Ask pretty much anyone who's on the hook for taxes, and he or she will tell you that paying the IRS is a drag. But if you're not careful this year, you may find that taxes are even more of a burden than you'd expect them to be. Here are a few tax mistakes that could come back to haunt you in 2020.
1. Not adjusting your withholding if you've been underpaying the IRS
One important facet of the 2018 tax code overhaul was lowering most individual tax brackets to put more money into workers' paychecks during the year. In conjunction with that change, the IRS issued new withholding tables that told employers how much tax to hold back from workers' earnings. Many workers have since seen their weekly, biweekly, or monthly paychecks go up. But those who haven't adjusted their withholding could be in for an unpleasant surprise during tax season -- owing money to the IRS for having too little tax taken out during the year.
If you owed money on your 2018 tax return but haven't since adjusted your withholding, then it pays to redo your W-4, which your employer should be able to provide you with. That way, you're less likely to land in a scenario where you can't pay the IRS the taxes you owe.
Keep in mind that if you first adjust your withholding now, it'll impact your 2020 taxes; it won't help with your 2019 return, which you'll file this year. But it's still worth doing if you haven't looked at your withholding since the 2018 tax changes took place.
2. Not keeping solid records of business-related expenses
One benefit of being self-employed is getting to deduct the expenses you incur in the course of earning money. But if you don't keep accurate records of your spending, you'll risk shorting yourself on deductions you're entitled to, or claiming the wrong deductions and subjecting yourself to an IRS audit.
With the new year just kicking off, you have a prime opportunity to get organized on the record-keeping front. Find a system that works for you and start logging everything from the cost of business equipment and supplies to mileage on your vehicle, which is deductible when you drive for work purposes.
3. Not paying taxes on side hustle income
Side gigs are fairly common these days, but often, the money you earn from them won't be taxed up front. That's because that work is generally done on a freelance basis, which means you're the one responsible for giving the IRS its share of your earnings. If you don't pay the IRS as you go, you'll risk costly penalties come tax time, so rather than let that happen, plan to make estimated quarterly tax payments in April, June, and September of this year, and January of 2021.
At the same time, work those taxes into your budget. If you earn an extra $300 a month from a second job, don't spend it all when you'll likely need to give the IRS a large chunk of it.
4. Failing to capitalize on tax-advantaged savings plans
There are a number of tax-advantaged savings plans out there that allow for tax-free contributions. Popular retirement accounts like traditional IRAs and 401(k)s let you set pre-tax dollars aside for your golden years, while health savings accounts (HSAs) let you allocate pre-tax money for healthcare expenses.
If you don't take advantage of these accounts, you'll miss a solid opportunity to lower your taxes, so if your employer offers a 401(k), sign up. And if that's not an option, open an IRA independently. HSA eligibility, meanwhile, hinges on being enrolled in a high-deductible health insurance plan, but if yours qualifies, then it pays to start making contributions. Any money you put into one of these accounts is income the IRS can't tax you on, so there's big savings to be reaped.
5. Not lining up tax help in advance
The tax code is complicated, and if your personal situation is at all complex -- say, you've recently started a business or pay taxes in multiple states -- then it could pay to enlist the help of a tax preparer to ensure that you file your return correctly and don't miss out on important tax breaks. But the longer you wait to find the right person to do your taxes, the more likely you are to get closed out. Tax professionals tend to be extremely busy from late January on, so get moving if you're hoping to outsource your return this year.
You never know when a seemingly innocent tax mistake could hurt you financially. Steer clear of these blunders to avoid problems with the IRS and, ideally, save yourself a chunk of money in the process.