Every year, taxpayers face unexpected tax surprises that could have been avoided with a bit of foresight and planning.
In this article, we’re going to share 5 of the most common (and biggest) tax mistakes, as well as provide strategies on how to best avoid them.
1. Not Withholding Enough
One of the most frequent tax surprises comes from withholding too little from your paycheck. This can lead to an unpleasant surprise when you file your income tax return.
Changes in Social Security withholdings and misunderstandings about how employers calculate tax withholding can contribute to this issue.
To avoid withholding too little, review your withholdings after filing each year’s tax return.
Modify your withholdings as needed by submitting a revised Form W-4 to your employer. This step is especially crucial if you’ve received unemployment benefits or if you need to make estimated tax payments.
Regular check-ins can help you stay on track and avoid any surprises at tax time.
2. Withdrawing From Pre-Tax Retirement Accounts
Withdrawing funds from pre-tax retirement accounts such as 401(k)s and IRAs can unintentionally generate taxable income.
The most frequent error happens during rollovers from one retirement plan to another. If mishandled, the entire rollover amount may be treated as taxable income.
To prevent inadvertently withdrawing these funds, try not to touch your retirement accounts if possible.
One exception is when you turn 73 and are subject to required minimum distribution regulations.
If you must withdraw funds, make sure the correct tax withholdings are applied at the time of withdrawal. Opt for direct rollovers into a new plan instead of managing the transfer yourself to minimize the risk of errors.
3. Not Utilizing Tax-Deferred Retirement Programs
Many taxpayers miss out on opportunities to reduce their taxable income through tax-deferred retirement programs.
Contributing to these programs can significantly lower your taxable income.
To better take advantage of tax-deferred retirement programs, check out your savings options and contribute as much as possible to your retirement accounts.
Pay particular attention to plans with an employee match component, as this is essentially free money that can grow your retirement savings.
Regularly reviewing and adjusting your contributions can maximize your tax benefits and enhance your retirement savings.
4. Making Mistakes With Direct Deposit
While direct depositing tax refunds into multiple bank accounts is convenient, it can lead to issues if account numbers are entered incorrectly.
Unlike a lost check, the IRS cannot easily correct this type of error, and there have been instances where taxpayers have lost their refunds due to such mistakes.
If you prefer not to give the IRS direct access to your bank account, you can choose to receive a physical check for any overpayment.
If you use direct deposit, avoid splitting your refund into more than one account to minimize the risk of errors.
Double-check the account numbers on your tax form before submitting it, and consider having a second person review them as well.
5. Not Keeping Proper Documentation
Without proper documentation, the IRS can disallow valid deductions, even if you have incurred the expenses.
This includes mileage for business travel, charitable donations, medical expenses, and daycare payments.
Good record-keeping should start at the beginning of the year.
Set up both digital and paper folders categorized by income and expense types. Maintain a current mileage log and meticulously record your charitable donations.
Maintaining accurate records throughout the year ensures that you can substantiate your deductions if questioned by the IRS.
Work With A Tax Professional
Avoiding these common tax mistakes requires a bit of planning and diligence. However, the peace of mind that comes with knowing you won’t face unexpected tax bills is well worth the effort.
For personalized assistance and professional tax preparation services, reach out to us at Minton CPA & Associates. Our team has been providing tax services to individuals and businesses In the Hampton Roads region for over 30 years.
Our tax experts can help you navigate the complexities of the tax system and ensure you maximize your tax benefits. Call us today at 757-546-2870 to schedule a consultation and take the first step towards a stress-free tax season.