If you don’t plan, failure is planned. This phrase applies to many aspects of life, including taxes. Avoid tax losses with proper planning while looking out for these twelve pitfalls.
1. Disorganization – If you’ve got the stereotypical shoebox full of padded receipts – or worse, if you don’t keep track of receipts and tax documents at all, we wish you the best of luck with your submission. You will need it.
Keep your important tax documents and receipts all year round and avoid the risk of missing any deductions or getting fined if you don’t have the documents you need to make a proper return.
2. Not understanding the necessary forms – Are you getting W-2, 1099 forms, or both? Do you know what the different 1099 forms represent? What is a 1095 form? Unless you know you need a specific tax document, you won’t find it missing until it’s too late.
Take some time to read the Form 1040 instructions, as well as any additional IRS instructions that apply to your situation.
3. Refund Shopping – Be skeptical of a tax advisor who promises you the highest refund without knowing anything about your tax situation. You may be tempted to expand the rules to fulfill that promise and leave you hooked for the consequences. Check with your tax advisor and don’t let dollar signs be your only guide.
4. Non-compliance with withholding tax – If you have not withheld the correct amount of tax from every paycheck, you will face a significant tax burden and penalties if the underpayment is large enough. There is nothing you can do this year to help, but you can adjust the withholding tax for 2021 to avoid problems next year.
5. Incorrect / missing quarterly payments – For the self-employed, May 15 comes four times a year for quarterly payments to the IRS. Sending too little or sending no payment at all is the self equivalent of bogus withholding tax. At least you can fix this problem every three months.
6.Waiting for file – Sure, it’s an uncomfortable job, but it won’t go away. Waiting until May won’t make it any better. Also, by delaying your filing, you are giving any criminal who has your personal information a chance to request a fraudulent refund on your behalf. If you want to prevent identity theft, join MoneyTips and check out our Identity Protector tool.
7. Forget your IP PIN – If you have an IRS IP PIN (which has been assigned to victims of identity theft and is available in other special cases), you will need to include that PIN on your form to avoid delays (on paper returns) or a full denial (for the electronic filing). Note that an IP PIN is not the same as an E-Filing PIN. An IP PIN applies regardless of how you submit your form.
8. Forget your 1095 – A 1095 form showing proof of your health insurance should come from your employer or a health insurance company, depending on your situation. The 2017 Tax Cut and Jobs Act (TCJA) removed the penalty for not having insurance (also known as an individual mandate) so you won’t be penalized for not having coverage in the 2020 tax year. However, if you have insurance, you should also get a 1095.
9. Forget other health requirements – Under the ACA, grant recipients must notify the health authority of any change in their income or status so that their estimated grant can be properly adjusted. The tax credit allowance for bonuses is still available to taxpayers who earn up to 400 percent of the federal poverty line.
10. Pass on deductions / credits – Too many people simply assume they don’t qualify for tax credits or don’t have enough deductions to break them down. You may forego significant savings – especially on tax credits that are deducted directly from your tax bill. Keep in mind that some prints are “above the bar” which means you can use them whether or not you list other prints.
11. Don’t inform your tax advisor correctly – Accountants, including online / software methods, ask key questions to help determine possible deductions and credits that you will qualify for. However, they are not perfect. Tell your tax advisor about changes in life that could change your taxes. If you’re your own tax advisor via software, do your research to answer these questions yourself. Don’t just rely on your tax advisor or your “intelligent” software. Thanks to the TCJA, you will no longer be able to deduct fees for tax preparation software, tax publications and electronic filing fees.
12. Don’t track transfers – Tax benefits such as capital loss deductions can be carried over to the next year if you did not receive full credit in the first year. You cannot take advantage of forgetting or not properly tracking last year’s broadcast.
Nobody literally plans to fail, but many taxpayers accidentally do so by not planning their taxes. Plan now and make your tax year a success.
Failure to pay your taxes or a fine you owe can have a negative impact on your creditworthiness. You can check your credit history and read your credit report for free in minutes by signing up for MoneyTips.
Photo by Nataliya Vaitkevich from Pexels
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