14 Tax Mistakes That Could Cost You Hundreds
A CPA shares a list of tax mistakes that he frequently sees people make—and they’re mistakes that could cost hundreds of dollars.
Failing to compare your current year’s return to the previous year
As a CPA, I always remind clients to compare their year-to-year returns. If they come across any unexplained, major discrepancies or changes, it’s a good indication that some piece of information is missing. This is one of the best sanity checks available, yet it’s the one I see used the least.
Check out these 13 secrets an IRS agent won’t tell you about tax planning.
Forgetting about your accounts that deliver statements electronically
As more and more companies to go e-statements, we get more clients coming to us missing information and not even realizing it. That’s understandable since you have to go retrieve the document rather than just getting a letter in the mail. Make a list of what information you expect to receive so nothing is missed.
This is the last year under the old system; the new tax legislation nearly doubles your standard deduction while it eliminates or limits many of the other standard deductions. If you are itemizing this year, don’t forget the following money-savers.
Mortgage interest and real estate taxes are seldom missed since you receive tax documents for them. One exception is when your mortgage was sold or you refinanced during the year. We will regularly find errors where statements are not delivered or do not contain all the real estate taxes paid during the year since so many different banks owned the mortgage.
Personal property taxes paid on vehicles
Even experienced tax accountants can overlook this deduction. You pay these taxes earlier in the year and most municipalities do not send any statements beyond the initial tax bill.
You can learn a lot from the 32 things tax accountants won’t tell you.
Don’t forget charitable deductions
People often leave out their charitable contributions (especially non-cash donations), miles they drove for charity, and smaller cash donations. Depending on the year, this can help immensely in reducing your bill.
Failing to maximize your retirement plan contributions
Whether you choose a traditional (pre-tax) or a Roth (post-tax) option, your retirement plan contributions all have major tax advantages—especially if you are eligible for an employer match. Not utilizing them will cost you: A small amount of money in the short-term, but a huge amount down the road.
You can use this timeline to guide your retirement planning.
Just don’t over-commit to retirement savings
Of course, you don’t want to contribute more than you can afford. Dipping into a retirement plan is extremely costly—you’ll have to pay normal taxes on the distribution in addition to a 10 percent penalty.
Try to keep your income steady
Sometimes you don’t have a choice, but you should always avoid having huge spikes and dips in our income. Since the U.S. tax system is progressive, higher earners pay much larger rates than people who earn less. If you need to tap a retirement plan due to an income dip, taking out $50,000 over six years will be far less costly than taking $300,000 in one year.
Not utilizing Flexible Spending Accounts (FSAs)
Some employers allow you to contribute to FSAs—both for dependent care expenses and for healthcare. These payments come out pretax, thereby automatically reducing your taxable income. These are great tools, especially for medical costs since health care expenses are exceedingly difficult to deduct.
Check out these new deductions—and reductions—under the new tax law.
Taking actual auto expenses instead of mileage
When driving for business you have two choices: Taking actual expenses (gas, repairs, maintenance, etc.), or taking the standard mileage rate. In 2018 that rate is 54.5 cents per mile. While there are certainly instances when taking actual expenses makes more sense, the majority of the time the mileage rate is more generous.
Forgetting about business expenses paid with personal funds
It’s hard to forget about business expenses that are paid via a business bank account or credit card. If you are doing monthly reconciliations it’s nearly impossible. But if you had to pay cash or use a personal card for a business purpose, those charges can get lost in the shuffle.
Timing expenses incorrectly
To help tamp down income fluctuations in a lean year, try deferring some of your spending until the following year if you expect your income to trend back upwards. If you’re having a great year, spend a bit more on needed equipment or other business expenses to save quite a lot on your tax bill.
Not keeping records or planning throughout the year
Your tax guy can only fix so much while actually preparing your return. Once the year closes, it’s too late to do the vast majority of tax maneuvers. Plan and make moves throughout the year for the best results.
Next, be sure to avoid making these finance mistakes even financial experts have made.