Taxes may not be pleasant, but they are—as they say—inevitable. Still, that's no reason to pay more than you need to.
Unfortunately, many Americans who prepare their own taxes do just that, to the tune of an average $400 overpayment! A 2014 study by H&R Block found that inaccuracies on do-it-yourself tax returns added up to a total of more than $1 billion in overpayments per year, affecting about 20 percent of those who file their own returns. Read on as our family wealth advisors share 8 common mistakes made at tax time — so you can avoid them.
1. Not taking time to prepare. We get it: Gathering all that paperwork isn't exactly how you want to spend your Saturday. But not organizing ahead of time can cost you in the long run, so grab last year's return and take a few minutes to note which papers and forms you're likely to need. Specifying one place to keep all your records as they trickle in throughout the year will make it much easier come tax day.
2. Forgetting to itemize. Many people choose not to itemize, instead just taking the standard deduction. Why? Probably because itemizing can seem like a lot of work... and a lot of math. But in many cases, your deductions might add up to more than the standard deduction, even if you don't own your own home. Don't forget to itemize commonly overlooked things like:
- State income tax, especially if you live in a state with a high income-tax rate (like California)
- Local income taxes
- Student loan interest
- Tuition and fees
- Medical expenses
3. Overlooking education credits. When it comes to education credits, you've got a few options: the American Opportunity Credit, the Hope Credit, and the Lifetime Learning Credit, as well as deductions for tuition and benefits for 529 savings plans. Though these credits may offer thousands of dollars to offset educational expenses, only about two-thirds of eligible tax payers claim them, says H&R Block.
4. Not taking advantage of the Earned Income Tax Credit. The IRS really wants you to take advantage of the Earned Income Tax Credit or EITC... so badly, in fact, that it created a special EITC Awareness Day. Unfortunately, only about one in five eligible households claim this credit, which offers up to $6,242, depending on your income and how many children you have.
5. Not keeping track of your charitable donations. Many people simply forget how much they donate each year... and then forget to deduct that amount at tax time. Keeping a record of all your donations throughout the year makes it easy to itemize. Remember, donations under $250 require a receipt or a canceled check/bank record, while donations over $250 require written documentation from the charity that benefited from your gift.
6. Trusting your tax software too much. The proliferation of tax software in recent years certainly makes it easier to prepare a return. But it's also easy to forget that if you enter a number incorrectly, your results will be incorrect, too. Typos can result in inaccurate returns, so take the time to double-check all of your entries. After all, the "Super Tax Filer Friend 2000" doesn't know if you entered your Social Security Number wrong... and amending your return isn't exactly fun.
7. Picking the wrong filing status. When it comes to filing, you've got several options: single, head of household, married filing jointly, married filing singly... The status you choose affects the results of your tax return; work with your tax professional or wealth advisor to determine which status makes the most sense for your specific situation.
8. Neglecting to amend old returns. While many believe that the only reason to amend a previous return is to correct a mistake or if you didn't pay enough, this isn't the case. You can also amend a return if you are owed a larger refund. You've got three years from the original filing date to submit amendments, so don't wait too long!
Working with a trusted family wealth advisor can help you make informed decisions at tax time.