Tax law in the U.S. is confusing, and mistakes unfortunately can come at a big cost. When you miss out on valuable tax breaks and pay more than you need, you could end up wasting hundreds or even thousands of dollars -- and you can't afford these expensive errors. To help you out, here are three costly tax mistakes you'll definitely want to avoid.
1. Failing to take advantage of accounts that provide tax breaks
Did you know you could save a fortune on taxes just by investing in your own retirement or investing to cover your healthcare costs? There are a number of tax-advantaged accounts you could potentially contribute to in order to slash your tax bill, including a 401(k), an IRA, and a health savings account (HSA).
For 2019, you could contribute up to $19,000 to a 401(k) if your employer offers one. If you're 50 or over, your maximum contribution is $25,000 thanks to an additional $6,000 catch-up contribution. And, if neither you nor your spouse has a workplace retirement plan or if you're below income limits, you could make up to a $6,000 IRA contribution -- or a $7,000 one if you're eligible for catch-up contributions. Contributing to these accounts reduces your taxable income, saving you the money you'd otherwise have owed on that income.
If you have a qualifying high-deductible health plan, it's also possible to contribute to a health savings account. You could contribute up to $3,500 if you have individual-only coverage, or $7,000 if you have family coverage on your insurance. These contributions are meant to cover healthcare spending with tax-deductible funds, but you can also choose to leave the money invested to grow -- and, once you hit 65, you can withdraw the funds for any reason.
Other accounts also provide tax breaks, such as Simple and SEP IRAs if you're self-employed, or Roth IRAs, which you contribute to with after-tax funds but allows tax-free growth. For most people, though, contributions to a traditional IRA, 401(k), and HSA are the simplest and easiest ways to score up-front tax breaks for the current tax year.
2. Not keeping track of deductible expenses
If you run a business or own rental real estate, you have lots of potential deductions you could take for expenses associated with running your business or managing and maintaining your property. If you aren't a landlord or business owner, you may still have some deductible expenses.
In 2019, for example, if your medical expenses exceed 10% of your income and you itemize deductions, you can deduct some of the costs incurred for your care. If you donate to a charity and itemize, you can also take a deduction. For itemizers, deductions are also available for state and local taxes, including sales tax or income tax, and for mortgage interest you pay. And, even if you don't itemize, you can deduct for student loan interest as long as your income isn't too high and you meet other IRS requirements.
It's imperative you keep track of any expenses you incur that could potentially earn you tax breaks. You can learn about common tax deductions here to see if you may be eligible for them. If you are, be sure you keep all your receipts!
3. Messing up the math on itemized vs. standard deductions
Speaking of deductions, you have two choices when it comes to the deductions you're eligible to claim. You can itemize, which means deducting for specific things including mortgage interest and local taxes paid. Or, you can claim the standard deduction instead.
The standard deduction is a flat amount that's based on your tax filing status, and it's not related to any expenses you incur. In 2019, the standard deduction is $24,400 if you file as married filing jointly; $18,350 if you file as head of household; and $12,200 for other tax filing statuses. If your itemized deductions don't add up to more than the standard deduction, claim the standard deduction instead for a bigger tax break.
Don't make these expensive errors when dealing with the IRS
Avoiding these costly tax mistakes can keep more money in your pocket where it belongs. Be sure to keep track of all of the different tax breaks you could be entitled to and, if you're not sure what deductions you could be eligible for, look into getting free or paid tax help ASAP. The cost of an accountant can be well worth it to avoid big IRS penalties for not doing what's required as a taxpayer.