7 common tax mistakes that could cost you thousands

There aren't many people who like doing their taxes, but it's even worse when you end up paying Uncle Sam more than is necessary.

Unfortunately, one in five Americans who did their own taxes paid an average of $400 to the federal government that they could have otherwise kept in their wallets because they didn't claim certain credits or take available deductions, according to a 2014 H&R Block study.

Related: The Best and Worst States for Taxes in 2017​​

Don't make the same mistake. Here are seven common tax errors to avoid this year.

1. Paying too much for tax prep: If you have simple taxes, don't pay a professional or shell out for software to do them. About 60 million taxpayers can do their taxes with the Form 1040 EZ, which you can file for free, says Lisa Lewis, an editor at TurboTax.

2. Not itemizing: "Only one in three taxpayers itemizes but millions more should, especially homeowners," says Jackie Perlman, principal tax research analyst at the Tax Institute at H&R Block. "Owning a home and paying mortgage interest is often the key that unlocks itemization."

But those with high state taxes or substantial charitable contributions may find itemizing is better than taking the standard deduction. When itemizing, taxpayers can deduct charitable donations, medical expenses, personal property taxes, real property taxes, state income or sales taxes, casualty losses, mortgage interest payments, certain mortgage insurance payments and miscellaneous expenses such as employee business expenses. "Itemizing can save taxpayers hundreds of dollars," Perlman says.

RELATED: 10 cities where homeowners save a ton on taxes

10 cities where homeowners save the most on taxes
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10 cities where homeowners save the most on taxes

1. San Francisco, California

Based on our calculations, homeowners stand to save the most on taxes in San Francisco. In SF – where the median home value is $958,400 – a two-income household with two dependents could save $5,479 in federal income taxes if the family claims both the mortgage interest deduction and the deduction for paying property taxes (in addition to other itemized deductions).

Photo credit: Getty

2. San Jose, California

San Jose is another city where homeowners can save thousands of dollars at tax time by taking advantage of tax breaks such as the property tax deduction and the mortgage interest deduction. The median home value in San Jose is $730,300. That’s one reason why tax savings are so high for the city’s residents. When homeowners have expensive homes and bigger mortgages, they pay more interest. And that translates to a higher mortgage interest deduction.

Photo credit: Getty

3. Washington, D.C.

Trying to own a home in Washington, D.C. can be an expensive endeavor. The median home value in the nation’s capital is $575,200 and the typical homeowner spends $18,924  per year on housing-related expenses, including mortgage payments and homeowners insurance.

Our analysis revealed that a family of four living in Washington D.C. can potentially save $3,363 in federal income taxes by claiming the tax breaks for homeowners. So if you can afford to live in D.C. and buy a home there, itemizing your deductions instead of taking the standard deduction might be worth it.

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4. New York, New York 

New York is notorious for being a city of renters. About half of the city’s housing units are occupied by renters and more than half of those renters are cost-burdened, meaning that they spend more than 30% of their income on rent.

Among the New Yorkers who make enough money to buy homes, the median home value is $540,800. On the bright side, homeowners who itemize their deductions and claim both the mortgage interest deduction and the property tax deduction may be able to lower their federal income tax bills by $2,248.

Photo credit: Getty

5. Seattle, Washington

On our list of the cities where homeowners save the most on taxes, Seattle ranks fifth. We found that if dual-income households with two children earn $118,552 (the median household income for homeowners) per year and pay $4,149 in real estate taxes, they can save nearly $2,000 just by claiming the tax breaks for homeowners and other applicable deductions.

Photo credit: Getty

6. Los Angeles, California

The median home value in Los Angeles is about 54% lower than it is in San Francisco and 28% lower than it is in San Jose. But lower home values mean that the tax deductions for homeowners aren’t as valuable to residents in L.A. as they are to their counterparts in the Bay Area. Homeowners in Los Angeles can only expect to save $1,762 in federal income taxes by writing off certain expenses, including mortgage interest, real estate taxes, charitable contributions and state and local income taxes.

Photo credit: Getty

7. San Diego, California

Torn between renting and buying a house in San Diego? Keep in mind that the median home value in the city is $535,600. While that may be a high price to pay for a house, the tradeoff is that you’ll likely be able to claim the deductions that offer homeowners exclusive tax benefits.

By our calculations, couples with two kids filing jointly could lower their federal income tax bill by about $1,712. So claiming the mortgage interest deduction, the property tax deduction and other deductions could pay off in the long run.

Photo credit: Getty

8. Boston, Massachusetts

If you’re looking to lessen your tax bite and you’re a homeowner in Boston, you’re in luck. The city takes the eighth spot on our list of places where homeowners save the most money on taxes. By itemizing their deductions and writing off mortgage interest and property taxes, joint tax filers with two dependents could lower their federal income tax burden by nearly $1,600.

Photo credit: Getty

9. Denver, Colorado

In areas where home values are low, the tax breaks for homeowners simply aren’t as beneficial. For example, while the typical homeowner in Denver earns $81,515 per year, she spends about $1,580 on real estate taxes and $14,160 on housing costs overall each year. Claiming the deductions for owning a home and paying other expenses may only save a family of four about $597 in federal income taxes.

Photo credit: Getty

10. Austin, Texas

Home values in Austin have soared. Recent reports suggest that in the past decade, they’ve been increasing at a faster rate than home prices in other cities across the country. Since we published our 2016 analysis, the median home value in Austin has risen by 9%.

The Census Bureau reports that the median home value in Austin is $285,600. We concluded that a dual-income household with two kids might save only $535 in federal income taxes by itemizing deductions and claiming tax breaks like the mortgage interest deduction. But if home values continue to climb, homeowners could save more money in the future during tax season.

Photo credit: Getty


3. Using the wrong filing status: One of the most common mistakes is entering the wrong status or number of dependents, says Perlman. While filing status may be easy for a married couple or single person, it's trickier for a single person with dependents or who lives apart from their spouse. Can the child living in the home be claimed as a dependent, and if so, by whom? "This can be extremely complex with multi-generational households or non-traditional households," says Perlman. "To avoid these mistakes, taxpayers can get help from a tax advisor or do some research on IRS.gov."

Related: The Tax Credit That Lets You Double-Dip on Retirement Savings

4. Missing tax breaks: Look carefully at requirements for credits and deductions, so you don't miss out on extra money. For instance, one in five eligible taxpayers don't claim the Earned Income Tax Credit (EITC) for lower-income workers, says Perlman, not claiming up to $6,269. "Because eligibility can fluctuate based on financial, marital and parental changes, a taxpayer can be ineligible one year and eligible the next," Perlman says.

5. Procrastinating: Rushing to do taxes at the last minute can mean more mistakes. For simple errors, such as inputting the wrong Social Security for a spouse or dependent, you will get a notification from the IRS to correct and your refund will be delayed. "Unfortunately, if you leave off a deduction or credit, you lose that benefit and the IRS will not call you and send you more money," says Mark Steber, chief tax officer of Jackson Hewitt. To get that lost money, you will have to file an amended tax return.

6. Not getting organized: Similarly, if you don't take the time to gather supporting documents, you may be leaving money on the table, says Lewis. Think about what happened last year. Did you get a new job? Or did you move for a job relocation? Expenses related to either of those scenarios can be deductible if you have the receipts. Make sure you have documents supporting charitable donations, especially large ones.

Related: Taxpayers Are Avoiding Billions in Taxes Due to Lax IRS Enforcement

7. Not filing at all. "Some people think they don't need to file taxes because they make under IRS income threshold -- $10,350 if single and $20,700 married jointly," says Lewis. But they could be missing out on a refund if they qualify for the Earned Income Tax Credit, which is refundable, or if they had federal taxes taken out of their paychecks during the year. "They probably will see that withholding come back to them," Lewis says, noting that the IRS has more than $1 billion in unclaimed refunds every year, or $700 per refund.

More from The Fiscal Times:
The Best and Worst States for Taxes in 2017
The Government Is Holding Millions in Unclaimed Retirement Money
The 21 Most Expensive Homes for Sale in the US

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