You're starting to think about your taxes -- or maybe you're fully engaged and already working on them. Either way, be careful. Last year, the Internal Revenue Service said it discovered 2.7 million errors made by 22 million taxpayers on their 2011 returns, which was considerably fewer than the 6.6 million errors the year before. It's believed that the rise of tax-software preparation programs have something to do with that.
Still, even if you use software or hire a professional, mistakes can be made. Here are some of the more common goofs, according to tax experts.
Simple errors. The IRS website, written by the people who would know, point out several of the top blunders, including taxpayers frequently entering the wrong Social Security number or shortening the number by a digit or two. They also enter the right information on the wrong line and make simple addition and subtraction errors. If you're mailing your tax forms, don't forget to sign and date them, and make sure to put postage on your envelope. The moral of this part of the story: Don't rush.
Improperly claiming (or not claiming) dependents. A dependent is someone who depends on you financially, like a spouse or a child, and who you can claim on your taxes for credits and exemptions. It may seem straightforward, but a parent in a blended family knows how it can get confusing.
It also gets confusing if someone depends on you financially who isn't a relative, says Dave Du Val, resident tax expert at taxaudit.com, TurboTax's exclusive audit defense service provider. He offers an example of a woman supporting a boyfriend and his son.
"The taxpayer in this scenario may be able to claim the boyfriend's son as a dependent if he meets all the tests for a qualifying relative, and as long as the son isn't a qualifying child of the boyfriend or another taxpayer," Du Val says, adding that the boyfriend might even qualify as a dependent "if he is a U.S. citizen who lived with her all year, he made less than $3,900 and she provided more than half of his support."
When you're not required to file, not filing. You might miss out on the earned income credit, says Donald Goldman, a professor who specializes in taxation and teaches at Arizona State University.
"At the lower end of the income scale, a very common mistake that could cost taxpayers money is not filing a tax return and therefore missing out on the earned income credit," Goldman says. "This is a refundable credit, meaning it can entitle a taxpayer to a refund in excess of the taxes he or she has paid. The average credit in 2012 was more than $2,000 and can reach almost $6,000."
There are a lot of rules concerning who is eligible, so it's a good idea to check out the IRS website and scroll down to look at the chart. But if your adjusted gross income is $14,340, and you're single and without a child, for instance, you may be eligible. If you make $51,567 and are married and have three or more kids, you also probably qualify.
Not reporting stock sales correctly. "Folks who sell stock often do not report the sale on their return if there was a loss. They don't realize that the IRS receives a 1099 [form] showing the amount of the sale and assumes the entire amount is taxable income unless it is reported on the tax return with the purchase and sale price listed to compute the taxable gain," Du Val says.
Retirement-related errors. "One of the most common mistakes people make on their tax returns is improperly reporting the taxable amounts of their retirement plan or IRA distributions," Du Val says. "Determining the taxable amount is particularly complicated when nondeductible IRAs or basis in the retirement account are involved."
By basis, also known as cost basis, Du Val is referring to the dollar amount you paid for your shares. The basis is adjusted for items such as returns of capital and transaction fees and can impact your tax liability when you sell shares.
Schedule E blunders. "This is the Schedule that is used to report rental property, royalties, partnership income and expenses, estate income and expenses and S-Corp income and expenses," says Du Val, flagging it as the area on the federal tax form 1040 where people are most likely to make a mistake.
He adds that anyone who needs to fill this out should be familiar with phrases like "property basis" and "suspended losses." If you own rental property and don't know those terms, you should start learning everything you can about them, as well as "depreciation" and "passive activities," Du Val says.
Or, of course, you could hire someone who does, because things can get sticky when it comes to rental property. "For example," Du Val says, "A residential rental property is depreciated over 27 1/2 years, but furniture is depreciated over five years."
Waiting until the last minute. That can be the biggest mistake for a taxpayer because it leads to making other mistakes, says Ryan Blume, a senior manager of tax and business consulting at Moss Adams, a public accounting firm headquartered in Seattle.
"The rush to meet tax-filing deadlines shifts your accountant's focus to compliance and ensuring that you fulfill the basic tax requirements, rather allowing him or her time to seek additional ways to reduce your taxes through overlooked deductions or preparation mistakes," Blume says.
And if you rush your taxes to the point where you feel that you've made a mess of things, Blume suggests asking the IRS for an extension.
"Some individuals think asking for an extension is a red flag for the IRS. Not true," Blume says. "Instead, it gives you more time to seek additional ways to reduce your taxes through overlooked deductions or preparation mistakes."
Not filing. That, everyone agrees, is the biggest mistake of all.
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