5 tax mistakes made by baby boomers

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Don't Make These Tax Filing Mistakes

Baby boomers nearing retirement can't afford to make tax mistakes. Instead, they need to shore up their capital for the future. The penalties for making these tax mistakes include triggering an audit, incurring a penalty and owing additional taxes.

Here are the five biggest tax mistakes made by baby boomers. As you file your 2015 tax return, take care to avoid these missteps.

1. Not Checking the Preparer's Work

In a small study of randomly selected tax preparers in 2014, the U.S. Government Accountability Office reported "significant preparer errors during undercover site visits to 19 randomly selected preparers." The refund errors ranged from giving the taxpayer $52 less to $3,718 more than the correct refund amount, with only two of the 19 preparers calculating the refund amount properly.

That is why you must not trust your tax preparer — or even a computerized program — to get your return right. Instead, baby boomer taxpayers should be sure to tell their accountant about major life changes that might affect their tax situation, said Crystal Stranger, enrolled agent and president of 1st Tax. Trusting the tax preparer to know it all "can lead to both unreported income and not taking advantage of tax deductions they are legally entitled to," she said.

To avoid overpaying your taxes or filing an inaccurate return, you must gain a basic understanding of the IRS tax law. Here's how to make sure not to pay Uncle Sam more than you owe:

  • Every year, examine the IRS changes.
  • Understand the basic IRS tax preparation forms that apply to your situation and how taxes are calculated.
  • Check your accountant or tax preparer's work to make certain the inputs are accurate. For example, did they put a $5,000 deduction for office supplies on schedule C when it should have been $500?
  • Review your online tax return before submitting to make sure it's correct and that you didn't make any inputting errors.

Before filing your 2015 tax return, perform your due diligence no matter how unpleasant, and review the documents.

Related: Tax Deductions 2016: List of 50 Tax Write-Offs You Don't Know About

2. Not Maxing Out Retirement Investing Opportunities

For working baby boomers, now is the time to shore up your retirement nest egg. Not contributing the maximum to your tax-advantaged retirement accounts can cost you large sums of taxes today, as well as lost spending money in retirement. Furthermore, if it's a choice between helping out your older children or saving for your own retirement — choose retirement.

If you're over age 50, you're eligible to contribute to your workplace 401k or 403b a base amount of $18,000, plus an additional "catch-up" sum of $6,000, for a total of $24,000. If you're in the 25 percent tax bracket, then contributing the maximum reduces your taxable income by the same amount and reduces your tax bill by $6,000.

You might also go beyond investing in your workplace retirement plan and consider an IRA, suggested Yvette D. Best, CEO of Best Services Unlimited, LLC. For 2015 and 2016, individuals over 50 can contribute up to $6,500 to a traditional IRA for a full tax deduction, even if they are covered by a retirement plan at work.

This applies to individuals earning under $61,000 and couples making under $98,000. There is a partial deduction allowed for income between $61,000 and $71,000 for singles and between $98,000 and $118,000 for couples. "This deduction can result in thousands of dollars saved on your tax bill," said Best. "You have until April 18, 2016, to avoid the tax mistake of not contributing the maximum to your retirement account."

Consider this scenario: Invest just $1,000 per month beginning at age 50, and by age 68 you might have a retirement account worth over $430,000. That assumes your investments yield an annual 7 percent return from a diversified stock index mutual fund. Not only will saving in a tax-advantaged account save you thousands on your tax bill, but it will also strengthen your retirement opportunities.

3. Making a Mess of Your Small Business Tax Reporting

Many baby boomers are starting new businesses or have up-and-running entrepreneurial ventures. If you treat the expenses from these concerns inappropriately, then you could owe Uncle Sam not only additional taxes, but penalties as well.

If you're starting a new business and racking up expenses, you might not be aware that any expenses incurred before the first sale are considered start-up costs and can't be deducted until the first sale, said Gail Rosen, CPA, PC. After the first sale, the start-up costs can be deducted over 15 years, and you can also elect to deduct the first $5,000 in the first year of business.

Another baby boomer tax mistake is made by those who have small business sales. They might think the income is so small that it's not worth reporting. "If it is a real sale, at a bona fide sales price, you should report your business sales and deduct your business expenses," said Rosen.

Read: 2015 Tax Law Changes You Need to Know About

4. Taking an Early Withdrawal From a Retirement Account

Some younger boomers who are going through a difficult time might tap their retirement account for extra cash. This a big tax mistake, according to Anil Melwani of 212 Tax and Accounting Services. If a taxpayer takes out money from their retirement account before age 59½, they will be taxed on the withdrawal amount and incur an additional 10 percent tax on the amount they took out.

For example, if 55-year-old Jane Baby Boomer takes out $10,000 from her IRA, she'll owe tax on the withdrawal, plus the $1,000 (10 percent of $10,000) penalty. If Jane is undergoing difficult times, it's advisable for her to seek out other sources of income rather than making the mistake of withdrawing money from her IRA.

The only way this penalty can be avoided is if the taxpayer demonstrates that they have a total and permanent disability, and that the money is used for unreimbursed medical expenses or health insurance premiums paid while unemployed. There are a few additional exceptions to the penalty, but not many.

5. Thinking Your Hobby Is a Business

If you have a business that never makes any money, watch out for this mistake. Boomers are frequently guilty of running afoul of IRS "hobby loss" rules. Several tax pros, including Stranger and Dan Henn, CPA, see this baby boomer tax mistake regularly in their practices.

If you take a loss on a business for more than three years, the IRS considers your enterprise a hobby, which makes it ineligible for preferential tax treatment. The tax authority assumes that if an activity is intended to be profitable and isn't so during at least three of the prior five tax years, including the current year, then you can't use the losses from that "business" to offset other income. So the struggling entrepreneur can keep struggling after year three, but don't expect Uncle Sam to give you the OK to use your losses to offset your income.

Baby boomers, take a few hours to understand the IRS tax forms. Keep the doors of communication open with your accountant. And finally, learn to take responsibility for your own tax preparation to avoid unpleasant and expensive tax mistakes.

This article originally appeared on GOBankingRates.com: 5 Tax Mistakes Made by Baby Boomers

RELATED: 10 Strangest Ways That States Tax You (or Don't)
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5 tax mistakes made by baby boomers
To preserve the uniqueness of their island paradise, Hawaii since 2004 has had an "Exceptional Tree" tax allowance. Landowners can deduct up to $3,000 from their income for expenses such as pruning and fertilization for any tree designated as rare, big, old or a combination thereof. That's per tree. Top-bracket earners taxed at the state's highest rate (11 percent) would save $330 via the deduction. The work must be done by a certified arborist, and the deduction can be claimed only every third year. Hawaii has had a list of "Exceptional Trees" since 1975, and there are now estimated to be more than a thousand thus designated.
Maine legislators tax anyone who deals in their official state fruit-blueberries, at the rate of 1.5 cents per pound. The resulting revenues-more than $1.6 million to state coffers in the fiscal year that ended in June 2013-are used to promote the crop and agricultural research. 
The state also taxes harvesters and processors of hard-shell clams (known in the state as mahogany quahogs) at $1.25 a bushel, but state revenues for that are much lower. 
Alabama is the last in the union to tax a deck of cards as if it were a "vice," like alcohol and tobacco. Taxing decks of cards, associated with gambling, was once fairly common, but most states have since set up separate control boards to regulate liquor and tobacco, and have let the cards slide.
But in Alabama, you'll still pay a 10 cent sales tax on any pack of cards you purchase. Retailers also have to pay $2 to the state each year for the privilege of selling playing cards.
Virginia levies a 50-cent excise tax on every lamb or sheep sold in the state. Both the Maine and Virginia taxes are examples of checkoff programs that collect taxes from an industry to fund promotional campaigns for the products. National commodity checkoff programs, authorized by the U.S. Department of Agriculture, have brought you campaigns such as "Beef: It's What's for Dinner" and "Got Milk?" But the Virginia program is extremely modest by comparison, having collected only $9,000 in fiscal year 2013. The funds go to the Virginia Sheep Industry Board, which spends them largely on predator control.
In 2013, in part to meet federal pollution-control mandates, Maryland legislators enacted fees on property owners in Baltimore and nine other Maryland counties, aimed at curbing storm water runoff. The fees were meant to fund programs to improve the water quality of the Chesapeake Bay, the largest marine estuary in the U.S. Sounds simple enough, but the way Maryland legislators wrote the law has led to an angry backlash in some corners against this so-called “rain tax.” One way localities calculate the tax is by measuring how much of a landowner’s tract is "impervious" to precipitation seeping into the ground. So the more you've developed it with buildings, driveways, tennis courts and the like, the less it will absorb and the more you pay. That's how the tax is being implemented (through aerial and satellite photos) in Montgomery County, a heavily developed suburb of Washington, and many landowners are up in arms. New Maryland Gov. Larry Hogan, a Republican, campaigned against this tax in his winning 2014 campaign and has introduced legislation to repeal it, though it’s not clear that will fly with Democratic state legislators. Money still needs to be raised to satisfy the federal pollution mandates, but the methods may change.
Kansas is among a bevy of jurisdictions that allows sale of lower-alcohol beer (the term of art is “cereal malt beverage”) in convenience and grocery stores. But Kansas also taxes “3.2” beer differently -- and there lies the rub. At a liquor store, all products, including, say, a conventional six-pack of Budweiser (with 5 percent alcohol by volume), are taxed at a special rate of 8 percent. At the convenience store down the street, however, ordinary sales tax is levied on the lower-alcohol, cereal malt beverage bottle of Bud. That often ends up being more than the 8 percent alcohol tax. In Pomona, Kansas, for example, the effective rate on the weaker beer would be 9.7 percent. Go figure.
When it comes to taxation, the rule is generally the stronger the booze, the higher the tax (that's why Kansas's beer tax scheme is an anomaly). California follows that curve, but at 100 proof, you better be ready to pay through the nose. Distilled spirits are taxed at $3.30 a gallon if below 100 proof, or 50 percent alcohol. Go over that, like with Bacardi 151, and the tax doubles to $6.60. Maryland also notes the 100 proof point, but it only adds 1.5 cents per proof, per gallon to the relatively modest liquor tax of $1.50 per gallon, taking the Bacardi 151 to $2.27 per gallon.
Entertainment venues pay a business tax to Nevada ranging from 5 percent to 10 percent on admissions fees (and food, drink and merchandise sales) whenever there’s live entertainment going on. There are exemptions, however, including this one, for businesses that provide "instrumental or vocal music, which may or may not be supplemented with commentary by the musicians, in a restaurant, lounge or similar area if such music does not routinely rise to the volume that interferes with casual conversation and if such music would not generally cause patrons to watch as well as listen." So your piano player can play “Feelings” softly and even crack a few jokes, tax-free, for your business. Just make sure they're not funny enough to attract attention.
Want to own a plush or fuel-thirsty ride? That’ll cost you extra in New Jersey. Cars that cost $45,000 or more or have a combined EPA fuel-mileage average of 19 or below pay an additional 0.4 percent on top of New Jersey’s 7 percent sales tax. 
In New Mexico, making it to 100 years has a payoff beyond the chance that Willard Scott will wish you a happy birthday: You don’t have to pay state income tax anymore. If you’ve been physically present in the state for at least six months and a resident of the state on the last day of the year, and you’re not someone’s dependent, you’re eligible. You’ll still need to file, and there are some complications if you’re married and your spouse doesn’t qualify.
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