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Friday, April 2, 2010provided by
Thanks to tax preparation software, more of us are making fewer mistakes on our annual tax returns. But still, just one slip in entering information on your computer could end up costing you, either in the form of a larger tax bill or a smaller refund.
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And even if a mistake, either on your computer or paper forms, doesn’t cost you cash, it could delay the receipt of any refund you’re expecting.
To get exactly what you should from the IRS — and as quickly as possible — look out for these filing pitfalls. A few are new, thanks to recent law changes. Others are perennial problems taxpayers face each filing season. With a little care, you can avoid them all.
1. Claiming the Making Work Pay Credit
Last year, your paychecks probably were slightly larger thanks to the Making Work Pay credit that was enacted as part of the 2009 stimulus bill. That change was thanks to adjusted payroll withholding tables, but to officially get that credit, you must claim it on your tax return this year.
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Filers who use Form 1040 or 1040A will need to send in Schedule M. Those who use Form 1040EZ need to complete the work sheet on the back of that form.
The credit is worth up to $400 for individuals and $800 for married couples filing jointly. The IRS says many taxpayers are omitting Schedule M. While in some cases the IRS is processing those returns anyway based on information reported by employers on workers’ W-2 forms, that added work is slowing down the process, meaning refunds are not going out as quickly.
2. New Form for Nonitemizers
Over the last few years, tax law changes have provided filers who don’t itemize more opportunities to reduce their tax bills. This includes homebuyers who can write off some of their property tax payments and purchasers of new vehicles who can deduct the auto’s sales tax.
These extra amounts are added to the taxpayer’s standard deduction amount. But this year, in order to claim these additional deductions you’ll have to fill out the new Schedule L. Since the IRS depends on you to provide the correct information here, it can’t cover you for as it might with the Schedule M. So be sure to include Schedule L or your added standard deduction amount might be disallowed, and that will definitely cost you some tax dollars.
3. Homebuyer Tax Credit Complications
In less than two years, three changes were made to the first-time homebuyer credit. Now it can be claimed by not only folks who’ve never owned house before, but also by owners who are looking to move to a new residence.
All the changes and accompanying time limits, income thresholds, home price restrictions and what-not are a tax-filing minefield. But if the guidelines and tax rules are followed carefully, it could net a first-timer a tax credit of up to $8,000 and a move-up buyer a credit worth up to $6,500.
So if you bought a house last year, or plan to close on one by June 30 of this year, take a close look at the homebuyer credit and make sure you fill out Form 5405 correctly. And remember, you can’t e-file your taxes if you claim this credit, so use your software to fill out your return and attachments and then mail it in.
4. 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. And a wrong account or routing number could cause you to lose your refund entirely.
You can divide your refund into three accounts by filing Form 8888 along with your individual return. 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 three ways. Even if your refund is going to just one account, make very sure you enter your account and bank routing numbers correctly.
5. Overlooking Unearned Income
Because your Social Security number exists on bank and investment accounts, the IRS knows precisely how much unearned income you made as soon as you did, thanks to the 1099 forms that financial institutions send to the tax agency. If you forget to include this info on your return, the IRS examiners will let you know that you owe taxes on it, too. And depending on when your oversight is discovered, you also could owe penalties and interest on the unreported earnings.
Also, be careful in figuring any tax due on your investment earnings. Some dividends, reported to you and the IRS on Form 1099-DIV, are eligible for lower capital gains tax rates. These amounts are in box 1b (qualified dividends) of that form. You’ll have to do some additional work to compute this tax amount, especially if you’re filing your returns without the help of a tax software program, but it’s worth the effort to shave some dollars off your eventual tax bill.
6. Math Miscalculations
The most common error on tax returns, year after year, is bad math. Mistakes in arithmetic or in transferring figures from one schedule to another will get you an immediate correction notice. Math mistakes also can reduce your tax refund or result in you owing more tax than you thought.
Using a tax software program to file your return can help reduce math errors. The built-in calculators do the work for you, adding, subtracting and inserting numbers on additional forms as needed. But you still have to make sure that your initial numbers are correct. Entering $3,500 when the real figure is $5,300 makes a lot of tax difference. Getting the numbers right is crucial because you can be sure that the IRS will be double-checking numerical entries against its copies of your tax statements (W-2, 1099s and the like). When IRS examiners find a discrepancy, they’ll definitely let you know and, in many cases, will correct your mistake and refigure your taxes for you. Don’t give them the chance. Make sure your math entries are right.
7. Social Security Number Oversights
Because the IRS stopped putting taxpayer Social Security numbers on tax package labels in response to privacy concerns, some taxpayers forget to write in their identification numbers. Your tax ID number is crucial because there are so many transactions — income statements, savings account interest, retirement plan contributions — keyed to this number. The nine-digit sequence also is vital to claim several tax credits, such as the Child Tax and Additional Child Tax credits and ones for educational expenses and dependent care costs. Without the numbers, or with wrong ones, the IRS will disallow these tax breaks.
8. Complete Charitable Contributions
Did you give to charitable groups last year? All types of donations, from cash to cars, could be valuable tax deductions, so make sure you count them all when you file. Be sure to follow the donation tax rules, the most important being that you give to a qualified organization — that is, one that has tax-exempt status with the IRS. Also be careful when calculating any gifts of clothing and household items. Tax law now requires that these donations be in good or better condition or the deduction is disallowed.
9. Signature Required
Sign and date your return. The IRS won’t process it if it’s missing a John Hancock, and that means on e-filed returns, too. Taxpayers filing electronically must sign the return electronically using a personal identification number, or PIN. To verify your identity, you’ll have to provide the PIN you used last year or your adjusted gross income from your previous year’s tax return. Your tax software should walk you through the e-signature process, but if you’re still mailing your return, don’t be in such a hurry that you stuff your 1040 in the preaddressed IRS envelope without signing it. And if it’s a joint filing, you and your spouse both must sign.
10. Missing the Deadline
If the impending April 15 tax deadline is a problem for you, make sure you buy yourself six extra months by simply asking the IRS for more time to complete your tax paperwork. All you have to do is submit Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by the regular filing deadline. Remember, though, that the extension is only for the forms; you still have to pay any tax you may owe by April 15.
If you make the mistake of not filing or paying on time, you’ll end up facing even more costs in late-filing penalties and interest fees.
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What about price? There’s a lot to be said for comparing the cost, since TurboTax adds up to cost quite a bit more.
Are you sure you are using the calculator for the correct form? This is indicating you have 4 children under the age of 16 is this correct? I would assume that you will recieve the lesser amount just because the calculator is very accurate…
Are you sure you are using the calculator for the correct form? This is indicating you have 4 children under the age of 16 is this correct? I would assume that you will recieve the lesser amount just because the calculator is very accurate…
Ours turned out well this year and I have to send them out tomorrow. Was waiting for payments that never arrived *UGH*. Frustrating to work and not get paid so now I’m back to getting notarized contracts with each client.
Oh my gosh, you just reminded me that I’ve NOT paid our state tax refund yet……LOL!!!! We got a huge federal refund but had to pay in to state this year ($112)………guess I’ve been waiting till the absolute last moment to send them money…..I’ll do it online so I get my bank “reward points!”
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A flat tax of 11% of ALL Americans would bring in more money to the government that they are bringing in today – but of course we would tick off a ton of liberals who now reside in their parents’ basements. But at this point if something is not done to reign in spending and taxes we will all be living there.
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