Tax season is in full swing, and the rush to file is on. And every tax season, millions of taxpayers (and many tax preparers) make mistakes.
The five most common mistakes aren’t about typing in wrong numbers, math mistakes, or forgetting to include interest income from your online savings account. Rather, these are more top-level mistakes that can affect your entire tax return.
Worse, these common mistakes will cost you extra money – and not always in the ways that you’d think.
- Using the wrong filing status
Here’s something tax planners know that you might not: There’s not always one clear tax status. And choosing the best filing status for your situation can help save you money. Many choices, like filing married or single, are based on tax laws: Your marital status on December 31 dictates your tax filing status, for example, so if you were still married as of 12/31/16 you have to file as married. But whether you and your almost-ex decide to file separate returns or one joint return depends on your particular financial situation. Other filing status choices – like Head of Household or Single – can make a huge difference in your tax bill. For most single moms, Head of Household will be the most beneficial tax filing status. Click here to find out if you qualify for Head of Household.
- Withholding the wrong amount from their paychecks
According to a survey by NerdWallet, 57% of American taxpayers don't know what a W-4 is. But if you’ve ever had a job, you’ve filled one out – and then probably forgotten all about it. IRS Form W-4 tells your employer how much federal income tax to withhold from your paycheck, based on your marital status and how many dependents you have. If your situation has changed in any way, take another look at your W-4, you may need to make a change there to make sure you’re employer is taking out the right amount. If your withholding is too low, you’ll end up owing taxes at the end of the year – and possibly a penalty on top of that. Too much withholding means you’ve been letting the government use your money interest-free instead of letting it work for you. Sure, you might get a big refund – but it’s better financially to have that money in your own hands every month throughout the year so you can use it to pay bills, or even make money investing it.
- Not sending a payment when filing a due date extension
Every year, you’re entitled to a no-questions-asked six-month extension on filing your tax return. To do that, you have to file Form 4868 by the regular tax due date – this year that’s April 18. But what 58% of Americans don’t know is that if you owe money, you have to mail your tax payment in with that extension form. The extension gives you extra time to file, but not extra time to pay. So if you will owe money, and you file an extension, pay when you file it, or you will get hit with interest and penalties.
- Paying someone to do their taxes instead of taking advantage of free filing software
Unless you have a super-complicated tax return, you can save hundreds of dollars by doing your own taxes using free online tax prep software. Most people have pretty straightforward tax returns: W-2 income, interest and dividends, Schedule A deductions (mortgage interest, property taxes, donations, etc.), tax credits related to children. If that describes (or comes close to describing) your tax return, most tax programs can easily walk you through your annual income tax return. The IRS website offers free federal tax prep and filing. There are also several commercial programs that offer free software for simple tax returns (and fees for upgrades if your return takes a more complicated turn.) We’ll talk more about those in an upcoming post.
- Not asking to see their tax preparer’s PTIN (Preparer Tax Identification Number) before turning over their private financial information
All paid tax preparers must have a PTIN issued by the IRS or they cannot legally file a tax return. That PTIN must be included in the “Paid Preparer” section of your tax return. If your tax preparer doesn’t have a PTIN, refuses to show you his PTIN, or won’t include it on the filing copy of your return, walk out and take all of your paperwork with you. Chances are, that tax prep service is a scam – possibly set up to steal your refund, and maybe your identity.
Keep these common mistakes in mind as you get ready to do your taxes – avoiding them can save you a lot of money, both now and in the long run.