5 Tax Filing Mistakes to Avoid
5 Tax Filing Mistakes to Avoid
Taxes are usually a blip on the radar each spring for most taxpayers, but many cannot expect to have taxes taken out by their employer and call it a day. There are a variety of different life scenarios that may affect your tax bill and deductions, and the end of the year is the perfect time to take a peek at your finances and ensure you are filing correctly. Doing so could help you avoid a hefty bill come April.
- Failing to make estimated payments
A large majority of the workforce has taxes taken out by their employer, but with self employment on the rise, many taxpayers need to confirm they are making the correct payments, filing annually or quarterly to avoid a heavy invoice from the IRS down the road.It is estimated that 15 million Americans are self employed, which means that taxes are likely not withheld from their regular paychecks. Those individuals are expected to consider their net annual income and estimate their tax payments, or work with a financial advisor to do so.
- Making money on the side but not reporting it
Many taxpayers have a “side-job” or a small business or service they offer to make a little extra cash each month. The problem arises when that money coming in is not reported to the IRS. Even just a few hundred dollars made in the last year should be reported.The taxes may be minimal, but failing to do so or choosing not to could result in an audit from the IRS. Depending on how much of your income you failed to report, the IRS has the right to audit up to six years of your return.
- Plans to sell a rental property
The process of reporting rental income is relatively simple. However, taking depreciation into account as one of your expenses is vital.If you fail to consider depreciation, when you go to sell the property, the IRS may charge you with a depreciation recapture, causing you to pay taxes on depreciation deductions that you never actually took.
- Not keeping track of alimony
Whether you are paying or receiving alimony, it is vital to keep track of the payments. If the payments you report do not match with your former spouse’s, you could find yourself in a major headache.Most often, the IRS sends a letter rejecting your alimony deduction and you must either amend your return to match your spouse’s or prepare a letter and full statement, including supporting documents, proving how you arrived at your number. This process can take anywhere from a few months to a year to be fully resolved.
- You’re turning 70 and aren’t planning to withdraw from your IRA
Almost every IRA has certain requirements for withdrawals regarding age (usually 70 or older) and usually regarding amount as well. Failing to make some sort of withdrawal, even if you don’t need to do so, can result in a 50 percent penalty fee.This fee is usually 50 percent of whatever amount you were supposed to withdraw. So, if you were supposed to take out $5,000 from your IRA after turning 70, then you would be hit with a $2,500 penalty.
If your life circumstances land you in one of these 5 categories, you may not want to wait until February or March to begin thinking about your taxes and what you need to file. Considering your financial situation now and taking the time to prepare the necessary documents in advance could not only save you time and stress, but potentially thousands of dollars.
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