Yearly Archive November 21, 2016

BySteve

Avoid Common Tax Filing Mistakes

Common 1040 Mistakes to Avoid

You may be in a rush to get your tax returns filed but take some extra time to avoid common tax filing mistakes that I see all the time.  These slip-ups often creep into federal and state tax returns.

No one wants to delay their federal tax refund. But mistakes happen.  So it never hurts to check twice to make sure that you’ve filled out your 1040 form correctly.

These are some of the most common tax filing mistakes to avoid, the little slip-ups that aggravate both the IRS and the taxpayer and can cause your tax return to be rejected or delayed.

Not signing your return. If you file online like most individuals, many tax software programs require you to type your name on the “Your Signature” line and in the “Sign Here” section, along with your spouse’s name if you file jointly. In many cases you’ll need a PIN code to file.  If you still file a hard-copy return, you’ve got to sign your name on the “Your Signature” line, and the same goes for your spouse on the “Spouse’s signature” line. No valid signature equals an invalid return.1

Not getting your name right. Believe or not, some people mistype their names as they e-file. More commonly, they enter an old name – a maiden name, for example – that doesn’t match the name linked to this taxpayer identification number. Another problem that I’ve encountered is with hyphenated last names.  So if you’ve changed your name, the Social Security Administration (and other federal agencies, as applicable) need to know that.1

Missing the filing deadline(s) applicable to you or your business. Is your company an S corp? That means you will probably need to file a Form 1120S by March 15. Is it a sole proprietorship? That means you have until April 15 to file a Form 1040C. If you are new to making estimated tax payments, you have hopefully pored over Form 1040-ES with a tax professional to figure out how much tax is due by each quarterly payment period.2

Turning in Form 4868 (the “extension”) gives you until October 15 to file, although any federal taxes owed must still be paid by April 15. If you are a servicemember on duty outside the U.S. and Puerto Rico, you have until June 15 to file your return and pay taxes, and you can also use Form 4868 to file as late as October 15.3

If you file late (that is, you submit your return after April 15 without using Form 4868 to request an extension), you face a penalty – a 5% penalty per month following the return’s due date, capping out at a 25% maximum penalty after five months. The penalty for unpaid taxes is .5% per month after the April 15 deadline, and 6% interest a year. If you have taxes a year overdue, you will be assessed both the monthly and yearly penalties.2

Making numerical errors. Even with some of the great tax prep software now available, math errors still happen. In fact, they happen largely because people don’t use the software: the taxpayers who insist on filing paper returns are 20 times more likely to commit math mistakes than those who e-file, the IRS reports.1

And let’s not forget about those all-too-common ‘finger errors’ when typing into a calculator or on a keyboard.  It doesn’t hurt to check twice.

If an electronically filed return contains a math mistake, it gets sent back to the taxpayer or tax professional for correction and resubmission. If a paper return has a math mistake, the IRS has to refigure it on the taxpayer’s behalf. That takes time and delays your expected refund.1

Additionally, some taxpayers get Social Security numbers wrong – not necessarily their own, but those of their spouses. Also, a smooth direct deposit of a federal tax refund won’t happen if a taxpayer types in an inaccurate bank account number.1

How many times has that happened to you?  It’s happened to me.

Selecting the wrong filing status. This happens a lot with divorced moms and dads. To determine if they should check the “head of household” box or the “single” box, they should take the online interview at irs.gov/uac/What-is-My-Filing-Status%3F.4

I once had a couple who were each divorced and recently remarried (to each other) ask to file as “Married Filing Separately” thinking that would be less complicated.  It took a little bit of time to explain that that wasn’t a good deal for them.

Claiming a credit or deduction you shouldn’t. Again, tax prep software tends to ward off this mistake. Credits often inappropriately claimed (or ignored): the Child and Dependent Care Credit, the Earned Income Tax Credit and even the standard deduction.1

Many business owners overlook deductions or claim them in error. Sometimes this can be traced back to slipshod record-keeping; other times, it stems from faulty assumptions. According to a survey from small business accounting software maker Xero, the most common merited deductions that aren’t claimed by SBOs are those for depreciation (30%), out-of-pocket capital expenses (29%) and car and truck expenses (16%).2

Claiming employees as independent contractors. Some small business owners try to save money by doing this, but the IRS may disagree with such claims. If so, the business can end up on the hook for employment taxes related to that employee.2

It’s worse in the state of Massachusetts where the definition of who is an independent contractor is even more restrictive than the feds; thus, exposing the business owner to a host of taxes and penalties later one if ever discovered.

So what steps can you take to try and reduce the risk of errors on your 1040 form? You can file electronically; you can use some of the terrific tax prep software available; you can turn to a skilled tax professional to help you prepare and file your return. No one is perfect, but those are all good moves to make this tax season.

And don’t forget to be like Santa … check twice.  That’s one way to be nice.

 

Citations.
1 – money.cnn.com/gallery/pf/taxes/2014/04/08/tax-mistakes/index.html [4/8/15] 2 – nerdwallet.com/blog/small-business/5-frequent-small-business-tax-mistakes-avoid/ [10/15/14] 3 – irs.gov/taxtopics/tc304.html [1/16/15] 4 – irs.gov/uac/What-is-My-Filing-Status%3F [1/12/15]

BySteve

10 Year-End Tax Strategies That Save You Money

As the end of another business and tax year is upon us, consider these 10 year-end tax strategies that save you money.

  1. Pay Taxes Early:  You can accelerate your income tax deductions by paying January estimated income taxes in December.
  2. Accelerate Income Tax Deductions:  Likewise, you can make your January mortgage payment in December.  You can also do the same for property or excise taxes and even charitable deductions. This will help you lower your taxable income and possibly offset increases in earned income, bonuses or real estate income.
  3. Postpone Receipt of Income:  For cash-basis taxpayers (that’s most of us), delay your year-end receivables. Defer payment of dividends from your C corporation until 2017. talk with your employer about delaying receipt of bonus income. If possible, contribute extra to your retirement plans. Anything that helps you lower your taxable income may also be useful for college financial aid strategies.
  4. Don’t Buy Capital Assets This Year:  With a new president entering the White House, you may want to take a wait-and-see approach to tax changes.  GOP proposals include allowing businesses to expense the entire purchase of capital assets.  This will lower taxable income more than the current Section 179 deduction limits.
  5. Make Gifts to Charities and Family Foundations with Appreciated Assets:  Consider gifting low-basis stock instead of selling it to raise cash for gifts which could lead to capital gains taxes.
  6. Harvest Losses to Offset Capital Gains: Be aware of the capital gains that may be distributed to you from your mutual funds or other investments near the end of the year.  Take advantage of those securities that are experiencing a loss and use the tax savings to offset your gains.
  7. Establish and Fund Qualified Plans for Your Family: Consider making a gift of up to $5,500 to either a traditional or Roth Individual Retirement Account (IRA) for your children or grandchildren who aren’t funding their own IRAs but have enough earned income to report.
  8. Identify Assets and Amounts to Make Proper Grantor Retained Annuity Trust Distributions Before April 17, 2017:  If the annuity payment date is tied to the end of the trust’s taxable year, the payment must be made no later than the date the trust’s income tax return us due.
  9. Make Annual Exclusion Gifts to Chosen Loved Ones of $28,000 (per Married Couple):
    • Make any gifts into trusts for children and/or grandchildren
    • Contribute to Internal Revenue Code Section 529 plans, which grow free of income tax
    • Make unlimited gifts directly to educational institutions and medical facilities or your own family foundation
  10. Make Distributions of Income from Trust Accounts and Estate Accounts to Lower the Income Tax Liability: Estates and trusts are taxed at the highest income tax rates (and a much lower threshold at which the 3.8 percent Medicare surtax applies).  So it may make sense to distribute income to the beneficiaries to be taxed at the beneficiary’s lower income tax rates.