10 Ways to Avoid Common Tax Filing Errors
Tax time is here, and we are rapidly approaching the April 15th filing deadline. Tax laws changed significantly in 2020 and taxpayers are now responsible for several new taxes as well as changes to deduction limits and exemption phaseouts.
Last year the IRS published a list of common tax-filing errors that we wanted to pass along with our tips for avoiding them. You can prevent the majority of these mistakes with a little extra attention or the help of a professional tax advisor.
It’s to your benefit to catch errors before filing because a simple oversight could delay or cost you a refund if you’re entitled to one. A blunder that causes you to underpay your taxes could lead to stern letters and penalties from the IRS, or worse, trigger an audit.
Here’s how to avoid making these common errors:
1. File electronically.
By filing electronically, you can use computer software to catch many common mistakes. E-filing can also reduce the chances that a processing error is made by the IRS.
2. Review your deductions.
The IRS says most mistakes happen when taxpayers are calculating their deductions. For example, if you are age 65 or older, remember you qualify for a larger standard deduction. Under time and pressure many taxpayers take the standard deduction instead of itemizing, potentially increasing the size of their tax bill. A tax professional can help you determine the best way to treat deductions.
3. Check your charitable contributions.
Missteps involving charitable deductions are quite common. It is important to understand what the IRS allows you to deduct and how it should be documented. Consult a tax advisor or review IRS Publication 526 for more information. Don’t forget to claim any charitable contributions you made through payroll deductions or qualified charitable distributions from your IRA.
4. Share important information with your tax preparer.
Working with a tax professional can help cut down on expensive errors, but they aren’t mind readers. Don’t make the mistake of failing to share vital information with your tax preparer.
5. Choose the right number of dependents.
While this should be a straightforward decision, periods of transition can add complications. For example, if your child recently got a full-time job or you recently became responsible for an elder’s care, you may want to review whether you can claim them as dependents.
6. Correct the spelling of names and social security numbers.
Make sure that all names and social security numbers match what’s on your family’s social security cards. If you’ve changed your name since the last time you filed your taxes, you’ll need to notify the Social Security Administration (SSA) so they can update their information. You can do this by filing Form SS-5 at your local SSA office or by mail.
7. Double-check your direct deposit information.
Most taxpayers give the IRS bank account information to receive their refund by direct deposit. Unfortunately, if you’ve given the IRS the wrong account information, your refund could easily go astray.
8. Sign the return and attach all documents.
The IRS won’t accept unsigned tax returns so it’s critical that you (and your spouse if you file jointly) sign your 2020 tax return and include all necessary schedules and documents. Don’t forget to include a check for any taxes owed.
9. Report any additional income.
If you picked up a side job this year or are receiving income from your investments, be sure to report it to the IRS. If you forget to include this information on your return, there’s a chance that you could owe additional taxes and penalties on your unreported earnings.
10. Consult a professional.
Tax laws are complex and consumer-grade tax preparation software is designed to meet the needs of the average taxpayer. If you have a complicated tax situation, a tax professional can help you prevent mistakes and identify potential tax savings.
Footnotes, disclosures, and sources:
The above discussion is based on current tax law and is for informational purposes only. Nothing herein should be considered individualized investment advice. C-J Advisory, Inc. is a registered investment adviser located in San Jose, CA. Registration of an investment adviser does not imply any level of skill or training and is not an endorsement of any regulatory agency. C-J Advisory does not provide tax or legal advice.
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