These 6 Common Tax Return Mistakes Could Cost You
By Mark Yatros
I despise seeing my clients lose money. But often, that’s what I see when I review tax returns.
My colleagues and I analyze numerous returns each year. We nearly always find errors that cost our clients money, whether the return was self-prepared using tax software or prepared by a professional.
But you don’t have to live with mistakes. Generally, you have up to three years after filing with the IRS to amend your return and get your money back if you’ve overpaid. That’s why it’s wise to have us look at your returns.
If you think one of your returns may have a problem, we’d be happy to look at it. Contact us here or call (269) 218-2100.
Please read on and discover the six most common mistakes we find when reviewing our clients’ returns.
1. Timing and reporting of contributions for deductions
Making contributions to your retirement accounts or charitable donations can help lower your taxable income, but timing these contributions is crucial. You can make contributions for the current tax year until the tax deadline, but it's easy to forget to report them.
One common mistake is forgetting to add contributions made early in the year or just before the deadline. This can result in missing out on valuable deductions. To avoid this, keep a record of all contributions and make sure they are reported accurately on your 1040 form.
Pro tip: Set reminders to make and report your contributions before filing your taxes. If you need clarification on the timing or reporting, a financial advisor can help ensure everything is included and correctly reported.
2. Ensuring all necessary tax documents are accounted for
Filing taxes can feel like a scavenger hunt as you gather all the required documents. From W-2s and 1099s to mortgage interest statements and charitable donation receipts, it's easy to miss something. Missing a document can lead to mistakes on your tax return, which could mean paying too much or too little in taxes.
One way to avoid this is by keeping a checklist of all the necessary tax forms. Checking off each document as you collect it can help ensure everything is included. This Nerd Wallet article provides a good overview of the common forms you may need to gather. However, consulting with a financial advisor like me or my colleagues at Allegiant Wealth Strategies can get you a better list suited to your specific situation. Contact us here or call (269) 218-2100 for a consultation.
Pro tip: Keep a folder for all your tax documents throughout the year so everything is in one place when tax time comes.
3. Not reporting Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions (QCDs) allow you to donate to your favorite nonprofits while lowering your taxes. You can use them if you are at least 70½ and have an individual retirement arrangement (IRA).
However, you must be careful. The IRS doesn't make claiming QCDs easy because they don't have a special code for these on the 1099-R form (the document used to report distributions from pensions, annuities, retirement plans, and IRAs). So, you must track your QCDs to ensure they are reported correctly. If you don’t, you may pay more taxes than necessary.
If you’d like more information about QCDs, please read our blog, “Want to give from the heart and reduce your taxes? Look into QCDs.”
Pro tip: Always keep a record of your QCDs and double-check your 1099-R form before filing your taxes.
4. Not including all necessary information on the 1099-R form
The 1099-R form includes information on how much tax was withheld from distributions from pensions, annuities, retirement plans, and IRAs. It's easy to make mistakes when reporting this information on your tax return. One of the biggest mistakes I see is not including how much tax was paid or incorrectly listing tax withholding amounts. This can lead to either paying too much or too little in taxes.
If you pay too much tax on distributions, you could end up with a smaller refund than you’re owed. You could also owe more than you should, tying up money that could be better spent or saved. On the other hand, if you pay too little, you could face penalties and interest from the IRS.
Pro tip: Always double-check the tax withholding amounts on your 1099-R form before filing your taxes.
5. Accounting for carry-over losses to offset gains
If you've had investment losses in past years, you can use those losses to offset gains and reduce your tax bill. This is called “carrying over losses,” and it's a smart way to ensure you're not paying more taxes than required. You can carry over up to $3,000 each year ($1,500 if married and filing separately).
However, it's easy to miss these carry-over losses, especially if you've switched tax software or tax preparers who might not have all your past information.
Want an illustration of how important it is to keep track of your losses and apply them correctly? One of my clients almost paid $40,000 to the IRS because their capital losses from previous years weren't applied. After reviewing the return, I found the carry-over losses, which reduced their tax bill to $10,000 after they applied the $3,000 carry-over loss on their returns for 10 years.
Pro tip: Keep a detailed record of your investment gains and losses, and always make sure they are accurately applied to your tax return.
6. Keeping track of Roth IRA contributions
Roth IRAs can be a tremendous boon for saving money for retirement because your contributions grow tax-free. Plus, you don't pay taxes when you withdraw them once you’ve retired. However, keeping track of your contributions is essential, especially if you switch firms where your Roth IRA is held. Contributions come out first and are tax-free, so knowing exactly how much you've put in can prevent confusion later.
Losing track of your Roth IRA contributions can lead to mistakes, like withdrawing more than you've contributed, which could result in unexpected taxes or penalties. Keeping a detailed record of your contributions ensures that you can enjoy the full benefits of your Roth IRA without any surprises.
Pro tip: Keep a running total of your Roth IRA contributions each year and update it whenever you make a new contribution. If you switch firms, make sure to transfer this record to avoid any issues.
Now’s a good time to review past returns
Now is an excellent time to review your past tax returns since we’re months from next April’s filing date. You’ll find out if you have errors that can be corrected – and possibly get money returned to you.
My team and I are happy to review your returns. Please get in touch with us here or call (269) 218-2100.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.