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Six Tax Mistakes and Penalties to Avoid

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Filing your federal income taxes can be a complicated process, and making mistakes along the way may lead to costly penalties or a delay in receiving a much-anticipated refund.

However, if you pay close attention and steer clear of major missteps, such as missing the filing deadline, forgetting a signature or losing out on a valuable deduction, you may find that tax season isn’t as scary as it sounds.

Read below for some of the most common tax mistakes and learn how to avoid making them yourself when you file this year.

1. Filing past the deadline

Tax Day has been extended to May 17, 2021. If you owe the IRS money and miss the May 17, 2021 deadline for filing your federal income taxes, fees will begin accumulating immediately. The IRS charges a 5% penalty on the amount due for each month your taxes are late, with a maximum penalty of 25%.

Not filing on time can also delay any tax refund you are owed, so it pays (literally) to plan ahead and make sure you meet the deadline.

If you are unable to file on time and want to avoid failure-to-file penalties, you can request a six-month extension to October 15 by filling out Form 4868 (available on the IRS website) before the deadline. Remember, if you owe taxes, an extension gives you longer to file but not more time to pay. Any payment you owe is still due by April 15 if you want to avoid penalties and interest.

2. Forgetting to file quarterly estimated taxes

In the same vein as being on time, it’s important to know if your type of income necessitates paying taxes more than once a year.

For example, if you are a freelancer or are otherwise self-employed, you don’t have an employer to automatically withhold taxes from your paycheck. As a result, the IRS requires freelancers, self-employed business owners, solo practitioners and those who derive income from investments to pay quarterly estimated taxes in addition to filing an annual tax return on or before April 15 with everyone else.

To calculate these estimated amounts, you can fill out Form 1040-ES and mail your payments by the IRS deadline for each quarter, found below. Alternatively, you can pay quarterly estimated taxes online via the Electronic Federal Tax Payment System® tax payment service administered by the U.S. Department of the Treasury.

  • April 15, for the first quarter of the year (January 1 – March 31)
  • June 15, for the second quarter of the year (April 1 – May 31)
  • Sept 15, for the third quarter of the year (June 1 – August 31)
  • January 15, for the 4th quarter of the previous year (September 1 – December 31)

3. Leaving out (or messing up) essential information

It’s important to dot your i’s and cross your t’s when it comes to filing taxes, which means double checking your name, address, Social Security number and other information so as not to delay the process.

If you’re entitled to a refund and opt for direct deposit, make sure you’ve correctly entered your bank account information on your tax form so that the money goes to the right place and you can access it as soon as it’s available.

Whether you’re filing electronically or mailing in a paper statement, be sure to include copies of any documents that are required.

Finally, don’t forget to sign your name at the end. The IRS doesn’t process unsigned returns, so you will have to provide a signed copy after the fact if you miss this important step. And be sure to put a stamp on the envelope. The U.S. Postal Service will not deliver a letter or package to the IRS without the proper amount of postage.

4. Failing to double-check your math

Be sure to double-check your math when filing taxes. Aside from potentially delaying the processing of your return, improper calculations can lead you to pay an incorrect amount. If you owe more than you pay, the IRS can charge interest on any unpaid taxes.

To avoid such penalties, many filers use tax preparation software or engage a tax professional for help. There’s also help that’s available at no cost. The IRS offers a free filing program for all taxpayers. If your income was $72,000 or less in 2020, you may file for free on an IRS partner site and may be able to file your state tax return at no cost as well. If your income was higher, there are free electronic forms that you can fill out and file yourself, which will help with basic calculations and offer limited guidance.

In addition, the IRS’s Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs offer free basic tax return preparation to qualified individuals, including those who earn $57,000 or less, persons with disabilities and limited English-speaking taxpayers. You can find a VITA/TCE location near you using this link. AARP provides no-cost online tax return preparation assistance via its AARP Foundation Tax-Aide service.

Please note that due to the Coronavirus/Covid-19 pandemic, many of these physical locations may be closed completely, or help may only be offered virtually.

5. Missing out on a potential tax break

When you file your taxes, make sure you know about all the deductions and other tax breaks that could be available to you. For example, if you have a child or care for another dependent, you can claim the Child and Dependent Care Credit. If you’re a small business owner, you can claim certain purchases as tax-deductible business expenses.

On the flip side, don’t claim credits that you’re not eligible to take. You may get a bigger tax refund at first, but it could lead to an audit that costs you more in the long run.

6. Making the wrong choice when it comes to tax deductions

It’s important to know whether it's best for you to take the standard deduction or itemize your deductions on your return, as the decision could affect how much you owe in income taxes.

Most people opt for the standard deduction, which for the 2020 tax year is $24,800 for those married and married filing jointly, $12,400 for single taxpayers and married individuals filing separately, and $18,650 for heads of household. The Urban-Brookings Tax Policy Center estimated that about 90% of households took the standard deduction in 2018 rather than itemizing. For the 2020 tax year, the standard deduction was nearly doubled, so it’s likely you’ll go this route.

However, itemizing your deductions may be the right choice if you had large, uninsured medical or dental expenses, paid sizable amounts in mortgage interest or property taxes, had extensive business losses or made significant contributions to certain charities.

If you’re unsure which way to go, check out the free filing resources at IRS.gov, purchase reputable tax preparation software or talk with a certified public accountant, enrolled agent or other tax preparation professional.

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