Tax Experts Share the 6 Biggest Mistakes People Make When Filing
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Jaime Catmull
6 min read
The process of filing taxes can be daunting and complex, so it’s easy to make a mistake if you’re not careful — and these tax mistakes can end up costing you. So I spoke to top tax experts to find out the silly mistakes people make on their taxes, and how to either quickly fix them or even avoid them entirely. Read what they had to say before you file so that you don’t end up missing out on money that could go into your refund — or worse, paying fees that you shouldn’t have to.
“The biggest mistake people make with taxes is poor bookkeeping,” said Doug Lynam, director of educator retirement services at LongView Asset Management. “As a general rule, if you don’t track an expense, you can’t deduct it — weak data in, weak results out. Be sure to set aside time each week for bookkeeping. Don’t procrastinate! Trying to do all the paper-pushing at tax time is a migraine wrapped inside a nightmare.”
Robert Fishbein, vice president and corporate counsel with Prudential Financial Inc., agreed that keeping track of expenses throughout the year is the best way to make sure you don’t miss any deductions you might qualify for.
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“Those who have waited until the last minute to do their taxes often risk losing deductions,” he said. “The time to consider what deductions you have and can report should be a yearlong process. As the year goes on, you should be keeping a list or otherwise collecting the documentation to support such deductions. At year-end, many — but not all — of those deductions will be reported to you, and you can then cross check against your records to confirm the tax reporting is accurate (sometimes the reporting companies make errors!).”
Online resources, such as LINK by Prudential, help get all your finances in one place and allow you to wrap your head around what could possibly be deducted.
The tax filing deadline is April 15, and this is a deadline you don’t want to miss. The IRS has announced that the federal income tax deadline for individuals is May 17, 2021 for the 2020 tax year. State deadlines have not changed, however, so make sure to confirm your state’s due date before you file.
What happens if you file taxes late? Well, the news isn’t great. “The penalty for missing the filing deadline makes it not just a dumb mistake, but a costly one,” said Nathan Rigney, lead tax research analyst at The Tax Institute at H&R Block. “The penalty for not paying in full is 0.5% of the unpaid balance per month with a maximum of 25%.
The monthly penalty for not filing a tax return is 10 times that amount (5%) capped at a maximum of 25%. Interest also accrues on the unpaid tax and the penalties assessed. If you can’t file by the deadline, request an extension to move the filing deadline to Oct. 15. And if you can’t pay, file on time and request an installment agreement with the IRS.”
3. Stressing Out About Filing
“Many taxpayers get stressed when thinking about taxes — they don’t feel confident they can complete and file their tax return themselves. This is a big mistake,” said Seth Babb, director of consumer products at TaxSlayer. “TaxSlayer has spent the last few decades working to ensure taxpayers feel comfortable and confident that they have filed the most accurate tax return while receiving their maximum refund. Each year we turn taxpayers into TaxSlayers by providing them a way to e-file with all forms, credits and deductions included, allowing them to choose the level of support they want at the absolute best value. We thrive on creating new ways for taxpayers to spend more time on the things they want to do instead of the things they have to do.”
“The changes to the tax laws from the Tax Cuts and Jobs Act have changed the deductibility of certain expenses, such as home mortgage interest, state and local tax payments, etc., so you want to make sure you allow yourself enough time to familiarize yourself with the new rules if you are filing your own return,” said Peter Mallouk, president of Creative Planning. “If you are working with a tax preparer, you’ll want to make sure you gather all of the appropriate receipts and other important tax documents as soon as possible to give them the adequate time to work on your return.”
5. Filing Too Early
While it’s a bad idea to be filing taxes late, it’s also a bad idea to file prematurely.
“Filing your tax return before you receive all the proper tax reporting documents is one of the most common errors we see with clients who used a DIY solution,” said Gernot Zacke, CEO and co-founder of Visor. “Remember that 401(k) you rolled over from a previous employer? Well, expect to receive a Form 1099-R by Feb. 15. If you file without it you will get an IRS notice assessing tax, when in reality it was a tax-free rollover. If you wait till you receive the Form 1099 you will save yourself a lot of headaches. Another example is filing before you receive your 1099 from your taxable brokerage account. Filing without this will result in a tax notice assessing interest and penalties as well.”
Not only that, but it can also cause you to miss out on deductions if you don’t have all of your financial documents yet.
“Rushing to prepare the returns without having all (the) information needed (can lead to) missing potential deductions,” said Mike Savage, founder, owner and CEO of 1-800Accountant.
“The IRS reports every year that they have close to $1 billion in unclaimed tax refunds, and the average refund is about $700 per taxpayer,” said Lisa Greene-Lewis, CPA, senior communications manager and tax expert at TurboTax. “If you haven’t filed previous tax returns because you thought you didn’t make the IRS threshold for filing, you may want to file since the IRS may be holding on to your unclaimed refund — especially if you had federal taxes withheld and are eligible for refundable tax credits like the earned income tax credit. You can go back three years and file for a tax refund.”
And depending on your situation, there can be a penalty for not filing taxes, so you’ll want to do what you need to in order to avoid paying even more.
