By now, you should have received most of your pertinent tax documents for 2013. W2s, 1099s and other forms are supposed to be mailed by January 31st. If you haven’t yet received everything you were expecting, now is a good time to contact the entity to inquire as to the status of your forms.
A few new laws are in effect for the 2013 tax year. Don’t get tripped up on them, nor on a few persistently common errors that plague more than a few taxpayers every year.
Making one of these common tax mistakes, no matter how innocently, could result in underpayment of taxes and trigger an onslaught of computer-generated correspondence from the IRS —threatening penalties, liens, imprisonment or other unpleasant action. And if the mistake is in the government’s favor, you could unwittingly forfeit hundreds of dollars or more.
Here are seven common tax mistakes you don’t want to make this year.
1. Fail to keep good records.
Your paperwork is your proof if you ever get audited. Get into the habit of stashing receipts (or better yet, scan them into financial software) and statements. Create an email folder for electronic receipts. They’ll always be sorted by date and you don’t have to print them unless you’re audited. After you file, keep a copy of your tax return and all supporting documentation until the time period for an audit expires. In most cases that’s three years for a federal return and up to five years for a state return. In some cases, your federal return can be audited up to seven years after you file. If you fail to file or file fraudulently, there is no statute of limitations at all.
2. Choose the wrong filing status.
If you’re a single parent, don’t file as “single,” but rather as “head of household.” By doing so, your standard deduction will be higher and, as a result, your taxable income will be lower.
3. Take the standard deduction when you’re better off itemizing.
In general, the higher your income and the greater your assets, the more you will benefit from itemizing. But just because you don’t earn six figures, don’t assume that you should take the standard deduction until you consider all factors. Do a quick check for the most common significant deductions. If you paid mortgage interest, points for refinancing, real estate taxes, significant medical or dental expenses, state and local taxes (including sales tax) or charitable donations, add them up to see if the total might exceed the standard deduction for which you qualify. If you do itemize, be sure you understand what a legitimate deduction is or get guidance from a tax professional.
4. Ignore strategies that could lower your tax bill.
Be sure you’re taking full advantage of your retirement plan and FSA account, making contributions that lower your taxable income. Also, if you are eligible to contribute to an FSA, you have until April 15th to make a contribution toward your 2013 limit ($3,250). Don’t ignore medical expenses because you’re intimidated by the 10% threshold (7.5% until 2016 for taxpayers over 65). Acupuncture, smoking cessation programs, dental work and meals and lodging expenses that you incur to get care for you or your dependent are all possible qualifying deductions.
On the flip side of the strategy coin, beware of overusing certain tax benefits. For example, if you participated in a dependent care flexible spending plan, you can’t claim a full dependent care tax credit. That would be taking two tax breaks for the same expense.
5. Overstate charitable gifts.
Gifts of $250 or more must be acknowledged in writing, and the letter from the charity must state whether anything of value was received in exchange for the gift. It there was, its value must be deducted from the gift amount before you claim the deduction. Gifts of property worth more than $5,000 require a qualified appraisal.
6. Neglect to report income.
The IRS receives documentation of your income from every source that sends you a statement or tax form, and their computers cross check those figures against the amounts you include on your return. If the numbers don’t add up, it’s a sure-fire red flag.
7. Forget to sign your return or neglect to include payment if you owe.
A surprising number of taxpayers forget to sign their return. This mistake is equivalent to not filing a return at all, so if you’re filing close to or on the deadline, that missing signature could cost you significant penalties and fees. One way to avoid making this mistake is to file electronically. Even if you get help from a tax pro, be sure to double check the return and all enclosures.