Most of us grow cold when the taxman comes calling. The feeling gets worse especially when you have to deal with a high tax bill or a tax audit. Simply put, most of us are never prepared for the tax season even if we have been through it so many times and came out without a scratch or even if we have overt signs on our faces, telling us that the tax season is upon us.
If my description suits your personality, then worry no more because we are here to help you. Below is a comprehensive guide on some of the things you need to avoid when filing your tax deductions to avoid any errors that might result into a tax audit on you.
Making mistakes with your calculations
Don't worry, we totally get this problem. After all, we are human and not 100 percent perfect. Nonetheless, these mistakes have negative consequences on us including time wastage, loss of money and sometimes, unnecessary headaches.
Some of the common errors made include:
- Wrongly stating dependents on your form
- Typos on your social security number.
- Forgetting to alter your name with the SSA after getting a divorce or marrying
It is recommended that you go through your form to iron out any errors that might lead to losing your refund or other penalties.
Failing to remember to review payroll-withholding deductions
Everyone loves it when they get a tax refund. Well, basically everyone should. Nonetheless, it is vital to know why you are getting the money back especially if you are an employee on a payroll or an employee being paid per hour.
Essentially, what you need to know is that during the course of the year, your employer normally deducts taxes from each of your paychecks and submits the money to the IRS for you. Therefore, the moment you get a refund, it should be clear to you that you had made an overpayment.
Normally, employers hinge payroll deductions on the details you provide when you complete your W-4 form. This form lists all the information regarding people who rely on you and other important tax-related details. That being said, in the advent that you overestimate, you will always get a refund.
Ignoring employer benefits that can reduce tax burden
Paying a fraction of benefits offered by your employer dips your taxable income in several ways. First, this enables your employer to calculate your deductions withholding on the balance of your wages. Therefore, if you are working for a company with a comprehensive employee benefit package, this will be an excellent way to pay up expenses while lowering your taxable income.
Withholding your retirement account contribution
There is no question about it, contributing t an employer-sponsored retirement scheme is among the must-do tax deductions for every employee. Nonetheless, some employees fail to take full advantage of this provision by not making any contribution or by failing to take advantage of specific tax incentives.
A prudent employee will most definitely take advantage of the tax break that normally comes with a 401k or 403b plan. You can either settle for the minimum contribution amount of $18,000 per month or add an extra amount to get the most out of it when you strike 50.
On the contrary, if your employer does not offer these plans, you can opt for the Roth IRA or a traditional plan that will offer somewhat the same benefits or even better.
Avoiding self-employment predicaments
Self-employed people are in a different category when it comes to tax deduction calculations since they do not have to deal with W-4 withholding or employer benefits. However, they have their own considerations to make pertaining to tax deductions.
Perhaps the most common mistake that self-employed people make is not considering the money they get as income.
Reality check: when you are running an income generating activity, you are simply running a business regardless of its size. In that case, you have to adhere to deductible expenses related to businesses of their nature including home office supplies, meals and entertainment among others.
Moreover, self-employed individuals are normally entitled to a tax of 15.3 percent of their net income. This is in addition to paying their Medicare taxes and Social Security. On the bright side, self-employed people get some of their money back when they file their tax returns.
Generally, filing for taxes can be a headache especially when you make a mistake. However, do not panic. The counter option is to hire a tax expert who can help you file an amended tax return and do away with the problem before it comes back to haunt you.