Tax season is upon us! Normally this time of year there are two types of reactions: excitement or dread. Everyone’s tax situation is different. Some folks love tax season more than they love Christmas, while others say a silent prayer and just hope to make it through this period with no major casualties. Whatever side of the spectrum you’re on, be sure to avoid these ten mistakes when filing your taxes this year.
Not Knowing if You Have to File a Tax Return
Not every one that earns income is required to file a tax return every year. Before getting caught up in the tax season frenzy, I think it’s good practice to figure out if you need to file a tax return in the first place. The only people that are required to file tax returns are the ones whose income is greater than the set income thresholds. Four factors will help you determine if you need to file, including whether someone can claim you as a dependent, marital status, your age, and if you’re legally blind. Yet and still, I am shocked at the number of people that don’t file a tax return each year.
Check to see if you need to file here.
Not Filing a Tax Return or Paying Taxes When You’re Required To
Failing to file your tax return and failing to pay taxes altogether are two major no-no’s and come with some pricey consequences. Including but not limited to, asset seizures and even jail-time!
I would advise you to file your tax returns if you’re required to! I know how annoying it can be, but I’m all about being safe rather than sorry. Now, for the people that do meet the requirements and have to file a tax return, simply neglecting to do so you’ll be facing a failure to file penalty. This penalty comes with a 5% fee for each month or part of a month that your tax return is late, with a maximum penalty of 25%. The clock will start clicking this year on April 15, 2020, which is the tax filing deadline. This penalty can get pretty expensive if you let it because the fee accrues until you file your return.
Now if you file your taxes and end up owing the IRS (been there..it sucks!) you have to pay this! If you don’t you will face the failure to pay penalty. I’ll get into this a little later in the post, but it’s best not to wait until the last minute to file just in case you end up owing money and have to pay it back. As with the filing deadline, if you owe, you have until April 15, 2020. The failure to pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25% of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full.
The combination of failing to file and failing to pay your taxes on time can run you a combined penalty rate of 5% per month, up to a maximum of 47.5% of the tax you owe!
Withholding Too Little or Too Much From Your Paycheck
Now, this is an area that I see a lot of people get tripped up on. The question is, how much should you withhold from your paychecks? Depending on who you ask, the answer will vary. I see a lot of people think that a four-figure tax return is a major come up. And I’ve also seen people owe 4 figures and nearly want to pull their hair out trying to figure out how they’re going to pay the IRS back by the deadline.
But here’s the thing. The optimal situation is to neither get a huge payout or get a huge tax bill, it’s to break even… or have to pay $0 or get $0 back.
Getting a large tax refund just means you’ve been loaning the government too much of your hard-earned cash with each paycheck. And once you file, the IRS must pay you back what is owed to you. This is money that could’ve been in your pocket monthly to be used for savings, investments, bills… whatever because it’s yours.
On the other hand, if you have to pay back a large tax bill, you aren’t setting aside enough for the taxes you owe each paycheck. So, during tax season, the IRS will want to collect what it is owed.
I’ve been on both sides of this and I much rather break-even! I like having say over what to do with my money without feeling like the imposing tax season is hanging over my head. Whatever your preference, it’s a good idea to assess your tax withholding’s. Your tax withholding’s are what you or your employer set aside from each paycheck to cover your taxes. For more information, check it out here.
Waiting to File At the Last Minute
As I stated earlier, the tax filing and payment deadline is April 15, 2020. It’s not wise to wait until the last minute to file your taxes just in case something unexpected comes up, you need more time to submit all of your documents, or you end up owing. Also, if you plan to hire someone to do your taxes this year, keep in mind that these people are going to be booked and busy for the next couple of months. If you wait until the last minute, you could find yourself scrambling to find someone to do your taxes for you.
Newsflash: The IRS doesn’t care if you filed three days before the deadline and have a tax bill of $2,000. They expect their payment by April 15, 2020!
You can request an extension to file if you need it. But that doesn’t get you out of paying your tax bill. If you fail to pay your tax bill you’ll be facing that failure to pay penalty that I covered earlier.
Read more about the tax season deadlines here.
Not Being Prepared
I know that filing taxes can seem like a tedious and daunting task, but it doesn’t have to be. Make things easier for yourself by being ready. Have all of your important tax forms, receipts and any other filing documents organized and ready to go. Doing so can cut the time it takes to file in half!
Not Maximizing Your Deductions and Credits
It’s important to understand what you can deduct and claim so that you can maximize your tax savings. The 2019 deductions are $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly. If you don’t have enough to deduct these amounts will be your standard deduction. But, you can also take advantage of some tax-saving opportunities like contributing to your 401(k) and IRA accounts (contributions capped at $19,000), health savings accounts (contribution capped at $3,500 for individuals and $7,000 for families).
Read more about tax deductions here.
Not Storing your Tax Documents
It’s good practice to hold any receipts, bank or credit card statements and any other tax documentation you plan to claim for at least three years. This is especially true if you take a lot of deductions and claims. I believe it’s a good cautionary step to follow, just in case you ever get an audit by the IRS.
Overpaying to file your taxes
It’s shocking when I hear about the number of people that overpay to file their taxes! Many prefer to pay someone that will the work for them. I get it. But be careful not to overpay! You can avoid this by picking a day out of the week to pour yourself some wine, get all your documents together and file your taxes yourself. Plus there are a lot of free resources out there.
For instance, you can file your taxes free with the IRS. The IRS Free File program is specifically available to assist those with low or moderate incomes to prepare and e-file their returns at no cost to them. If you don’t meet the low or moderate-income requirements, you can take advantage of the plentiful tax filing sites on the web.
I mean I’ve been filing my taxes since I could! I use Free Tax USA and I love it. It’s simple, user-friendly and really easy to follow. Filing your federal taxes is free, while most tax filing sites charge $10-$15 to file your state taxes.
Not filing electronically
When it comes to filing your taxes, electronically is the best way to go. The IRS prefers that people go the electronic route. This is for several reasons. Filing electronically is faster, more accurate and the best way to ensure that you’ll get your refund back in a timely fashion.
Not Selecting Direct Deposit for Your Refund
As I stated before, the IRS prefers the electronic route, which includes how you get your refund. Direct deposit is the way to go. In doing so you can get your refund in less than 21 days of filing. But if you go the old-fashioned mail-check way, you could be waiting up to 6 weeks since filing!
Note: If you owe taxes, electronic payment will be your best bet. Here’s the IRS ran site for any tax bills you owe.
There you have it! The ten mistakes you should avoid this tax season! Was this post helpful? Let me know in the comments below!
Getting a refund? Don’t blow your money all in one place! Why not save it?? Check out my post “50 Ways to Save Money Everyday” here.