payday.