The 5 biggest tax mistakes people make
Did you know taxes are due right around the corner?
Of course you did, and you’re probably almost done preparing everything as well. However, before you file them away and checkmark that box off your to-do list, ask yourself one question — are you totally prepared to file?
We spoke with Thomas D. Fisher, CPA, LLC and asked: What are the top five tax mistakes people make every year?
Check out what he told us, and be sure to get your own ducks in a row before signing those magical slips of paper.
1. Not contributing to 401(k) plans
Forgetting to fund your 401(k) policy is a mistake for a number of reasons. For starters, if your company offers a match, deciding to not sign up means that you are actually leaving free money on the table. On the tax side of things, 401(k) contributions are taken from participants’ paychecks before taxes are deducted, which means contributing to this type of plan will lower how much income you’re required to pay taxes on.
2. Taking unnecessary withdrawals from retirement plans
According to a new study, more than one in four households dips into retirement accounts like 401(k)s and 403(b)s for funding of things outside of retirement, despite the fact that doing so can cause some significant damage to those savings tax wise. According to the New York Times, the report, ‘The Retirement Breach in Defined Contribution Plans,’ found that withdrawals for non-retirement purposes by account holders under 60 amount to $60 billion a year, or 40% of the $176 billion employees put into such accounts each year…”
Their proposed solution? Hold off on funding retirement plans until you have an emergency savings account to pay for things that may unexpectedly come up. And if you’re considering borrowing against retirement accounts to help fund college for your kid, you might want to think again. After all, your kids can always take out student loans for school — there are no such loans available for your retirement.
3. Not getting receipts for clothing donations to charities
When it comes to making tax-deductible clothing donations to charity, keeping accurate records is key. Complete and accurate records can help speed up the process when it comes time to file and, perhaps even more importantly, will be what you’ll need to fall back on should you ever be audited. In fact, H&R Block’s Guide to Charitable Deductions claims that for deductions of less than $250 you should keep a receipt from the organization with the name and location of the charity, the date of donation and description of the property, as well as a photo of what you’re donating. You might also keep notes on the fair market value of the property at the time you donated it and how you figured the value you’re applying for a deduction for.
Donations over $250 come with their own set of rules. See the full list of suggested documentation for donated items here.
4. Not considering the marriage penalty
As my new husband and I recently discovered, sometimes there’s a nice little price tag that comes with getting married, and it has absolutely nothing to do with paying for a pricey wedding. In a situation where both members of a couple work, that couple can most likely expect to owe more in taxes. Why is this the case? Once you earn above the 15% tax bracket, thresholds for higher tax rates are less than double the thresholds for single filers.
On the other hand, a marriage between two people where one person is not working could yield a marriage bonus, since working spouses can claim deductions and exemptions for non-working spouses and will be paying taxes at a lower tax rate overall.
5. Paying IRS notices without questioning
Believe it or not, IRS employees are only human, and as such, they do make the occasional mistake. Before blindly paying out any amount that the IRS may tell you that you owe, it’s a good idea to recheck your own numbers first. If you still feel you paid the correct amount of taxes, send a letter back and enclose all of your mathematic calculations.
Cheryl Lock is a personal finance writer at and former editor at LearnVest and Parents magazine. When she’s not writing, she enjoys travel, which she blogs about at wearywanderer.wordpress.com.