You may not put a lot of thought into taxes until you sit down to file a return. But the truth is that the more strategic you are on the tax front, the more money you stand to save yourself. Here are a few common tax mistakes that are easy to fall victim to -- and that should you make every effort to avoid.
1. Not keeping track of deductible expenses
The standard deduction has gone up in recent years, which had led fewer filers to itemize on their tax returns. And if you're not itemizing, you generally don't need to retain receipts for charitable donations, medical expenses, or other deductible items, since taking the standard deduction doesn't require you to account for those costs.
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On the other hand, if you are planning to itemize on your tax return -- which could easily make sense if you're a homeowner who pays a lot of mortgage interest and property tax -- you'll need accurate records of your spending to ensure that you claim the right deductions, so be vigilant about filing receipts throughout the year. A good bet, in fact, is to take pictures of your receipts and store them electronically, since physical receipts can degrade over time.
2. Not paying taxes on your side income
These days, millions of Americans hold down a side hustle on top of a full-time job. But any time you earn money, the IRS is entitled to a piece of it, which means that if your second gig earns you $1,000 a month, you're required to submit a portion of that income to the IRS as you go, assuming you don't have tax withheld from the start (which will be the case if you're doing that work as an independent contractor).
Also, you can't just wait until you sit down to file your tax return to make the IRS whole. The agency wants its money as you earn it, and if you don't pay taxes on your side income throughout the year, you may be liable for penalties on your underpayment. As such, be sure to make estimated quarterly tax payments on those earnings to avoid problems.
3. Not contributing to a tax-advantaged savings account
There are a number of savings accounts out there that allow you to contribute money on a pre-tax basis. That sum you put into one of these accounts is earnings the IRS can't tax you on, so if you're not currently participating in a traditional retirement savings plan, like an IRA or 401(k), you're losing out on an opportunity to shield some income from the IRS (not to mention accumulate wealth for your golden years).
The same holds true for health savings accounts, or HSAs. These accounts let you contribute pre-tax dollars to pay for qualified medical expenses, and because HSA funds never expire, they're an extremely flexible savings tool. The only catch with regard to HSAs is that not everyone is eligible to fund one -- you can only participate in an HSA if you're on a high-deductible health insurance plan. But if you do qualify, it really pays to capitalize on that opportunity.
Most of us don't know the tax code inside and out, and that's OK. But it does pay to read up on ways you can lower your taxes, both now and in the future. And if you avoid the above mistakes, your finances are apt to take a turn for the better.
