Taxes are unavoidable. When you earn money, the IRS wants a piece of it, and the more you earn, the higher a percentage of your income the agency takes. But if you manage to avoid the following mistakes, you may succeed in keeping a bit more of your earnings for yourself -- and avoiding problems that cost you money and cause you stress.
1. Passing up credits you're entitled to
Tax credits serve the very important purpose of lowering your tax liability on a dollar-for-dollar basis. There are a number of lucrative tax credits you may be eligible for, and if you don't claim them, the IRS won't hunt you down begging to take that money. That's why it pays to put yourself in a position where you won't miss out on credits you're entitled to -- namely, by filing your taxes electronically (today's software will prompt you to claim credits that may apply to you) or hiring a tax professional to complete your return for you.
2. Not filing and paying your taxes on time
Most years, taxes are due on April 15, but this year, because of the COVID-19 crisis, the deadline to both file a tax return and pay the IRS any money you owe has been pushed back to July 15. But if you owe money and don't file a return by that date, you'll face a failure-to-file penalty equal to 5% of your unpaid tax bill for each month or partial month your return is late, up to a total of 25%. Furthermore, if you don't pay your tax bill by July 15 this year, you'll face a late payment penalty equal to 0.5% of your tax debt for each month or partial month it's unpaid, up to a maximum of 25%.
If you owe the IRS money and can't pay it by July 15, at least make sure to get your return in on time to avoid the failure-to-file penalty. And then, reach out and ask to get on an installment agreement to pay off that debt over time.
Keep in mind that if you don't owe money to the IRS, you won't be penalized for submitting your taxes late. But what you will do in that case is delay your refund.
3. Hiding income you earned
When you earn money outside of your regular salary, it can be tempting to keep that income to yourself. After all, how will the IRS know if you did freelance work for the occasional client? But actually, every time you earn $600 or more from the same company in a given year, you get a 1099 form summarizing that income. And guess what? The IRS gets a copy as well. If you tear yours up and avoid reporting that income on your tax return, the IRS will know you're lying. And that's a good way to get your taxes audited.
Losing money to taxes is hard enough, so the last thing you want to do is make a mistake that could cost you even more. Avoid these blunders, and you'll be less likely to run that very risk.