Understanding tax rules is complicated.
In 2018, the launch of the new tax reform means that US citizens now have a host of unfamiliar rules and regulations to keep up with — beneficial or not, any change in the rules can increase the stress involved with tax season. Already, millions of Americans make mistakes each year that can lead to consequences all the way from penalties to IRS audits.
Here are some key mistakes to avoid, to reduce your risk of facing a tax blunder for the year of 2018.
1. Forgetting to Double-Check Information
Surprisingly, a common mistake taxpayers make when it comes to filing their return is choosing the wrong filing status or accidentally selecting multiple filing options. Preparing your taxes online or with the assistance of a tax professional will ensure you choose only one filing status. The status you choose affects which deductions and credits you’re eligible for, as well as the value of your standard deduction. If you’re unsure because multiple options seem to fit your situation, the best thing you can do is discuss your circumstances with a tax expert.
Keep an eye out for any other clerical issues that might harm your tax situation this year. Double check your numbers, ensure you’ve entered the right social security details, and if you’ve chosen a direct deposit refund, make sure your bank account information is accurate. An error in any of your information will require you to refile.
2. Leaving Out Information or Failing to File on Time
Failing to file your tax return on time may lead to penalties and fees, and could even prompt the IRS to audit you. Even if you haven’t received any income this year, you’ll still need to file a return to inform the IRS of why you believe you have no taxes due.
When you do file your tax return, it’s critical to make sure that you include all the required information. For instance, the IRS requires you to claim any income you’ve made in the last year — regardless of whether you received a 1099 or W-2 from an employer. This includes any freelance work you may have done on the side. Leaving out information may result in you needing to file an amended tax return.
3. Overlooking Your Retirement Accounts
Filing your tax return is an opportunity not only to think about your current financial situation but your future, too. A huge tax blunder that many people make is failing to take advantage of retirement savings accounts; or overlooking important decisions and actions regarding their retirement accounts.
Consider Traditional or Roth
Whether you set up a 401(k) through your employer or an IRA (or both), be sure to consider the choice of traditional or Roth for your account.
A traditional 401(k) or IRA will reduce your taxable income for the years that you contribute, so you get an up-front tax break straight away. A Roth 401(k) or IRA allows for tax-free withdrawals during your retirement, so it won’t impact your taxable income currently but it may pay off significantly down the road.
Contribute Within the Limits
When you elect the amount you’ll contribute to any of your retirement accounts, keep in mind the limits. As of the new tax reform in 2018, the contribution limit for an IRA is $5,500 (for the majority of filers) and $6,500 if you’re over 50 years old. A 401(k) has a limit of $18,500 or $24,500 for those over 50.
Watch Your Withdrawals
If you are approaching or have already hit retirement age, be mindful of the rules regarding withdrawals from your retirement accounts. For instance, if you have an IRA and you are 70 years or older, you will need to withdraw a minimum amount from your account or face a hefty tax penalty. Plan ahead with your accountant or financial advisor to ensure you don’t lose any of your hard-saved money simply for neglecting your withdrawal minimum.
4. Not Taking Advantage of Credits
You likely already know to look for available tax deductions, but don’t forget to also check for tax credits. A deduction will reduce your taxable income in relation to your tax bracket, while a tax credit reduces your tax bill by a determined amount — regardless of bracket.
The 2018 tax reform has significantly changed the credits available. Here are just a few that may apply to you:
- The offers a credit of up to $3,000 to care for a dependent child.
- The earned income tax credit can reduce your taxable income by up to $6,000.
- The child tax credit offers $2,000 for each qualifying child in the new reform.
5. Claiming Disappearing Deductions
While taxpayers love taking advantage of deductions, it’s important to keep an eye on what you can reasonably claim. If you ask for a deduction that no longer applies or has been adjusted, this may raise a red flag in the eyes of the IRS and could increase your risk of being audited. For 2018, disappearing deductions include:
- Theft and casualty losses
- Moving expenses
- Tax prep expenses
- Unreimbursed employee expenses
- Employer-subsidized transportation and requirement
- Miscellaneous deductions under the 2% AGI cap
6. Going it Alone, Without a Tax Professional
Many Americans struggle to get the most out of their tax returns, as they don’t fully understand all the deductions and credits available to them. Working with a tax professional like a CPA to file your return can help ensure you won’t pay more taxes than necessary.
If you owe tax debt to the IRS or are facing an audit, reach out to a professional tax attorney who can help guide you through the legal process of interacting with the IRS. Whether you want help filing your return this year or are worried that you can’t afford the taxes you owe, working with a professional is always a wise option. Contact our expert team at Milikowsky Tax Law if you need a tax attorney, or if you have questions about your tax situation.