With the tax filing deadline rapidly approaching, countless Americans are already scrambling to gather their paperwork, dig up receipts, and get their returns in on time. If you're filing your taxes, we have some last-minute tips that can reduce what you owe the IRS and put more cash back in your pocket. From credits to deductions, we'll show you how to avoid audit trouble while maximizing your tax savings.
1. Report all of your income
One of the easiest ways to wind up on the dreaded IRS audit list is to hide the extra income you collect throughout the year. Any time you receive income, whether it's payment for a freelance job, a dividend check, or interest from your bank, you're required to report that income and pay taxes on it. In fact, you should receive a 1099 form from each issuer that pays you, and once you get those documents, make sure the information you enter on your return matches what's on each form. Because 1099s are also filed with the IRS, it's important that your numbers match what the agency is seeing. If they don't, you stand a good chance of getting audited.
2. Know your tax credits
Unlike tax deductions, which simply exempt a portion of your income from taxes, tax credits work by reducing your tax liability dollar-for-dollar. In other words, a $1,000 tax credit means you get to automatically deduct $1,000 from your tax bill in full. As you get ready to file your return, take some time to read up on the various tax credits out there. There are tax credits geared toward parents, students, and low earners that can add up to huge savings -- provided you know when to claim them.
3. Don't guess at deductions
Tax deductions can save you money by excluding a portion of your income from taxes. There are numerous deductions available to tax filers, including the mortgage interest deduction, medical expense deduction, and deductions for charitable contributions. And while you absolutely should claim as many deductions as possible, you'll need to first check your records and make sure your numbers are 100% accurate. If, for example, you can't remember how much you spent on medical costs and guess at $10,000, that could raise a red flag. After all, what's the likelihood that your expenses for the year magically worked out to such a nice round number? You're far better off combing through your bank and credit card statements, adding up what you spent, and calling providers if necessary to fill in the remaining blanks.
4. Contribute to last year's IRA
If you failed to put money into an IRA last year, here's some good news: It's not too late to make a contribution that counts for the 2016 tax year. In fact, you have until the April 18 tax filing deadline to contribute to the previous year's account, and if you max out a traditional IRA, you could shave well more than $1,000 off your tax bill. Currently, workers under 50 can contribute up to $5,500 annually to an IRA, while workers 50 and older can contribute up to $6,500. If your effective tax rate is 25% and you hit that $5,500 limit, you'll benefit from $1,375 in savings.
5. File electronically
Math errors can happen to the best of us, but if your return contains a major mistake, it could get you audited or cause your refund to be delayed. In 2014, the IRS identified almost 2.3 million math errors from the previous year's returns. But if you file your taxes electronically, you're less likely to make a mistake. Though the error rate for paper tax returns is estimated at 21%, it's less than 1% for electronically filed returns. And, if you make less than $64,000 a year, the IRS lets you file electronically for free.
As you gear up to crank out your taxes, be sure to leave yourself enough time to review your documents and check your numbers -- even if you are submitting an electronic return. The less stressed you are going into the process, the better equipped you'll be to follow these tips and benefit from the tax savings that go with them.