Tax mistakes are more common than you think, and despite people worrying about making mistakes, they do happen. If you make a mistake when filing, it may take longer for the IRS to process your return but it’s not the end of the world. If you opt for e-filing, you decrease your chances of making a mistake compared to when you file a paper return. If you are aware of the most common filing errors, you’re less likely to make the mistake yourself when filing your tax return. The eight biggest tax mistakes are:
- Social Security Number: often, Social Security numbers are left off returns, and in many cases, when they are entered, the incorrect number is given.
- Names: people misspell the names of one of the people on the return. Each person’s name has to match exactly what is written on their Social Security Cards.
- Filing Status: You should always choose the filing status which best fits your situation. When you e-file, the software will ensure you’re choosing the correct status.
- Accounting: Errors in calculations are pretty much a given when it comes to paper returns. Again, this is a major benefit for e-filing, as the software does the math for you, and ensures its accurate before you submit.
- Credits/Deductions: Be aware of calculations regarding the Earned Income Tax Credit and the Child and Dependent Care Credit, as these are the most commonly found to have errors in accounting.
- Bank Account: if you want to have your refund direct deposited, ensure you put the correct bank account number and routing number on your return. E-filing combined with direct deposit is one of the fastest ways to get your return.
- Signature: Many people forget to sign their tax return, which makes it unvali If it’s a joint return, all persons have to sign the form.
- PIN errors: those who have e-filed in the past use a Personal Identification Number to sign their tax return. This number is valid from year to year, so it’s important to remember it. If you forget, your AGI from the previous year can be used, but not the AGI from a corrected or amended return.
Do you regularly make donations to charitable organizations? It feels great to help out those in need, and you can even get a benefit at tax time in the form of a deduction. In some cases, you may be eligible to deduct your donation from your taxes. The following facts can help you determine if your donation is able to be deducted.
Organization: You must donate to a charity qualified by the IRS if you want to claim a deduction. Any charitable gifts made to individuals, political associations, and candidates are not tax-deductible.
Itemized: You have to itemize your deductions to claim a donation. File Schedule A, Itemized Deductions with your regular Form 1040.
Benefits: If you received any compensation or benefits for your donation, such as meals, event tickets, or other goods, your deduction amount may be limited. In these cases, you are only able to deduct the amount donated that exceeds the value of the benefit.
Value: Donation amounts for property are determined using the fair market value. Usually, you determine the value of donated property based off what you can actually get if you were to sell the item.
Noncash: If you donate gifts that aren’t cash, and the amount exceeds $500, you will be required to file Form 8283, Noncash Charitable Contributions with your regular return.
Records: Ensure that you keep all documentation to support the amount of the donation you gave. Each donation may have a different type of proof, so save receipts and documentation. If you donate cash, you need a written record.
Cash: If you donate more than $250 worth of goods or cash, the charity will need to provide a written statement, documenting the amount and description of items donated. If any benefits were received, they should also be listed on the document.
Generally, it is easier to just choose the standard deduction when filing your tax return, however it may not be the best method for saving you money. In some cases, opting to itemize your deductions can actually lower the amount of taxes you owe. The best option is to determine the amount you will save with each deduction method, and opt for the choice that reduces the amount of tax you owe. Follow these tips to make an educated choice about which deduction method to use when filing:
First, calculate your itemized deductions by adding up all the expenses you accumulated throughout the year which are eligible for deduction. These can include home mortgage interest, property taxes, medical expenses, unreimbursed employee expenses, income and sales taxes, and donations made to charity.
Next, see how the total amount of itemized deductions compares to the standard deduction. For 2016, the standard deduction is based on your filing status like so: Single, Married Filing Separately, $6,300, Married filing Jointly, and qualifying widow(er), $12,600 and Head of Household, $9,300. If you are blind or over the age of 65, the standard deduction may increase. It may decrease if you are claimed as a dependent by another taxpayer.
In some cases, the standard deduction doesn’t apply, and therefore you are ineligible to claim it. If your spouse choses to itemize on their separate return, you must also itemize. Generally, this lowers your taxes anyway, but it’s important to be aware of when you can and can’t use the standard deduction.
Always ensure you have the correct forms for the deduction method you chose. If you want to itemize, you’ll need to file a Schedule A, Itemized Deductions along with your Form 1040. Standard deductions are able to be claimed directly on your tax form.
College is an important part of your life, hopefully solidifying your path for the future. However, it comes at a price, and often students need all the help they can get. Thankfully, there are a two different tax credits that can alleviate some of the burden on your wallet as a student.
American Opportunity Tax Credit:
The American Opportunity Tax Credit (AOTC) applies to any student enrolled in their first four years of undergraduate study at an eligible college or vocational school. The student must be studying to earn a degree or a recognized certificate, and be enrolled at least half time for an entire academic period. This credit can be claimed up to $2,500 per eligible student, and is refundable up to $1,000. AOTC expenses can be tuition fees, books, supplies and other incidentals.
Lifetime Learning Credit:
Students who are enrolled in any level of higher education, including graduate and vocational classes. Unlike the AOTC, this credit is not refundable, but uses the same expenses to reduce the amount of your taxes by up to $2,000.
You can claim these credits if you, your spouse, or your dependent are an eligible student. To claim a student credit, file Form 8863 with your tax return. As a student, you will receive a Form 1098-T, Tuition Statement, which will report all the required information to claim the credits correctly.
You can’t claim both credits for the same expenses, and you also can’t be a dependent of anyone else to claim the credit yourself. There are income limitations that affect both credits as well.
If you donate to a charity, you may be eligible for a tax deduction. In order to deduct the amount, you’ll need to keep records of each contribution you make. You should always have a hard copy record as proof of your deduction. This proof can include:
- A canceled check
- A monthly bank statement showing the front of the check
- Credit card or bank statement that states the entry for a charity
- An actual statement from the charity with their name, date of donation, amount donated, and contact information.
To deduct donations made to a church, you have to write a check each week. Otherwise, use church provided envelopes, which generally allot you a statement at the end of the year with the total amount of your donation. You’ll need documentation that you donated with a total amount, as the IRS will not just take your word for it.
Any cash donations, regardless of amount, need documentation to be deducted. There’s a false sense of belief that only donations over $50 or $100 require proof. That is not the case. All cash contributions should be documented.
If you donate over $250 in a single gift, the charity has to give you a written document that acknowledges the donation. This statement should include the charity’s name, contact info including physical address, date of donation, and the amount received. Additionally, if you didn’t receive any benefit for making the donation, the document should include the words “No goods or services were provided by the organization in return for the contribution.”
Deductions should be of fair market value for clothing, household items, food, furniture, or other goods. You have to determine the market value on your own, as the charity is not responsible for providing a value for your donation.
Keep your records as accurate and detailed as possible. List the condition of the item (new, good, excellent) somewhere on your document, and remember only items in good condition and above can be deducted.
If you donate a bag full of clothing to an organization, you need a list documenting everything in that bag in order to deduct it. And if you claim more than $250, you’ll need the charity to write a receipt to make the deduction valid.
It’s halfway through the year, and there’s no time like the present to start thinking about next year’s taxes. With six months left to accumulate and organize your tax documents, starting to prepare early will only alleviate stress and aggravation when tax season arrives. The following five tips can help you make filing your taxes next season a breeze.
- Correct Withholdings: If you work for an employer, you should ensure that your withholding information is up to date and accurate. You may either be paying too much in taxes with each paycheck, or you may not have enough withheld, causing you to owe more at tax time. Check with your human resources department and fix any errors.
- Previous Returns: Just because last year’s return has been filed, it doesn’t mean you should just toss it aside. Be sure to file it away safely, complete with all your supporting documents like receipts, as you may have to refer to it in the future. Keep it separate from the current year’s taxes.
- Filing System: Organization is key to keeping your stress level low at tax time. Keep all of your tax documents in an organized filing system, separate from previous years’ returns. As you incur expenses, you can label and document receipts individually, instead of having one big pile to sort through at tax time.
- Documentation: If you plan to take deductions, you’ll need documentation such as receipts and other proof of your expenses. Additionally, other tax forms, such as a 1099 or an investment statement may come into play when you are filing your return, so ensure that all of your documents are up to date, accurate, and filed safely in a secure location. You’ll save yourself the hassle of having to locate duplicates at the last minute.
- Target Date: Establish a date, which will most likely be in the first few weeks of February, as most tax documents will be received by then, in advance to have your return filed. By setting a target date, you’re likely to prepare ahead of time.
Self-employed taxpayers are those who freelance, own their own business, or work on contract. Self-employed individuals have certain tax requirements that they must meet. If you are self-employed, you should be aware of these requirements when you file your federal income tax return. The IRS offers six different pieces of advice about how to correctly file self-employment income.
- Now what income is considered self-employment income. If you receive payment for side jobs or part time work that is contacted, you may have self-employment income. This income can be supplemental to your regular salary as an employee of another business.
- Self-employed taxpayers have to file a schedule C or C-EZ along with a form 1040. A schedule C-EZ is available provided expenses are less than $5000 and other criteria is met.
- You have to pay self-employment tax along with income tax. You can use the schedule FE, Self-Employment Tax to determine how much you owe and file it with your form 1040. Self-Employment tax covers your portion of Social Security and Medicare taxes.
- You may have to pay estimated taxes throughout the year in quarterly installments. You can owe a penalty if you haven’t paid enough in taxes.
- If you have business expenses, you may be able to deduct them provided they meet the standard of being ordinary and necessary. Expenses have to be common and accepted in the industry in which you work.
- In most cases, expenses are deducted in the same year in which they were incurred, however some expenses can be capitalized on, which extends the deduction on number of tax years.
The IRS isn’t always out to get you, despite what Hollywood movies want you to thing. If you owe taxes, and aren’t able to pay the entire amount in a single lump sum, the IRS will work with you to make payment arrangements. It’s important to note that any back taxes owed or past due amounts will decrease the amount of refund you may be expecting. Thankfully, the Treasury Offset Program settles debts by using either all or a portion of your federal tax refund, making it easier to get ahead of your debt.
If you plan on using your refund to offset any state or federal debts you have, be aware of the next five points:
- The Department of Treasury’s Bureau of the Fiscal Service (BFS) runs the Treasury Offset Program.
- The types of debts that can be paid with a refund offset include state income taxes, state-owed unemployment compensation, delinquent student loans, child and parental support.
- You will be notified through the mail in a statement that documents your refund amount, the portion which was used to pay the debt, and the agency, including contact information, which received the offset.
- If you dispute the offset, you need to handle it with the agency directly, and not the IRS. The IRS doesn’t handle disputes for offset payments.
- If you file jointly with your spouse, who is completely responsible themselves for the debt, you may file Form 8379, Injured Spouse Allocation to receive any portion of the offset you are entitled to.
The IRS can’t collect health care related individual shared responsibility payments using liens or levies. However, if you owe a payment, they can offset the liability using your refund.
Sometimes, depending on income, you may owe more money to Medicare. This is known as the additional Medicare tax, which is assessed at a 9% tax rate. For those who owe, tax time can be simpler if you’re aware of the following:
Income threshold: your income, including Medicare wages, Self-Employment income and railroad retirement compensation, has to exceed certain thresholds before the tax kicks in. All of your income is added together including regular and Self-Employment income in order to calculate the tax, and any loss from Self-Employment is not factored in. See Form 8959, Additional Medicare Tax, for more information.
Filing status: your filing status determines that income threshold. For example, those filing married filing jointly, will combine both spouses’ wages and income, and then compare it to the threshold amounts.
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Single: $200,000
- Head of household: $200,000
- Qualifying widow(er): $200,000
Employer responsibility: if you work for an employer, it is their responsibility to withhold any additional Medicare taxes if you earn more than $200,000 per year. If you are self-employed, you can determine whether you owe when you calculate your estimated taxes. You may have to pay a penalty if you didn’t have enough withheld or did not pay enough.
Form 8959: file Form 8959 along with your regular tax return if you owe the tax. You can report the amount you owe employer withheld on this form as well.
Sometimes, you may find yourself having to travel for work purposes. If you are not self-employed, and you work for a company or business, you may incur expenses while traveling. While it is possible to recoup your expenses by taking a tax deduction, you may find it more pertinent to seek reimbursement from your employer.
Expenses that are considered deductible are those incurred while you are outside of your main area of business for work related purposes. Such expenses include:
- Hotel or motel costs
- 50% of the amount you spend on meals and business related entertainment
- Transportation such as local shuttles and taxis once you arrive at the destination
- Amounts incurred from the actual traveling portion of the trip (back and forth to and from destination)
According to the IRS, the classification for business trip is one in which more away from the main area in which you conduct business for significant period of time. It also relates to your intention to stay absent from your tax home or a predetermined amount of time. If you are away for a period of time in which you must sleep, the trip may meet IRS standards for business travel.
Traveling from one job location to another, or meeting clients in different locations within your normal area of business will not qualify as a business travel expense deduction. However, they may qualify as transportation expenses to the IRS.
Travel expenses must be necessary and ordinary in order to be deducted. Reasonable expenses will qualify, but any that are extravagant will not be able to be deducted.