Failure to plan is planning to fail. That phrase applies to many aspects of life, including taxes. Avoid tax-time failure with adequate planning while watching out for these twelve pitfalls.
1. Disorganization – If you have the stereotypical shoebox full of wadded-up receipts — or worse, if you don’t keep track of receipts and tax documents at all, we wish you good luck with your filing. You’re going to need it.
Keep your important tax documents and receipts filed throughout the year and avoid the potential for missing out on deductions or incurring penalties for not having the documents that you need to file a proper return.
2. Not Understanding the Necessary Forms – Will you be receiving W-2s, 1099 forms, or both? Do you know what the different 1099 forms represent? What’s a 1095 form? If you don’t know that you need a particular tax document, you won’t realize that it’s missing until it’s too late.
Take some time to review the Form 1040 instructions as well as any further IRS instructions that apply to your situation.
3. Refund Shopping – Be skeptical of a tax preparer who promises you the highest refund without knowing anything about your tax situation. They may be tempted to stretch the rules to meet that promise and leave you on the hook for the consequences. Research your tax preparer wisely, and don’t let dollar signs be your only guide.
4. Failing to Adjust Withholding – If you didn’t withhold the proper amount of taxes from each paycheck, you will be hit with a significant tax bill, along with penalties if the underpayment is large enough. You can’t do anything to help this year, but you can adjust withholding for 2021 to prevent problems next year.
5. Incorrect/Missing Quarterly Payments – For self-employed people, May 15 comes 4 times a year when they’re supposed to make quarterly payments to the IRS. Sending too little, or not sending any payment at all, is the self-employed equivalent of incorrect withholding. At least you can correct this problem every three months.
6. Waiting to File – Sure, it’s an unpleasant task, but it’s not going away. Waiting until May won’t make it any better. Besides, by delaying your filing, you give any criminal that has your personal information a chance to file for a fraudulent refund in your name. If you would like to prevent identity theft, join MoneyTips and check out our Identity Protector tool.
7. Forgetting your IP PIN – If you have an IRS IP PIN (assigned to identity theft victims and available in other specific cases), you must include that PIN number on your form to avoid delays (with paper returns) or outright rejection (for e-filing). Note that an IP PIN is not the same as an e-filing PIN. An IP PIN applies regardless of how you file your form.
8. Forgetting your 1095 – A 1095 form with proof of your health care coverage should come from your employer or from a health care exchange, depending on your situation. The Tax Cuts and Jobs Act of 2017 (TCJA) removed the penalty for not having insurance (aka the individual mandate), so you won’t be penalized for not having coverage in tax year 2020. However, if you did buy insurance, you should receive a 1095.
9. Forgetting Other Health Care Requirements – Under the ACA, subsidy recipients must notify the health care exchange of a change in their income or status so their estimated subsidy can be properly adjusted. The premium tax credit subsidy is still available for taxpayers earning up to 400 percent of the federal poverty line.
10. Passing up Deductions/Credits – Too many people simply assume that they don’t qualify for tax credits or don’t have enough deductions to itemize. You may be passing up significant savings — especially with tax credits that subtract directly from your tax bill. Remember that some deductions are “above-the-line,” meaning that you can take them whether or not you itemize other deductions.
11. Not Properly Informing Your Tax Preparer – Tax preparers, even online/software methods, ask leading questions to help determine possible deductions and credits for which you qualify. However, they are not perfect. Fill in your tax preparer about life changes that could alter your taxes — and if you are your own tax preparer via software, do the research to answer these questions on your own. Don’t just rely on your tax preparer or “smart” software. Thanks to the TCJA, you can no longer deduct fees for tax preparation software, tax publications, and electronic filing fees.
12. Failing to Track Carryovers – Tax benefits like deductions for capital losses can carry over into the next year if you did not take the full credit in the first year. You cannot take advantage if you forget about the previous year’s carryover or did not properly track it.
Nobody literally plans to fail, but many taxpayers do so inadvertently by failing to plan for their taxes. Start planning now and make your tax year a success.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.