Thirteen all-too-common tax mistakesPublished:
Planning on doing your own taxes this year? Here are some mistakes you don’t want to make, unless you want Uncle Sam knocking on your door.
NEW YORK (MainStreet) — You have your no. 2 pencil, a calculator and this year's W-2. Now what?
That's the thought that crosses many self-preparers' minds as they get ready to tackle their taxes. Veteran CPA Steve Duben says it's a tale as old as time. "The truth of the matter is that the law is complex and not easy to understand," Duben said. "The IRS claims that the average tax return self-prepared will take an individual 21½ hours to complete. This includes information gathering and understanding and preparing the return."
If you're willing and able to put in the time and effort to prep your own taxes this year, here are some of the most common (and unfortunately, the most common-sense) tax mistakes that filers make year in and year out.
Using the wrong Social Security number
When you file, don't forget to double-check the form before you submit it by mail or online. If you've accidentally switched two digits in your Social Security number, you could be facing trouble down the road.
Not turning in your W-2
This is a definite "d'oh" moment. Although the most obvious of all of the mistakes we've listed, this error could be costly.
Duben says this simple error could waste a lot of time. "[It] will cost additional taxes plus interest and possibly penalties. If a taxpayer is waiting for a refund [it] can delay the refund for as long as it takes to correct the error. I have seen cases where it takes over a year to get things corrected."
Your W-2 is incredibly important. Don't spend the time and effort to do your taxes only to find that you forgot to send in the paperwork.
Mixing up years
Want to deduct moving expenses from when you switched jobs and moved to New York? Great, but didn't that happen right before New Year's Eve in 2009? Sorry, that's not deductible.
Duben says "Any deduction to be deducted on an individual’s tax return needs to be paid (or charged on a credit card) during the tax year."
Next time, wait until Jan. 1 to book that flight.
Paying for other people's expenses
Even if you're a nice person, the IRS doesn't really care.
"Some taxpayers consider payments of expenses for another as their expense. The law only allows one to deduct his/her expense," Duben says.
Nice guys really do finish last.
Confusing deductions and credits
Tax terminology is a mixed bag of letters and numbers: 1099, 1040, W-9 and W-2 are just the basics. So it's easy to see how some filers mix up deductions and credits.
"Deductions reduce your taxable income, which is the number you have to calculate before figuring out your actual tax liability. Credits are a dollar for dollar reduction of your tax liability," says Wray Rives, CPA.
To give you an idea of how fatal this error can be, Rives says a good example is education expenses.
"There are two tax credits available to certain taxpayers who pay for college education expenses. If you qualify these credits can reduce your tax liability by as much as $2,000. Individuals may also qualify for an itemized deduction of up to $4,000 for certain expenses for college tuition and fees. I often talk to people who confuse the two and you can't take both the credit and the deduction for the same expenses."
Claiming a "dependent"
With so many "boomerang" kids coming home to live with mom and dad, it's no surprise that the definition of a "dependent" is very important this year.
If you want to claim a dependent on your taxes this year, but you aren't sure if the person fits the definition, make sure you visit the IRS Website or ask a professional tax preparer. The IRS site has a really good tutorial on the ins and outs of who counts as a dependent.
Forgetting to keep track of charitable giving
Receipts, receipts, receipts. We can't say it enough. When it comes to tax time, good record-keepers will win.
As Duben explains, "Contributions over $200 require a letter from the charity to substantiate the deduction. Contributions in which something is received such as a dinner or merchandise can only be deducted to the extent the contribution exceeds the fair market value of goods or services received."
So, if you won a pair of tickets to the Super Bowl at a blind auction for charity, but only paid $20 for them, you're out of luck (and a deduction). Then again, you do have Super Bowl tickets.
Trying to deduct your "time donation"
Doing PR for a charity if you're a PR professional is a really good deed, but it's still not tax deductible.
Duben says that donating your own time doesn't create a deduction for the value of the time donated. So, if you normally charge $60 an hour for your PR services and worked for 15 hours for the charity, sorry, but you can't take $900 off of your taxable income.
Not taking a reimbursement, then wanting to deduct it
Say your employer offers to reimburse you for the conference you attended, but you turn it down because you'd rather have the deduction. Oops, not a good move.
"Employee-related expenses can be deducted if they are related to employment, required by the employer and not reimbursed or reimbursable. Not claiming a reimbursement from the employer if it is available does not create a tax deductable expense," Duben said.
Forgetting to report all income
Did you do some freelance work while you were looking for the dream job you finally landed in September? You still need to report that income in your return.
"Some taxpayers feel that if they did not get a 1099 form then they do not have to report income received," Duben said. "The IRS has a long arm and seems to know what was and was not reported. To avoid this take your time and review all sources of income."
What's the penalty if you don't report all income? Duben says "The cost, besides the tax, will be interest at 6 percent per year and penalties of up to 20 percent."
Deducting mileage without records
If you use your vehicle for business, you can deduct your mileage on your tax return, but make sure you've kept adequate records. If your log isn't exact, the IRS is not going to be happy.
Duben says it very simply: "Auto mileage needs to have a log to substantiate the amount claimed."
Rushing to file your return
There will undoubtedly still be a line at the post office on tax day. Ryan Himmel, a CPA and founder of online marketplace for professional tax advice BIDaWIZ.com, says that filing late has its consequences.
"Many think, 'I'll complete my tax return and if there is an issue I'll just amend it later.' Mistake. An amended return is more likely to raise a red flag from an audit perspective than filing an extension. It is better to file an extension if you are not done than file your return and plan to amend it later. Also, if you file a tax extension, don't forget that you still owe your estimated tax liability. A tax extension doesn't mean that you can delay your payment to the IRS."