Taxpayers who prepare their own returns need to be careful before they file. A review of recent tax law changes may reveal opportunities. Conversely, it could uncover obstacles. Understanding the various forms and schedules used to report income and expenses is important. Knowing what expenses can be deducted may help you lower your tax liability or increase the chances of a refund. It also helps to know what mistakes to avoid.
Don’t Assume you Must Take the Standard Deduction
Even if you are accustomed to claiming the standard deduction, review the expenses you incurred during the year. Some may be deductible. They could help lower your tax bill if they total more than the standard deduction.
You may see that some of the activities you regularly engage in may create opportunities for deductions. For example, if you’re a member of the reserves and travel in the performance of that duty, those miles may be tax deductible.
But be careful. Some expenses that used to be deductible, aren't. These include:
- Credit or debit card convenience fees
- Depreciation on home computers used for investments
- Investment fees and expenses
- Safe deposit box rental
- Service charges on dividend reinvestment plans
- Tax advice fees
Check to make sure you're current on the rules before you assume something is deductible.
If your expenses do not exceed the standard deduction, check to see if they qualify as tax credits. Credits reduce a tax liability dollar-for-dollar. Some tax credits exist for everyday expenses like childcare and education.
Report Cash Earnings From Your Side Hustle
Don’t forget to report earnings from any side jobs you have, even if you’re paid in cash and your employer or customer suggests the earnings won’t be reported. Payments under $600 made to contractors don’t require the payor to issue a 1099. Amounts over that do.
In either case, the safest course of action is to behave as if a 1099 was filed and you didn’t receive a copy. Getting caught under reporting income will likely be more painful than paying taxes on those earnings.
If you operate your side gig as a business, there may be expenses that you can deduct to potentially offset some of the income.
Scrutinize Those 1099s
It is not uncommon for financial institutions (banks, brokers, mutual funds, etc.) to issue corrected 1099s after the February filing deadline. So, if you typically file your return as soon as you receive these types of reporting documents, it’s probably a good idea to review them very carefully.
Check to see that the information about you is correct (your name, address, Social Security number, etc.). Verify that the amounts reported agree with your records. Make sure that items such as dividend income and capital gains are properly characterized.
Don’t Wait for K-1s
The form used to report an investor’s share of a partnership’s earnings, losses, deductions, and credits is a K-1. It is not uncommon for private partnerships to issue these statements after the April 15th tax filing deadline. Some investors in such partnership may seek filing extensions.
While extensions are granted automatically, there is no leeway to pay late.
If you have to file an extension, make sure to include an estimate of your expected tax liability to avoid penalties and interest for late payment.
Check Your Math
Math errors are one of the most common mistakes taxpayers make. Be careful when adding or subtracting numbers directly on your return. Using spreadsheets to calculate income or expenses before completing forms and schedules may help.
When you’re done, consider having a second set of eyes review your work. Before you put your return into the mailing envelope, your reviewer should also check to make sure that the return is complete and that all the reporting documents, like 1099s, W2s, and K-1s are included.
In the final analysis, the best course of action may be to seek professional advice. A certified public accountant (CPA) is likely to know exactly where the opportunities are in your finances and can be enormously helpful if the IRS has a question about your return.
iSource: Internal Revenue Services webiste, Filing taxes 101: Common errors taxpayers should avoid.