In the few minutes that it takes to read this short list of common mistakes, Uncle Sam will have collected millions of dollars. Taxes act as a headwind against your financial future. Families raising children feel the pressure of tax obligations on their budgets. Investors growing assets to fund retirement feel the tax resistance to growth. Businesses expanding must allocate precious dollars to taxes instead of new buildings or equipment. The more we make, the more we grow, the more we struggle against the tax headwind.
At ETS, we have the opportunity to help our clients reduce tax liability through planning and consultation. We also see opportunities to lower taxes lost because taxpayers make the following common mistakes:
Not Taking Advantage of Traditional IRA Deductions
Here’s a “mistake” that you can retroactively use to lower your taxes in the previous year. Plus, it also boosts your retirement savings! If you have a 401(k) at work, you can also contribute to your retirement savings in a traditional IRA and get a tax deduction if your income falls under the income limits. So let’s say that it’s 2017, and you realize that you didn’t contribute the full amount allowed to you for your IRA for 2016. You can still make a contribution (before tax filing deadline) that will count for 2016, lowering your taxes for that year. Not taking advantage of available tax deferred retirement vehicles is a common mistake.
Neglecting to Tell Us about Life Changes
Although things that happen in your family life or your job may seem unrelated to your taxes, they can affect how much you owe. Maybe your parent has moved in and is now your dependent, or your kids just finished college. Maybe you lost healthcare coverage or you sold your home. Tell us what’s going on in your life instead of just bringing in a bundle of forms. For instance, if you’ve changed jobs or started a business, we could help you structure your compensation to maximize tax savings.
Not Filing on Time
While taxpayers might naturally be tempted to wait a few weeks after the deadline before filing, that decision could cost them. The IRS charges interest (compounded daily) at an annual rate equivalent to the federal short-term rate plus 3 percent on any unpaid taxes, starting from when payment is due until the payment is received. In addition to charging interest, the IRS also charges a penalty for filing late (5 percent of the amount owed for each month or partial month the payment is late, up to a total of 25 percent). Depending on the amount someone owes and how long he or she waits to pay, interest and penalties can mount up fast. Missing the filing deadline wastes your hard-earned money!
Waiting Until the Last Minute
This can be the biggest mistake for a taxpayer because it leads to making other mistakes. The rush to meet tax-filing deadlines shifts our focus to compliance and ensuring that you fulfill the basic tax requirements, rather allowing us time to seek additional ways to reduce your taxes through overlooked deductions. A little planning goes a long way. We send reminders all year and tax support documents well ahead of any deadlines. Take the hint and organize your tax information right away. Be first in line to file your taxes.
Failing to File
Yes, it seems silly to even bring this up. And yet, many people make this tax mistake. Even if you don’t owe taxes to the government, you are still required to file a return if you earned income. And what if you are due a refund? Bad news: Taxpayers forfeit refunds if they don’t file returns within three years.
If you have income and do not file a return, the IRS can file a return for you, assess tax without any deductions, and send you a bill. This is not a good strategy for families trying to get ahead or older taxpayers about to retire.
If you cannot pay the tax owed when you file the return, filing and negotiating a payment plan is a better strategy than not filing.
Omitting investment income, like interest, dividends, and capital gains, and non-employee compensation reported to the IRS on Forms 1099 leads to higher tax bills, penalties, and interest. The omission also increases the risk of audit. Make a list of income sources and report all income even if you do not receive a Form 1099 from the source.
Losing Record of Estimated Tax Payments
If you paid estimated taxes during the year, keep good records. When we must contact tax agencies to determine estimated taxes, your tax return filing may be delayed. This shifts our focus to compliance and away from finding ways to reduce your tax liability. The quality of your record-keeping could impact your tax liability.
With a little attention to detail and planning, you can avoid the common mistakes that wreak havoc on your tax bill. At ETS, we partner with our clients by proactively advocating for ways to reduce tax “headwind.”