5 Costly Last-Minute Tax Mistakes to Avoid
Before you know it, the April tax deadline will be right upon us.
Get a leg up on your tax return now.
Waiting until the last minute to file can increase the odds of making an error if you're scrambling to track down your paperwork, and some mistakes come with a high price tag.
1. Not filing an extension if you need to
If you're still waiting on W-2s, 1099 forms or other tax documents, filing your return on time may not be possible.
Fortunately, the IRS allows taxpayers to request an extension, which gives you an additional six months to get your return in.
Extensions have to be filed before April 15th so if you have even the slightest inkling that you're going to be late, now's the time to ask for one.
The primary reason for filing an extension is to avoid a hefty penalty.
The IRS assesses a failure-to-file penalty of 5 percent of the unpaid taxes due for each month or partial month that your return is late. Eventually, the penalty can max out at 25 percent of your unpaid tax bill so the longer you wait to file, the more you'll owe. Not only that but you'll also have to pay interest on the taxes due.
It's important to keep in mind that filing an extension doesn't give you more time to pay if you owe taxes this year.
There's a separate failure-to-pay penalty of 0.5 percent that applies when you don't cover your tax liability by the filing deadline. This penalty accrues monthly and is capped at 25 percent of what you owe.
Tip: If you filed an extension, you can avoid the failure-to-pay penalty if you pay 90 percent of what you owe on or by the April deadline.
2. Getting your direct deposit information wrong
The IRS encourages taxpayers to file their returns electronically and opt to have their refunds deposited directly into their bank accounts whenever possible.
Typically, it takes between 1 and 3 weeks to get your refund this way, compared to 6 to 12 weeks for a paper check.
With the clock ticking down, it's particularly important that you double-check your return for errors, especially when it comes to your bank account information.
If your direct deposit information is wrong, it could cause your refund to be rejected by the bank. When that happens, the payment is sent back to the IRS and a paper check is reissued, which adds to your wait time.
In the worst case scenario:
Your money could end up in someone else's account.
You can initiate a trace with the IRS to find out where it went but then you'll have to go through the added hassle of proving to the bank that the refund was deposited in error.
Depending on who you bank with, it can take weeks or even months to straighten it out so it's vital to review your routing and account numbers before you complete your filing.
3. Not comparing standard vs. itemized deductions
Deductions reduce your taxable income for the year, which can help to lower your tax bill or increase your refund so it pays to claim as many as you can.
When you're working on your return, you'll have the option of taking the standard deduction or itemizing. For the 2020 tax year, the standard deduction amounts are $12,400 for single filers or $24,800 for married couples filing jointly (For 2021 - $12,550 and $25,100).
When April 15th is looming on the calendar you may not think you have time to track down all of your receipts but you could be missing out on some tax savings if you don't.
Donating money to charity, incurring out-of-pocket medical expenses, covering the cost of a move to start a new job, paying for travel expenses on a business trip or shelling out big bucks in interest for your student loan payments are just a few of the most valuable deductions you should be looking out for.
4. Overlooking income
Any time you receive an income statement, such as a W-2 or 1099, the IRS also receives a copy.
If you forget to include part of your earnings on your taxes, even if it's just the interest earned from a bank account, Uncle Sam is going to pick up on the discrepancy. Most of the time, they'll correct the error for you and send you a bill if additional taxes are owed.
If you leave out a big part of your pay, on the other hand, that can be a red flag which could trigger an audit.
The IRS can audit your returns for the previous three years and if a substantial error is found, that time frame can be extended to six years.
Even if you're in a hurry to file, you still need to take the time to make sure you haven't left out any of your income so you don't earn any unwanted attention from the IRS.
5. Failing to fund an IRA or IRA CD
Saving for retirement can work to your advantage at tax time if you're contributing to a tax-deductible account.
If you're chipping in money to a traditional IRA or IRA CD, you can generally write off anything you're saving on your taxes. The amount of your contributions you can deduct are dependent on your filing status, income and whether or not you're covered by an employer's retirement plan.
In addition to a deduction, you may also qualify for a saver's credit. Tax credits reduce your tax liability on a dollar-by-dollar basis and the saver's credit is good for up to $1,000 if you file single or $2,000 if you're married and file a joint return.
Eligibility for the credit is based on your filing status and income.
Tip: If you're interested in an IRA CD, take a look at how rates compare at top banks here.
Putting off your tax filing usually isn't the best approach, especially if your return is on the complicated side.
If you've gotten behind this year, keeping an eye out for these five pitfalls can ensure that your filing goes as smoothly as possible.