Don’t let them happen to you!
Every year taxpayers are hit with tax surprises that could be avoided if they just knew the rules. Here are five big ones that are easy to avoid with some simple planning:
- Mistake #1.Not paying estimated taxes.This results in a tax surprise when you don’t calculate an estimate of taxes you owe each quarter. A surprise could also occur if you plain forget to make a payment. Maybe you’ve got plenty of cash to cover your estimated tax liability, but you fail to make an on-time payment.
The plan: Conduct a calculation each quarter to estimate the taxes you owe. Performing this calculation will also prevent you from any last-minute surprises if your payment ends up being higher than you expected. Also put estimated tax payment due dates on all your calendars. They are April 15, June 15, Sept. 15 and Jan. 15.
- Mistake #2. Not noticing revised versions of tax documents. Brokerage firms sometimes send out multiple 1099-B forms as new transactions are calculated during the early weeks of each tax season. With Form K-1s, sometimes new versions are issued throughout the year as additional information becomes available.
The plan: Be on the lookout for updated tax forms throughout the year so you can ensure accurate information is included on your tax return. When in doubt, call the brokerage firm or company that issues your tax documents to clarify whether or not a superseding version of a document has been issued.
- Mistake #3. Inadvertently withdrawing funds from retirement plans. Amounts taken out of pre-tax retirement plans like 401(k)s and IRAs can create taxable income. The most common inadvertent withdrawal occurs when you roll over funds from one retirement plan to another. If done incorrectly, the entire rollover could be deemed taxable income.
The plan: Do not touch your retirement accounts if at all possible. (Exception: When you reach age 72, you may be subject to required minimum distribution rules.) If you do withdraw funds, ensure you have the proper withholdings taken out at the time of withdrawal. Direct rollovers into your new plan are always a better alternative than receiving the withdrawal from the plan administrator and then conducting the transfer yourself.
- Mistake #4. Not taking advantage of tax-deferred retirement programs. There are numerous opportunities to reduce your taxable income through tax-deferred retirement programs.
The plan: Review your retirement savings options and plan to contribute as much as possible to your plans. Pay special attention to plans that include an employee match component.
- Mistake #5. Not keeping documentation. You know you drove the miles, donated the items to charity, had the medical expense, and paid the daycare. How can the IRS be disallowing your valid deductions? Remember that without correct documentation the IRS is quick to disallow them.
The plan: Set up good record keeping habits. Create both a digital and paper folder separated by income and expense type. Keep a contemporaneous mileage log and properly document your charitable contributions