Taxes can be boring and complicated, but they're also a part of life. Anyone who works has to pay them, and if you're not careful, you could wind up with a major problem on your hands. Here, in fact, are three major tax mistakes that could really come back to bite you.
1. Not checking or adjusting your withholding
Many tax filers got a big shock earlier this year when they submitted their 2018 tax returns and realized they owed the IRS money. The reason, however, likely boiled down to their failure to check and adjust their withholding.
As part of the 2018 tax code overhaul, almost every individual tax bracket was lowered as part of an effort to give workers access to their earnings sooner. So, many workers wound up underpaying their taxes during the year and owing money at tax season.
Now owing the IRS a bit of cash isn't a bad thing per se. If anything, it means you got to hang on to that money for longer. Things get problematic, however, when you owe the IRS a large sum at tax time and can't pay. At that point, you risk racking up interest and penalties, so rather than run that risk, take a look at how much tax you're having withheld at present, and consider claiming fewer allowances if you owed a chunk of money this past year.
2. Not keeping accurate records of your business expenses
If you own a small business or are self-employed, you're probably aware that there are certain expenses you can claim as deductions on your taxes. For example, you can write off the cost of equipment, work-related travel, and office supplies. But if you don't keep solid records of what those expenses are, one of two things will happen: You'll either risk losing out on deductions that could've lowered your taxable income, or you'll risk claiming erroneous deductions and potentially getting audited -- and caught -- after the fact.
Rather than let that happen, find a record-keeping system that works for you and stick to it. That could mean logging and then photographing all receipts to avoid losing them, or buying software that makes that process even easier.
3. Not contributing to tax-advantaged savings accounts
The more of your earnings you exempt from taxes, the less you'll pay the IRS. Therefore, if you have the option to contribute to a tax-advantaged savings plan, like a traditional IRA or 401(k) for retirement or a health savings account, passing that opportunity up is a decision you might regret.
For the current year, you can contribute up to $6,000 to an IRA and up to $19,000 to a 401(k) if you're under 50. If you're 50 or older, these limits increase to $7,000 and $25,000, respectively. Meanwhile, this year's health savings account (HSA) limits are $3,500 for individual health coverage, and $7,000 for family health coverage. If you're 55 or older, you get a $1,000 catch-up on top of whatever category you fall into.
Funding a traditional IRA or 401(k), or a health savings account, means the IRS can't tax you on the money you put in. Additionally, once funded, those accounts get to grow in a tax-advantaged fashion, which is why it especially pays to make those contributions.
Though tax season has long been over and won't kick in again for a good number of months, it's never a bad time to do some personal tax planning. This especially holds true if you haven't adjusted your withholding this year, tracked your business-related spending, or contributed to an IRA, 401(k), or HSA. And if you continue to neglect those items, you could end up very sorry once the 2020 tax season starts up.