Five Common Mistakes to Avoid When Preparing Your Tax Return
It's officially tax season, and for many Americans, filing returns this year might be extra tricky. "With everything that happened in 2020, we're seeing trends that are causing shifts in taxpayers' situations," says Lisa Greene-Lewis, CPA and TurboTax tax expert. "Whether they faced unemployment, worked in another state, or took up a new side gig, the events that occurred last year have impacted most taxpayers' lives and taxes in some way." Unfortunately, the more complicated your financial situation is, the more room for error on your tax return. If you've undergone big financial changes this year, Mikkel Jensen, U.S. manager director at Ageras, says your best bet is to hire a professional to prepare your taxes. "Using a tax specialist gives you the peace of mind that your taxes are done correctly, and that you're not missing out on any credits or deductions that you might qualify for."
If you plan on doing your own taxes this year, it helps to know what common tax prep mistakes to look out for. From selecting the wrong filing status to incorrectly reporting your income, here's what tax experts say you might be doing wrong when preparing your taxes.
If you're waiting until the eleventh hour to file your taxes, Greene-Lewis says it could cost you in the long run. "People who wait until the last minute tend to leave out forms reporting income or receipts and forms for expenses worth valuable deductions," she explains. To get a head start on your tax return, Boryana Zamanoff, senior wealth strategist at BNY Mellon Wealth Management, recommends keeping your financial records organized throughout the year. "For some employees, this can be as simple as a designated tax folder in which you keep your W2 form, mortgage statements, property tax information, and any donation receipts or employee expenses that may be deductible for state tax purposes," she explains.
You're choosing the wrong filing status.
Selecting the right filing status—as in single, married filing jointly, married filing separately, qualified widow with dependent child, or head of household—is an essential, but often incorrectly marked, part of filing your tax return. "Each filing status comes with its own rules regarding eligibility," Greene-Lewis explains. "If you're eligible for more than one tax filing status—say single and head of household—the choice you make could be the difference in a higher tax refund or having to pay more."
Not choosing the correct filing status can also prevent you from claiming certain deductions. "Filing status is also important because it affects your standard deduction and can impact which deductions you qualify to receive," says Robert Kilroy, wealth management advisor at Northwestern Mutual. If you're unsure which status is right for you, the IRS website has a helpful tool for determining your filing requirements.
You're not claiming deductions and credits you qualify for.
According to Jensen, many Americans don't take advantage of all of the tax credits, deductions, and exemptions that they're eligible for. "If you've had a reduction in your income this year, you could qualify for certain tax credits or deductions," he explains. In addition to the standard deduction for 2020—which is $12,400 for single filers and $24,800 for people who are married and filing jointly—certain taxpayers, particularly those who are self-employed, can claim itemized deductions for some of their work-related expenses. "For most people the standard deduction may be best, but if you are a new freelance or contract worker, for example, it might be worth doing the research to be sure you are not short-changing yourself and your deductions," Kilroy says.
You're not reporting all your income.
Between side jobs and freelance work, Dina Pryon, global leader at EY TaxChat, says it's easy to forget to report some of your income on your tax return. "In this 'gig economy' you might have made money from different sources than in prior years," she explains. "Even if they don't report it to you on a Form 1099, it is still reportable." According to Colleen McCreary, chief people officer at Credit Karma, this means reporting your stimulus payments on your tax return. "Since the payment is actually a tax credit, you'll need to account for it on your return, even though it won't reduce any tax refund you're owed," she says.
You're not filing your return on time.
Even if you don't think you will be able to pay your tax bill in full, Jensen says you should still file a return instead of not filing at all. "The IRS provides a variety of options such as payment plans, deferment, or an offer to settle your debt for less than the full amount owed," he explains. "Failing to file at all will lead to penalties and late filing fees that will leave you paying even more money to the IRS."
If you need some more time to prepare your taxes, Jensen says you can also file an extension with the IRS. "But remember that you will still need to pay any taxes owed by the filing deadline," he explains. "Not paying by the due date will result in an even bigger tax bill, as the IRS will begin to charge you interest on what you owe."