We’re all human and mistakes happen. But even a seemingly small mistake to the IRS could end up costing you, either in the form of a larger tax bill or a smaller refund (cue sad trombone soundbite). Some tax preparation mistakes seem to happen year after year. Having your bookkeeping services company engage in a thorough review of your tax return before it is filed with the IRS could help save you time and a boatload of money. Here’s a list of five top errors according to the IRS.
- Names and Numbers
You might be shocked to find out that one of the most common mistakes on tax returns, both professionally and self-prepared returns, are names and taxpayer ID numbers not matching up with the IRS’s or Social Security Administration’s database. This causes a number of problems. For example, if a dependent’s name or tax ID number doesn’t match, it will first result in denying a dependency exemption for the child. Secondly, the IRS will disallow the child tax credit for that child and will reduce or disallow taxpayer’s earned income credit if the child is a qualifying child for purposes of the credit.
- Direct Deposit Dangers
Taxpayers can have a refund directly deposited into multiple bank accounts. This option is a great way to save your refund money, but the more numbers you enter on a tax form, the more chances you have to enter them incorrectly. Having the wrong account or routing number could cause you to lose your refund completely. It’s not a difficult document to complete, but if you put in wrong account numbers, your refund could end up in someone else’s account or be sent back to the IRS. Either way, you might not be able to retrieve your refund because there is no IRS procedure for replacing lost electronically transferred funds.
Incorrect account numbers aren’t just a problem when a refund is split multiple ways. Even if your refund is going to just one account, make very sure you enter your account and bank routing numbers correctly.
- Capital Gains Tax
Incorrect calculation of capital gains taxes was among the top errors on individual returns. These errors stemmed from failure to take into account the lower tax rates of qualified dividends and capital gains. If you’re in the 10% or 15% federal income tax bracket, you are eligible for the 0% capital gains rate. You can realize capital gains equal to the difference between the top of the 15% income tax bracket and your current adjusted gross income without incurring additional tax. However, if you realize too many gains all in one year, you must pay a 15% tax on the amount. In 2014, remaining in the 0% rate means keeping the sum of income and capital gains below $73,800 annually for married filing jointly and below $36,900 for single filing. Most middle-income taxpayers pay the 15% rate. If you are in the top 39.6% bracket, you are subject to a 20% capital gains rate.
- Self-Employment Tax
A significant number of Form 1040 returns contained errors in adjusted gross income due to failure to claim a deduction for a self-employed taxpayer’s self-employment tax. When figuring out the amount of self-employment tax you owe, you get to reduce self-employment income by half of the self-employment tax before applying the tax rate. Say, for example, that your net self-employment income is $50,000. That’s the amount you report as taxable for income tax purposes on Form 1040; but when figuring your self-employment tax on Schedule SE, Computation of Social Security Self-Employment Tax, the taxable amount is $46,175. Not paying the 15.3 percent tax on $3,225 difference in this example is a savings of $493.
In addition, you can claim 50 percent of what you pay in self-employment tax as an income tax deduction. For example, a $2,000 self-employment tax payment reduces taxable income by $1,000. In the 25 percent tax bracket, that saves you $250 in income taxes.
- Health Savings Account Deductions
With the number of taxpayers with health savings accounts (HSAs) growing each year, it is not surprising that errors in computing the deduction for HSA contributions have begun to show up on taxpayer’s returns.
Tax return tip: For 2014, the annual limitation on HSA deductions for a taxpayer with self-only coverage under a high deductible health plan is $3,300. The annual limit on deductions for a taxpayer with family coverage is $6,550.
We can help by reviewing your taxes before they are filed, saving you the headache!
