Common Tax Mistakes and How to Avoid Them

Why would filing too early be a problem? Understandably, you want to finish taxes as early as possible. However, you could miss out on important tax reporting documents coming your way, especially if you have more than one income stream or are a homeowner.

Some tax documents might arrive in mid-February, so it could make sense to wait until then before filing your taxes to avoid any potential processing delay. As TBH Advisors’ Brett Walters pointed out, “While it might be tempting to file your returns at the earliest possibility, higher-net-worth taxpayers may not have the luxury.”

On the flip side, though, you don’t want to leave your taxes to the last minute either. As TurboTax says, “Preparing your taxes early will give you time to figure out how you’re going to pay, or other options if you owe. You can even make a 2023 contribution to your IRA before the tax deadline of April 15, 2024 and reap the benefits of an additional tax deduction on your 2023 taxes, reducing what you owe or increasing your tax refund.”

If you miss the deadline, be ready for a 5% penalty on the taxes due for each month, with the maximum charges capped at 25%. If applicable, you might also pay interest on the penalties.

If you owe money to the IRS and are unsure you can pay it by the deadline, simply file for a free six-month extension using the IRS Form 4868 electronically or by post before the deadline. Do so to avoid the IRS seeing you as a late filer and imposing accruing charges.

Double-check all your earnings, be it interest from bank deposits, capital gains, or income reported on information returns like W-2, K-1, or 1099. These forms are reported to the IRS, so ensure they tally since government computers expect them to match.

For instance, if your calculations don’t match with what was reported to you on your W-2 form, get it rectified with your employer. If you still don’t get a corrected form by February-end, contact the IRS to lodge a W-2 complaint.

Remember, you must also input your correct 2022 adjusted gross income (AGI) to file your 2023 taxes online since the IRS uses the previous year's AGI for identity verification. Any mismatch will lead to the rejection of your tax return, compelling you to refile. If you didn’t file taxes last year, simply enter $0 for your 2022 AGI to file taxes this year.

Don’t worry if you can’t access last year's income tax return, as you can request an online transcript from the IRS website by creating a free online account.

You should also make sure you’re aware of how your taxes are being withheld to avoid a surprise tax bill. As Jake Northrup from Experience Your Wealth pointed out, “Your base salary and RSUs are taxed the same (ordinary income)... but taxes are withheld differently.

“Your W-4 informs your tax withholding on your base salary, but RSUs are treated as "supplemental wages" where taxes are withheld at a statutory 22% federal rate up to $1 million, instead of being withheld per your W-4.”

Some people jump to take the standard deduction, failing to realize they could save more money with itemized deductions. This is because they can’t remember or don’t have receipts for last year's business expenses.

Hark Financial Planning Certified Financial Planner Eric Scruggs said taxpayers often forget their expenses during the year and then fail to report vital tax-saving data on their returns.

“For example, they forget to report contributions to IRAs and 529 accounts and therefore miss potential deductions and tax savings,” Scruggs said. "For taxpayers, it can be helpful to keep a running list of what you did during the year and keep that with your tax info so that come tax time it is easier to remember what you did.”

However, ballparking your business expenses while reporting could raise red flags in a tax audit. The IRS could then seek receipts as proof and complicate a simple tax return. In such cases, tax audit services could be your only resort.

Do you have children or have a low-to-medium annual income? Are you paying for higher education and keeping money aside for retirement? Have you bought health insurance from the marketplace or invested in electric vehicles? If involved in the above activities, you could claim credits to lower your tax dues or increase your refunds.

Did you know you can claim refundable credits even if you don’t owe taxes? While most credits can lower your tax dues to $0, refundable credits can translate into free money by refunding any remaining credits you are entitled to.

Tax credits often come in the form of Earned Income Tax Credit (EITC), Child Tax Credit, Premium Tax Credit, and Personal Tax Credits, among others. Each type has its unique eligibility criteria. Hence, check that you qualify for the credits you claim.

Kay Bell from Don’t Mess With Taxes recommends checking for recent tax changes that could benefit you: “There weren't any major tax law changes in 2023, the 1099-K changes notwithstanding. But some earlier tax code revisions that cover several years might apply to your 2023 return. This includes Inflation Reduction Act of 2022 climate change provisions that could save you as much as $1,200 in tax credits if you made energy-efficient changes to your home. The car you bought last year could get you another credit of up to $7,500 if it's a qualifying electric vehicle.”

Deductions and claims might be rejected; your return might change completely, or you might even be suspected of tax fraud if you file taxes under an incorrect filing status.

There are five filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. The filing status determines your taxable income and standard deductions, as well as your refunds and tax credit eligibility.

Note that for the 2023 tax year, the maximum EITC credit amount you can claim for two qualifying children and an AGI limit of $52,918 is $6,604 when filing under the single, head of household, or widowed status. The AGI limit increases to $63,398 when filing under the Married Filing Jointly status.

You could even be eligible for more than one filing status, which could make things confusing. If you have filed using an incorrect status, you must file a revised return with Form 1040-X attached.

To end all debates on your filing status and which one suits you the best, check out the IRS filing status tool for making the right decision.

Misspelt names and incorrect social security numbers of filers and their dependents are common mistakes in tax returns. These errors are all the more likely if you file taxes in haste when nearing the deadline.

Ensure you enter your full, correct name and the SSN mentioned on your social security card to avoid the IRS rejecting your tax return. You must notify the Social Security Administration of any changes to your legal name before filing with the new name.

When calculating EITC, deductions on loan interest payments, or premium tax credits for health insurance coverage, complex rules for different tax items could make computation tedious. A miscalculation or incorrect number entry could directly impact refunds or even convert to tax dues you don’t owe.

Tax preparation software is one way to eradicate errors in calculating tax credits or refunds. Some tax specialists also offer guarantees for any losses or penalties you incur for calculation mistakes from their end. However, calculations will be based on your input, so make sure all information you provide is accurate.

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If you expect a tax refund, the US Treasury will mail you a paper check by default if you don’t specify the refund method. You must select the right place for the Treasury to send the refund for paper checks.

At the same time, tax processing centers differ based on your location and tax form type, leaving it up to you to find where to submit your tax form. The IRS submission guide could help you with this.

You can avoid such extra work by filing electronically. E-filing with direct deposit into your bank account speeds up your tax refunds. You should know that entering wrong routing numbers when e-filing could prompt the IRS to send you a paper check at the mailing address, causing weeks of delay.

At worst, you may enter valid bank details of an account that is not yours. In that case, the refund will go into someone else’s account, and retrieval could become a maze of complicated paperwork and in-person visits to the bank.

Kelly Phillips Erb, aka Taxgirl, said “Every year, I receive a slew of taxpayer emails asking how to redirect payments scheduled to be deposited in old or closed accounts. Head this off early by double-checking your bank info on last year’s return… and confirming that it’s still correct.”

Those who file tax returns offline must sign the form before mailing it to the appropriate tax center. If you jointly file with your spouse, both signatures must be on the form; though exemptions apply for armed forces members. The IRS only accepts paper returns with signatures. This error can be prevented by digitally signing your returns and filing taxes electronically.

While the IRS goes a long way with tools and resources to help you correctly file taxes, some details, like keeping track of business receipts and staying on top of regulatory changes, can help you manage your yearly taxes better.

If your AGI is $79,000 or less, you can select from a range of IRS partners like TaxSlayer and TaxAct to file your taxes for free. Beware, some IRS partners might charge a fee for state tax preparations.

Getting prepared early means you won’t get a nasty surprise. If you know how much you owe, you can budget for this and avoid getting penalized for being unable to pay.

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