Monday, March 10

10 common tax-filing mistakes to avoid

10 common tax-filing mistakes to avoid
Business Week | By Kay Bell,

Tax season is stressful enough without stumbling into one of these traps.

Thanks to tax preparation software, more of us are making fewer mistakes on our annual tax returns. But still, just one slip in entering information on your computer could end up costing you, either in the form of a larger tax bill or a smaller refund.

And even if a mistake -- either on your computer or paper forms -- doesn't cost you cash, it could delay the receipt of any refund you're expecting.

Tax changes also complicate the annual tax filing exercise. For the 2013 tax year, some higher income taxpayers (and their tax preparers) will have to decipher the 3.8 percent tax on investment income. Don't be surprised to see this new provision make the IRS list of specific problems during the 2014 filing season.

Special tax scenarios aside, there are still plenty of ways to mess up a 1040 form. Here are 10 common mistakes that show up every tax season. Don't make them this year!

The most common error on tax returns, year after year, is bad math. Mistakes in arithmetic or in transferring figures from one schedule to another will get you an immediate correction notice. Math mistakes also can reduce your tax refund or result in you owing more tax than you thought.

Using a tax software program to file your return can help reduce math errors. The built-in calculators do the work for you, adding, subtracting and inserting numbers on additional forms as needed. But you still have to make sure your initial numbers are correct. Entering $3,500 when the real figure is $5,300 makes a lot of tax difference. Getting the numbers right is crucial because you can be sure the IRS will be double-checking numerical entries against its copies of your tax statements (W-2, 1099s and the like).

When IRS examiners find a discrepancy, they'll definitely let you know and, in many cases, will correct your mistake and refigure your taxes for you. Don't give them the chance. Make sure your math entries are right.

These are cousins to the standard math mistakes. In these computation cases, taxpayers or their tax pros make mistakes in figuring such tax-return entries as taxable income, withholding and estimated tax payments.

Credits and special deductions also pose problems. Errors regularly show up, says the IRS, in figuring the Earned Income Credit, the taxable amount of Social Security benefits or in calculating the larger standard deduction for taxpayers who are age 65 or older or blind. A common connection in all of these errors is added worksheets or forms before the amounts are transferred to the taxpayer's Form 1040.

The IRS is all about numbers, but words, specifically names, are important, too. When the names of a taxpayer, his or her spouse or their children don't match the tax identification number that the Social Security Administration has on record, that difference will cause the IRS to kick out or slow down processing of the tax return.

This often is a problem for new wives. Many women change their surnames when they marry. That's also an option for spouses in same-sex marriages, which the IRS now recognizes. If you didn't alert the Social Security Administration of your name change soon after your wedding, do so now so that your new name won't cause a problem when you file your first joint tax return.

And if marital bliss doesn't last and you change your name after a divorce, make sure Uncle Sam's appropriate agencies know that, too.

Taxpayers can have a refund directly deposited into multiple bank accounts. This option is a great way to save your refund money, but the more numbers you enter on a tax form, the more chances you have to enter them incorrectly. And a wrong account or routing number could cause you to lose your refund entirely.

You can divide your refund into three accounts by filing Form 8888 along with your individual return. It's not a difficult document to complete, but if you put in wrong account numbers, your refund could end up in someone else's account or be sent back to the IRS. Either way, you might not be able to retrieve your refund because there is no IRS procedure for replacing lost electronically transferred funds.

Incorrect account numbers aren't just a problem when a refund is split multiple ways. Even if your refund is going to just one account, make very sure you enter your account and bank routing numbers correctly.

Did you have a side job this year? If so, as a contractor you probably received a Form 1099-MISC detailing the extra earnings. What about savings and investment accounts? For these, you should have received Form 1099-INT and Form 1099 DIV statements.

In each 1099 instance, the IRS knows precisely how much extra money, either as wages or unearned investment income, you made as soon as you did, thanks to the copies of your 1099 forms that went to the tax agency.

If you forget to include any of these earnings on your return, the IRS examiners will let you know you owe taxes on them, too. And depending on when your oversight is discovered, you also could owe penalties and interest on the unreported earnings.

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