I’m a Tax Expert: The Top 8 Mistakes That Cost People Money

Khanchit Khirisutchalual / Getty Images/iStockphoto
Khanchit Khirisutchalual / Getty Images/iStockphoto

Filing taxes can be confusing and overwhelming for a lot of people. It can be easy to make mistakes, especially if you are doing your taxes by yourself for the first time.

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Keep reading to find out some of the most costly tax mistakes people make when filing their tax returns.

Math Errors

Math errors are among the most common tax mistakes, especially when completing your taxes by hand. Even with online software, numbers can be input incorrectly. Be sure to take your time and double-check your work before submitting your tax returns.

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Paying Your Taxes With a Debit or Credit Card Without Realizing the Fees

It’s possible to pay your taxes with a debit or credit card, but it will cost you extra. Different processors charge different fees for debit card and credit card transactions. However, the fee to use a credit card is roughly 2% of the transaction amount. So if you owe $2,000, it will cost you around $40 to use a credit card.

Debit card transactions are considerably less costly, but you’ll still be charged around $2.50 per transaction.

Not Paying on Time When Filing an Extension

Even if you receive an extension for filing your taxes, you still need to make your payment by the April 15 tax filing deadline. If you don’t pay by then, you’ll have to pay penalties for a late payment. The IRS charges you one-half of 1% each month on the amount you still owe after the deadline. If you don’t file a return at all by the deadline, the IRS penalty increases to 5% per month, for a maximum penalty of 25%.

Not Accounting For Taxes When Doing a Roth Conversion

You can do a Roth conversion and move your retirement funds for many different reasons. You might believe you’ll be in a higher tax bracket at retirement, or you could be trying to minimize your estate for your heirs. Whatever the reason, it’s important to know that a Roth conversion will trigger a taxable situation.

“Converting funds from a pretax retirement account to an after-tax retirement account triggers a taxable event,” said ​​Christian Putnam, CPA, managing director at Augur CPA. “Because it’s taxable, your brokerage might ask whether you want taxes withheld from the conversion and sent on the IRS on your behalf. However well intentioned you may be, this can be a costly mistake.”

“Because the tax withholdings are taken from the pre-tax retirement account and not deposited into the after-tax retirement account, the IRS will consider the tax withholdings as an early distribution. The 10% penalty will apply to the amount withheld for taxes, a cost that could have been avoided,” Putnam said.

Missing Potential Deductions

When you file your taxes, you can take the standard or itemized deductions. Many deductions that you’re unaware of may be available to you. If you’re itemizing your tax return, double-check to ensure you’re not missing any potential deductions.

You can deduct things like mortgage interest, property taxes, charitable donations, student loan interest, travel expenses for volunteering or medical care, energy-related home improvements, job search expenses, and more. Make sure you know all potential deductions that may apply to you. This way, you can minimize your tax liability as much as possible.

Not Reporting Income From Your Side Hustle

You must report any income you earn, even if it’s from a side hustle. If you worked as an independent contractor with a United States-based company, you likely received a Form 1099. You can use this form when filing your taxes.

If you’re caught under-reporting, you could face fines. Don’t forget that you can deduct all expenses related to your side hustle. This can help offset your income on your taxes. Just make sure to keep your receipts for these expenses.

“Unlike employment, when self-employed, you do not have taxes automatically withheld from your income,” Putnam explained. “Instead, you’re liable for paying income and self-employment taxes on your income. ​​​​Many don’t realize this obligation until they file their tax returns the following year, at which point they might have already spent what they should have paid toward taxes. Penalties and interest will accrue until they’re able to pay their tax bill.”

Putting Down the Incorrect Bank Account Number

If you’re due a tax refund, you can choose a direct deposit to receive the money. However, if you put down the wrong bank account number on your tax form, you’ll have issues receiving the money. You’ll likely need to call the IRS to get the discrepancy sorted out. This could cause your refund to be delayed by weeks or months.

Not Having Healthcare Coverage in Some States

The Affordable Care Act used to require individuals or their family members to have qualifying healthcare coverage every month, and if they failed to do so, a penalty fee was imposed. However, this penalty was eliminated in 2019.

Some states have their own individual health insurance mandates. For the 2023 tax year, California, Massachusetts, New Jersey, Rhode Island, Vermont and Washington, D.C., have health insurance mandates for residents. Vermont is the only state that does not impose a penalty for noncompliance.

The Bottom Line

Very few people enjoy doing their taxes, but it’s a must each year. However, that doesn’t mean you need to waste money by making tax mistakes. To avoid these common issues, double- and triple-check your work, whether you are doing your taxes yourself, with an accountant or with an online software.

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This article originally appeared on GOBankingRates.com: I’m a Tax Expert: The Top 8 Mistakes That Cost People Money

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