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These Common Tax Filing Mistakes Could Cost You BIG!

By: Bhavesh B.

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It’s imperative to prepare for tax season well in advance. Neglecting this can lead to a lot of paperwork and information being forgotten, which can cause costly mistakes. A lack of planning may result in missed deductions or penalties that could cost thousands of dollars if the necessary steps are not taken. Oversights in tax preparation may also lead to delays or a difficult audit by the IRS. Discover some of the most common mistakes people make on their tax returns so that you can avoid making them yourself this year.

Related: 5 Life-Changing Tips for Investing In Your 50+ Years

1. Waiting until the last minute

Waiting until taxes are almost due and then rushing to do them is a common mistake people make. Avoid the urge to wait until April 14th, when you'll be rushed to file online. Collecting the essential documentation and thoughtfully responding to each query in the online software takes time and effort. Rushing through this process may result in you overlooking tax deductions or making other serious mistakes.

2. Assuming Tax Day is always April 15

Tax Day usually falls on April 15; however, if that day comes on a weekend or holiday, it is moved to the following business day. Additionally, taxpayers in some places may receive an extension due to a holiday in those states. Those in disaster zones may also be granted extensions to their filing deadline.

3. Missing the filing deadline

Keep April 15 circled on your calendar – it's the tax filing deadline, and overlooking it could prove costly. Missing this deadline can result in significant financial consequences, as the penalties for late filing and payment can add up quickly. For each month that taxes remain unpaid, a penalty of 0.5% of the outstanding balance is imposed, capped at 25%. The penalty for failing to file a tax return is even steeper, set at 5% per month, up to a maximum of 25%.

Additionally, interest accrues on both the unpaid taxes and the penalties incurred. If you find yourself unable to meet the deadline, consider requesting an extension to push the filing date to October 17. If payment is an issue, it's advisable to file on time and negotiate an installment agreement with the IRS.

4. Not keeping up with Tax Code changes

Tax regulations are subject to frequent changes. A deduction that was applicable in the past may no longer be valid, while new deductions may have emerged without your knowledge. Moreover, your income bracket may vary from year to year. Staying informed about these changes is key to reducing your tax burden and capitalizing on available opportunities. Please keep in mind that these changes may extend beyond federal legislation; state tax laws may differ.

5. Reusing last year’s information

Tax software often stores your previous year's information, which is convenient. However, it's risky to rely solely on this data without a thorough review. Circumstances may have changed since your last filing. Whether you've married, switched jobs, taken on a side hustle, or opened a new retirement account, ensure all relevant details are updated. A change in filing status is required when you transition from being single to being married, and can have a significant impact on your taxes.

Related: Guide: How to Use Rising Interest Rates to Your Benefit

6. Failure to report all sources of income

Failing to report all sources of income, including earnings from investments, rental properties, or freelance engagements, is a common oversight. It's mandatory to declare all income sources, no matter their size, to ensure compliance with tax regulations.

7. Forgetting to claim eligible deductions and exemptions

Many taxpayers fail to claim eligible deductions and exemptions, such as those for home loan interest, medical expenses, or charitable donations. A detailed evaluation of potential deductions and exemptions can help taxpayers reduce their tax burden.

Sources: Livemint, ClearTax, TODAY, The Economic Times, Investopedia, IRS (.gov)

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