10 Common Tax Mistakes to Avoid
1. Ditching School (Credits)
Moms with kids in college should check out the Hope credit; it's ,500 per freshman and sophomore year, per child. And empty-nesters who took culinary or art classes in 2008 should look into the Lifetime Learning credit, which allows students to claim up to 20% of the first ,000 spent on adult-ed-type pursuits. (If you paid 0 for a local university's writing class, that's a 0 credit, or 20% of 0.)Tip:"Typically credits are better than deductions," says Amy McAnarney, executive director of The Tax Institute at H&R Block. But if you don't qualify for the above credits—perhaps your child is past his or her sophomore year—then tuition and fee deductions may be your only option.
2. Losing Interest
People paying off a student loan can deduct up to ,500 of the interest they paid last year (unless their income was more than 5,000). Loan companies are required to send a report detailing the amount of interest paid, but they often e-mail the information, which sometimes gets stuck in a spam folder—making it easy to overlook the deduction.Tip:If you haven't received your report, call the loan company or visit their website.
3. To Itemize or Not to Itemize
"A rule of thumb is, if you have a home with a mortgage, it's generally advantageous to itemize," says Abraham Schneier, senior manager of taxation at The American Institute of Certified Public Accountants (aicpa.org). Basically, itemized deductions should add up to more than the standard deduction (,450 for singles and ,900 for married couples filing jointly) to be worth it.Tip:Schneier also points out that the rule of thumb doesn't apply to those who've paid down most of their mortgage. Those people should take advantage of a new rule that allows non-itemizing homeowners to deduct ,000 (0 for singles).
4. Home Sweet Home
First-time buyers can claim the Home credit, which was ,500 last year and just went up to ,000. And with foreclosed homes becoming more common, one helpful and relatively new rule is that you no longer have to pay income tax on the difference between the amount you owed and the amount for which the bank foreclosed on the house.Tip:"When you file for 2008 you can take the ,000 even if you bought the house in 2009," says McAnarney, from The Tax Institute at H&R Block.
5. Neglecting Unemployment
"Most people don't realize that they have to pay taxes on their unemployment earnings," says McAnarney. "They think, I'm getting government money." Sadly, you do. So bring the 1099 you should have received in December or January to your accountant, or remember to include the earnings on the 1099 on your tax forms.Tip:If you're receiving unemployment now and you'd prefer the government to withhold taxes, contact your unemployment agency to set it up.
6. Failing to Amend
As you're reading through this list, perhaps you're realizing that last year you missed an education credit. The solution? Amend the return. For instance, mother and IT financial project manager Chandreyi Mukherji of Radnor, Pennsylvania, saved over ,000 amending her 2006 returns last year. "It was pretty simple. I did not check off the child tax credit," she says.Tip:Many accountants or tax-preparation services will look over old returns for a small fee. Mukherji took her 2006 forms to Second Look, a H&R Block service in which accountants check for mistakes. Taxpayers have up to 3 years to amend a return.
7. Not Thinking Small
The little stuff counts, too, from the money you paid for résumé paper to the travel expenses of driving to job interviews. "Track all of your charitable contributions, job-search expenses and medical expenses," says McAnarney of H&R Block. The latter particularly applies to taxpayers who were laid off last year and lost their health insurance; if your medical expenses matched or exceeded 7.5% of your yearly income, they're deductible.Tip:Schneier, the senior manager at AICPA, recommends getting organized from the outset. "Assembling all the information is key," he says. Write down everything you know—wages, dividends, expenses—in an electronic document; you'll be less likely to overlook details.
8. Going It on Your Own
Chandreyi Mukherji, the Pennsylvania mom who saved thousands after having an old return amended (see #6), used to do her own taxes. "I'd generally not had any problems," she says. The year she made a mistake, however, was extremely busy and change-filled. That's why it's smart to get tune-ups once in a while. "Think of it like a medical checkup," says McAnarney.Tip:Not sure when to go to a professional? "Whenever you have a major life change, you should check with a CPA," advises Schneier.
9. Asserting that 2+2=5
We know you know the answer is four, but even addition can go awry when you're stressed. "People often transpose numbers," says McAnarney. The good news? "When the mistakes are simple, the IRS will go ahead and correct them," she says.Tip:It's better to double-check your work than rely on the IRS. "Federal doesn't talk to state," says McAnarney; even if the IRS catches bad math on your federal form, it's likely that you copied those incorrect numbers onto the state form.
10. Overlooking the Obvious
Don't roll your eyes, but…please remember to sign the form. You'd be surprised at how many taxpayers forget to do this. No, you won't lose money, but you will lose time, since the IRS will send the form back to you, delaying any refund. Other bloopers in this category include not remembering to include your social security number.Tip:Details go out the window when you're rushed. Even if you're filing on April 15, set aside 10 minutes to go through the IRS's checklist, which is listed on the return envelope.
Video: 6 Tax-filing Mistakes to Avoid
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