8 Tax Mistakes That Can Cost You a Fortune
Written by
Sean Bryant
Edited by
Molly Sullivan
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Tax season can be a stressful time of year for many people. And if you have a complicated tax situation, that pressure can be even greater. Unfortunately, according to the Internal Revenue Service (IRS), nearly 17 million mathematical mistakes were made on tax returns in 2022 alone. While some of these mistakes can be minor, others can cost you significant money.
Keep reading as we’ll look at some of the most significant tax mistakes that can make your tax bill even more expensive this year. Luckily, each of these can be avoided, helping tax season go much more smoothly.
Making a Mathematical Error
Mathematical and data entry errors are common when completing your taxes and can potentially be costly. Before online tax software became the common way to file tax returns, most people did everything by hand. This caused mathematical errors to be more frequent. Now, you enter the data, and the software will do the work for you.
Today, the issue is the numbers you input into the software. If you are trying to finish quickly, it’s easy to enter the wrong number accidentally. The solution is simple. Take your time and make sure to check your work before submitting your return.
Not Paying on Time When Filing an Extension
If you need additional time to file your taxes, you can file a six-month extension. However, it’s important to understand that your tax payment is still due on April 15.
If you fail to pay on time, you’ll face a penalty of 0.5% of the unpaid tax each month you have an outstanding balance. However, the penalty will never exceed 25% of the unpaid amount. Understanding that your taxes must be paid, even with an extension, can help you avoid a significant fine.
Waiting Until the Last Minute To Do Your Taxes
Most of us don’t get excited to do our taxes each year. However, with tax day on April 15, it’s best not to wait until April 14 to get started. Instead, start early to give yourself plenty of time to complete it correctly. By waiting until the last minute, you’re more likely to make a careless mistake that could cost you more money.
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“According to an IRS estimate, 20% of taxpayers wait until a week before the deadline to file their tax returns,” said Wayne Bechtol, senior tax accountant and board advisor at Fiona.com. “Unfortunately, waiting until the last moment can lead to delayed filings. Procrastinating till the end could result in missing deadlines, especially if you encounter problems while completing your forms.”
Not Reviewing Your Tax Return Before Filing
Online tax preparers like H&R Block and TurboTax make the filing process much easier than it once was. Unfortunately, even with the use of technology, mistakes can still occur. After all, it’s only as accurate as the information you provide. Before hitting the submit button, make sure you’re double-checking all the numbers to verify they’re correct. This will save you a lot of additional work in the long run.
Taking the Standard Deduction When You Should Have Itemized
In 2017, when the Tax Cuts and Jobs Act was introduced, it nearly doubled the standard deduction amount. The idea was that fewer people would itemize their taxes, saving taxpayers time and reducing stress. However, it’s still important to determine if the standard deduction is appropriate for your situation.
You might have paid mortgage interest and property taxes if you’re a homeowner. Both of these are deductible. You also might have had a large medical bill, paid interest on your student loans or made a charitable donation. Add up all your deductions and you’ll be able to find out if it makes sense to itemize or use the standard deduction.
Missing Potential Deductions
If you’re itemizing your taxes, it’s important to understand the deductions you can take. Missing one or more of these could increase your tax liability by a significant amount.
For example, many people might not know you can deduct mortgage points when refinancing a mortgage. However, you’re only able to deduct the points for that year. If you purchased $3,000 worth of points on a 30-year mortgage, you could deduct 1/30 of $3,000 yearly, or $100.
Another common deduction that isn’t typically realized is that if you were searching for a new job, the expenses related to the job search could be deductible. Plus, your moving expenses can be deducted if you’re relocating for a new job.
Forgetting About Your Charitable Donations
Because most taxpayers use the standard deduction instead of itemizing, they don’t consider the tax benefits of charitable donations. However, even if you use the standard deduction, you can still deduct up to $300 in cash donations made to a qualifying nonprofit.
Not Reporting Income From Your Side Hustle
Whether you recently started a side hustle or have had an additional income for years, it’s easy to forget about it when you file your taxes. Unfortunately, this can end up costing you significantly.
If you worked as an independent contractor in 2023, you’ll likely receive a Form 1099 as long as the income was earned from a United States-based company. This can then be used when filing your taxes.
“As an independent contractor, you don’t want to forget about the expenses required to do your job,” said Grant Sabatier, founder, Millennial Money. “These expenses can be used to offset your income, helping to reduce your tax liability. Make sure you keep your receipts and have a system to keep track of your income and expenses.”
The Bottom Line
Not many people enjoy doing their taxes. However, they’re a vital part of our lives. Whether you’re doing your taxes with software or hiring an accountant, make sure to review everything before submitting. This will help you avoid any unnecessary and costly mistakes.
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