10 Tax Mistakes You Don't Want to Make
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1040, 1040A, 1040EZ, Schedule C, Schedule B, 1099, W-2— doing taxes is like trying to speak a foreign language that you’ve never taken a course in.
Given how complicated the tax code is, it’s not surprising that people mess up when filing their returns—and those mistakes can cost people thousands .
As a Certified Public Accountant with his own boutique firm, Gary Craig has seen it all. He shares some of the most common tax blunders that he witnesses to ensure that your own filing goes smoothly.
1. Shopping for the Biggest Refund
Craig says that perhaps the biggest mistake is trying to find someone who will give you the largest refund without making sure that it’s accurate. “I got a guy last year who came in at the very last minute on April 10,” says Craig. “He and his wife filed separately to take more exemptions, and the tax preparer he’d initially used was really aggressive about reimbursing. The guy was flabbergasted by how much he still owed and came to me ‘refund shopping’ to see if I could lower his tax liability, and I had to tell him, ‘ You actually owe more ,’ because the other preparer was so aggressive with the deductions.”
2. Not Making Sure That Your Tax Preparer Signs the Return
If your tax preparer is confident in the accuracy of the return that he’s prepared for you, then he’ll have no trouble putting his name on it. But if he doesn’t sign the return, it could be a sign that he’s done something shady. In fact, Craig says, “If [the mistakes on your return are] serious and seem intentional, you can report him to the IRS. That’s grounds for losing one’s license.”
3. Being Too Aggressive With Unreimbursed Business Expenses
This mistake has an easy solution: In addition to keeping those receipts for unreimbursed business expenses, always keep a record of your company’s reimbursement policy —even for past years. This is the only document that will save you in an audit. Without it, the IRS won’t recognize those expenses.
4. Taking Inappropriate Real Estate Deductions
If you’re not a real estate professional, and you make more than $150,000, you can’t take losses on any rental properties that you own against your normal working wages in order to lower your taxable income. Take it from Craig: “I had a client making $300,000 and taking $160,000 in real estate losses”—none of which was allowed. His bill? A cool $50,000 in back taxes and penalties.
5. Inflating the Value of a Car That You Donate
“This has been really popular the last few years,” says Craig, “but IRS regulations around that have become more stringent in terms of documenting the value. If you’ve got a 1985 Toyota Corolla sitting in your garage , and you donate that vehicle to charity, claiming it’s worth $1,500, you’d better have good documentation to support that value.” His recommendation: Start with the Kelley Blue Book value. And if you make any improvements to the car, keep the receipts so you can prove their worth.
6. Being Too Aggressive With Home Office Deductions
This year, the IRS changed the requirements on the home office deduction for the 2013 tax year (to be filed in 2014). Under the new rule, taxpayers have the option to take a “standard” home office deduction of $5 for every square foot of office space up to 300 square feet. In the interim, the home office deduction could trip up those filing for it in the 2012 tax year, so make sure to measure your square footage correctly.
7. Misunderstanding the Stock Transactional Wash Sale Rule
Let’s say you buy a few shares of Facebook stock, and then you later sell them at a small loss. Normally, you could deduct that loss against any other capital gains you made that year in order to lower your taxes. But if you bought more stock 30 days after selling (or 30 days before selling), then the first sale is disregarded. “It’s like you never sold the stock in the first place,” says Craig. And you won’t get the tax benefit.
8. Not Taking Advantage of Traditional IRA Deductions
Here’s a “mistake” that you can retroactively use to lower your taxes in the previous year. Plus, it also boosts your retirement savings! If you have a 401(k) at work, you can also contribute to your retirement savings in a traditional IRA and get a tax deduction if your income falls under the income limits. (For 2012, singles making $58,000 or below and those married filing jointly making $92,000 or below can contribute the full $5,000 to their IRAs; singles with income between $58,000 and $68,000 and married couples with income between $92,000 and $112,000 can make partial contributions.) So let’s say that it’s 2013, and you realize that you didn’t contribute the full amount allowed to you for your IRA for 2012. You can still make a contribution now that will count for 2012, lowering your taxes for that year.
9. Neglecting to Tell Your Tax Preparer About Life Changes
Although things that happen in your family life or your job may seem unrelated to your taxes—and therefore none of your CPA’s business—they can affect how much you owe. “Maybe your mother has moved in and is dependent on you, or your kids are now old enough to be in daycare,” says Craig. “Tell your CPA what’s going on in your life instead of just bringing him a bundle of forms.” For instance, if you’ve changed jobs, your CPA could help you structure your compensation to maximize tax savings.
10. Settling for a CPA Who Just Goes Through the Motions
“Find a tax preparer who knows and cares about what makes you, you,” says Craig. Your CPA should know what brings you pleasure in life, what kind of family you have, and what your values are. This way, for instance, he or she can help you make sure you’re meeting your retirement goals with smart tax planning . Also, according to Craig, “the CPA can look out for opportunities to bring you during the year.”
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Photo of woman doing taxes courtesy of Shutterstock .
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