Taxes are a very complicated subject not only for regular citizens but also for the tax professionals. There are just so many rules and so many books on the tax codes that it would be impossible for one person to keep up. This is probably one of the reasons that a lot of people really dread tax season especially if you know that you are owe taxes and you need to pay.
Preparing taxes are not that simple even if you are using the tax software. Most tax professionals nowadays are required to use a tax preparation software and file the returns electronically.Â The problem with a tax software is it the outcome depends on how you answer the questions. So if you answer it differently or you miss a question, there goes the mistakes. But don’t be alarmed as even tax professionals can make the same mistakes on your return. So the best way is to really know these mistakes and be prepared to double check the entries. Here are the 5 Most Common Mistakes Made on Your Tax Return
Entering Data Incorrectly
Data entry errors can happen both when entering information in the tax software and manual returns . These errors come in various forms and the most common are:
- Math Calculation Mistakes – According to the IRS, math error is the most common mistakes that people make on their tax return. Believe it or not, there are still a lot of people who are doing taxes themselves and completing their returns by hand. Examples of the errors made are incorrectly adding the W2, subtracting deductions, calculating credits and calculating refunds or payments.
- Incorrect Social Security Number – Often times, people may write the wrong social security number (SSN) on their tax returns. One common mistake is the numbers are Â interchange within your SSN or mistyping one digit. Another mistake that people make is interchanging two different SSN: this could be interchanging SSN of your spouse with your dependents. This could happen easily especially if the numbers are so close to each other. For example, if your family have just migrated from another country, chances are that the social security number of the family members are very close to one another. Because of this, there is a high possibility that you may interchange one SSN with another family member.
- Unmatched Names and Social Security Number – Another mistake that people make is using the name that is different from what you have reported on your social security. This is very common for the wife who have just gotten married and Â she has changed her last name to her husband’s with the local agency registrar or her driver’s license but forgot to change it with the Social Security Administration (SSA). You’ve got to remember that the names that you use on the tax return should be the names you reported with the SSA. This is because the IRS uses the SSA database to verify your social security number.
- Answering the questions incorrectly – Â Just because you are using the tax software does not mean that there are no more errors. Maybe the math calculation error will be minimized, but other errors could still occur.Â You’ve got to remember that tax softwares are completely dependent on you answering the questions correctly. The main problem with the tax software is it is if you miss a question or do not answer the question correctly, then the outcome will be different. You may or may not see the credits or deductions that you deserved or the calculation will be incorrect.
- Transferring the wrong amount from one schedule to another – If you are completing your return by hand, one of the most common mistake is transferring the wrong amount from one schedule to another. This can easily happen by putting the amount in the wrong line on your 1040 form or you may inadvertently use the wrong amount from Schedule A to your 1040 form.
- Incorrectly typing the wrong amount in the tax software – People can easily make an error when entering amounts in the tax software. Perhaps you may interchange the numbers or you may type an extra digit. For example, the amount on the Social security tax on your W-2 form is $400, and you inadvertently entered $4000. If you have a low income and qualified for the additional child tax credit, there is a high possibility that you may be getting a refund more than you’re supposed to.
Solution: You should always double check the entries and the calculation on the return even if you have to do it multiple times. The last thing that you want is the IRS holding your refund because of these errors!
Failing to Report All Income
If you worked for someone, even as a contractor, or have multiple savings account or bank account, chances are the company or bank institution will report your earnings to the IRS. The IRS matches those Â income to what you have reported on your tax return. Below are the most common errors:
- Not reporting all your W2 – There are some cases where people have multiple jobs or may have changed jobs during the year. You will need to make sure that you receive the W2 for each employer and you need to report each of those income on your return. If you did not receive your W2 or perhaps you may have lost it there are ways on how to obtain copies of your W2.
- Not reporting interest earned – Another mistake people make is failing to report interest or dividends earned on your tax return. Interest earned from your savings, checking, or even money on escrow are reported on your 1099-INT.
- Not reporting capital gains on stocks sold or dividend earned – yes, if you sold stocks and made money from it, you need to report the gains on your tax return. You should be receiving a 1099-B and 1099-Div and these forms should provide you information on how much the dividend that you’ve earned and the gains on the stocks that you sold. Please keep in mind that you are only reporting the gains on the stock that you sold! Yes, if your stock keeps going up but you have not sold anything, then there is no gain to report.
- Not reporting other income – this could be the sale of your car, home, and any other personal and real estate property. Please see the 10 Income Subject to Tax that you may not be aware of for other reportable income. For non-reportable income, please see 7 Income That You Think Are Taxable But Actually Are Not
Overlooking Tax Credits and Deductions
Another most common mistakes people make is overlooking the tax credits and deductions (such as itemized deductions or above-the-line deductions) on their return. This is very common if you are completing your own return by hand. That is why it is always good to invest by using a tax software, tax professional and even those free Â tax preparation service. The amount of money that you’ll spend is well worth it and is much less on the amount of refunds that you can potentially lose. The cost of the tax preparation service maybe $200 but if you do it on your own and you missed a $5,000 credit, guessed what, it just cost you $5,000 to prepare your return yourself. This is being penny wise but pound foolish!! Of course, you can always file anÂ amended tax return but if you do not know that you’ve made a mistake in the first place, then you would not know that you need to file an amended return! Got it!
Failing to File Taxes and Making Payment On time
One of the most common mistakes that people make is not filing taxes on time. If you owe taxes, you will need to pay the penalty for not filing and penalty for late payments.Â If you are expecting a refund, you do not have to pay any penalties as penalties are only applied on the amount that you owe and not on your refunds. But if you have a refund, wouldn’t you want to receive your refund right away so you can use it instead of keeping it with the IRS and earning 0% interest?
If you think that you’ll owe taxes but you are unable to file your taxes on time, you can alwaysÂ file an extension. However, an extension to file does not mean an extension to pay. You should still make an estimated payments by the April 15 (in general, if it does not fall on weekend or holiday) deadline for you not to incur penalties.