Avoid these 5 common tax-filing errors

Last year the Internal Revenue Service issued most tax refunds in about three weeks, but many refunds get held up by simple errors.

Even though more people are using tax software to file their state and federal income taxes, mistakes still happen, prolonging the pain of a not-very-fun duty. Financial advisors and tax experts say filers can save themselves headaches if they take simple steps before sending their returns to Uncle Sam.

Here are five potential problem areas to watch.

Making typos and inputting incorrect information. One of the most common errors tax filers make is entering wrong information or typing the incorrect figures, such as mistaking Social Security numbers or federal ID numbers, says Grafton "Cap" Willey, managing director at CBIZ Tofias in Providence, Rhode Island.

[See: 10 Skills the Best Investors Have.]

"The IRS is relying more and more on document matching, so it's more important than ever that your numbers show up as they are on those returns," Willey said.

Errors like typos are something no tax software will be able to catch, either, which is why taxpayers should double check all their information before filing.

Missing or incorrect information can lead to delays for not only refunds, says Linsay Thomas, finance expert at San Jose, California-based consumer website Dealsplus.com.

"If you're due for a refund, you won't receive it if you use the wrong account number," she says. "If you need to make a payment and use the wrong account number, the payment will fail and you'll be charged late fees and other penalties."

In that vein, not telling the IRS of a move or a name change falls under this category, says Al Zdenek, founder of New York City-based Traust Sollus Wealth Management and author of "Master Your Cash Flow: The Key to Grow and Retain Wealth."

"When people move, they change their address with friends, but they don't notify the IRS," he says. "Use Form 8822, the change form, especially if you're in communication with IRS and in the middle of it you move. They don't know where you are. Also, if a spouse has changed his or her name and they don't notify the IRS, it causes problems."

Check out this must-see guide to the most-commonly used tax forms:

Guide to commonly-used US tax forms
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Guide to commonly-used US tax forms

The 1040 family of tax forms is for federal income tax and is absolutely essential for all.

The 1040EZ form is the simplest version and is typically filed by those who:

  • Have no dependents
  • Are younger than 65
  • Earned less than $100,000
  • Don’t plan to itemize deductions

Form 1040A is more comprehensive than 1040EZ, but simpler than the regular 1040. It's beneficial for those who earn less than $100,000 and don’t have self-employment income -- but who want to make adjustments to their taxable income, such as child tax credits or deductions for student-loan interest. Note that it doesn't allow for itemized deductions.

Form 1040 is filled out by those who make $100,000 or more, have self-employment income or plan to itemize deductions.

The W-2 is completed by employers document each employee's earnings for the calendar year. You will want to take a look at this tax form for important information you'll need to fill out your 1040, 1040A or 1040EZ. 
The 1098 form is filled out by those who:
  • paid interest on a mortgage
  • paid interest on a student loan 
  • paid college tuition
  • donated a motor vehicle to charity

The 1099 series is reports all income that isn’t salary, wages or tips, and must be reported on both the state and federal level.

1099-DIV reports dividends, distributions, capital gains and federal income tax withheld from investment accounts, including mutual fund accounts.

1099-INT trakcs interest income earned on investments.

1099-OID (Original Issue Discount) is provided if you received more than the stated redemption price on maturing bonds.

1099-MISC documents self-employment earnings, as well as miscellaneous income such as royalties, commissions or rents. It covers all non-employee income that is not derived from investments.

If you receive a refund that you're unable to pay in full, you can request a monthly installment plan using Form 9465.
Don't forget to notify the IRS if you move! Use Form 8822 to change your address with the Internal Revenue Service. Otherwise, notices, refunds paid with a paper check and other correspondence relating to your personal, gift and estate taxes will be sent to your former address.
Anyone who has been employed by a company has completed a Form W-9. The W-9 is used by employers for payroll purposes -- and the information on the W-9 is used to prepare employee paychecks during the year and W-2 forms at the end of the year. 
The W-4 is an IRS form completed for employers know how much money to withhold from your paycheck for federal taxes. Accurately completing your W-4 can both ensure you don't have a big balance due at tax time and also prevent you from overpaying your taxes.

Claiming dependents. Gil Charney, director at The Tax Institute at H&R Block in Kansas City, Missouri, says this is a common question with filers, noting the rules on who gets to claim a dependent can be complex.

"(Mistakes) might mean claiming someone who should not be claimed, or not claiming someone you can claim," he says. "Each dependent is worth up to $4,000 off your tax bill, so it's important to get it right."

This can happen with divorced spouses each trying to claim a child as a dependent. Also, if a child who is working tries to claim himself or herself as a dependent when a parent also tries to claim the child, he said.

For divorced parents, usually it's the custodial parent who gets the deduction, Willey says. In the case of children trying to claim themselves as dependents, this can happen when children are under the age of majority but are working, or are adults attending school full-time.

[See: 7 Dividend Stocks to Benefit From Trump Tax Changes.]

Most often this occurs when children file taxes for the first time and don't realize what dependent means, the tax advisors say. If the parent is paying for the majority of the support, usually they get to claim the deduction, not the child. That's why parents should talk to their kids ahead of time to explain how to file.

"Otherwise you'll have a battle with the IRS," Willey says.

Misunderstanding education credits. Willey says there are a lot of missed opportunities regarding education credits.

There are several benefits for education credits, Charney says, but it can be complex and confusing. He recommends filers look at IRS publication 970 about education.

"It's a thick book, but a chart near the back shows key features of this benefit," he says. "It helps you know what you qualify for."

Thomas says people who took just one college course last year may be eligible for a portion of the education credits. Among them, the American opportunity credit is worth up to $2,500 while the lifetime learning credit is worth up to $2,000.

Not holding onto receipts. People who itemize need to retain receipts showing what they've spent, Thomas says.

"If you're ever audited, the IRS will go off of your receipts, so if you don't have any, you likely won't get credit for the deductions," she says. "Hold onto your receipts for at least three years and you won't have to worry." she says.

Speaking of receipts, make sure to get one when making a payment to the IRS. That's especially true for people who still use the post office to mail payments, Zdenek says.

"When you're going to send a payment to the IRS or for the state taxes, always send it certified mail with a receipt, especially if it's close to the due date," he says. "If you put the check in the mail and if it's lost or whatever, you can prove you sent it."

Paying less attention to state returns. Charney says people have a habit of not being as rigorous in seeking out exemptions on their state return.

"State tax is often an afterthought," he says. "There are so many dollars that are available on a state return, with state- and city-specific credits: angel investing, renewable energy, rehabs and so on."

Zdenek agrees. For instance, he says residents in New York who have long-term care insurance can receive a 20 percent credit on their state returns for premiums paid.

Charney says it is worth the taking the time to find these credits.

[See: 10 Great Ways to Buy Emerging Markets.]

"You need to research it," he says. "When you file your federal return you're not done yet. There can be a lot left on the table, possibly, if you don't claim those credits."

Copyright 2017 U.S. News & World Report

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