We all have to file taxes, and with so many digital tools available, more people are opting to prepare their taxes on their own.
While do-it-yourself tax preparation might appear to be more cost-effective, there are numerous subtle complexities in tax laws that can easily be overlooked by going that route. Missing these details can lead to errors that cost more than just money; they can result in audits, penalties and missed opportunities for tax savings.
Let's dive into a few common pitfalls you should be aware of if you're considering DIY tax prep.
Overlooking Deductibles and Credits
One of the most common errors of DIY Tax preparation is missing out on deductions and credits. Each year, tax laws might introduce new deductions or have old ones no longer applicable, and keeping up with all of these complex changes can be challenging.
Itemizing vs. Standard Deduction: Many taxpayers might benefit more from itemizing deductions but choose the standard deduction because it’s simpler. A tax professional can help determine which is more beneficial based on your expenses and lifestyle specifically.
Education Credits: There are multiple credits related to education expenses, but understanding eligibility and claiming them correctly can be especially complex and unique for your specific situation.
Home Office Deduction: With more people working from home, the home office deduction has become much more common on tax returns but strict criteria make it easy to make mistakes in calculations that could potentially trigger audits.
Incorrectly Reporting Income
Reporting income seems straightforward, but it can get complicated, especially if you have multiple streams of income like freelance work, rental income, or investments.
Freelance income: Freelancers often miss reporting small gigs or fail to deduct expenses properly, impacting their net income and tax liabilities. Make sure to keep detailed records of all income earned from freelance work, including invoices and receipts for expenses along with any 1099s you receive .
Rental income: Misreporting rental income, such as failing to include all rental income received or neglecting to deduct allowable expenses, can lead to inaccurate tax filings and potential penalties. You'll wan to make sure you're reporting all rental income received during the tax year on your tax return. This includes rental payments, advance rent, security deposits used as a final payment of rent, and any property or services received in lieu of rent. You are permitted to deduct eligible expenses related to renting out your property, such as mortgage interest, property taxes, insurance, repairs, maintenance, and utilities.
Investment Income: Dividends, capital gains, and losses must be reported accurately. Failing to do so can lead to underpaying taxes and incurring penalties and interest. So you'll want to keep accurate records of all investment transactions, including purchases, sales, dividends received, and capital gains or losses realized.
Misunderstanding Tax Laws
The intricacies of tax laws are ever-evolving and can be highly complex to navigate. Misinterpretations may result in inaccuracies in your tax filings.
Filing Status Errors: Choosing the wrong filing status can affect tax rates, deductions, and eligibility for credits. You'll want to make sure you're considering factors such as your marital status, dependents, and household arrangements. Use the IRS guidelines or consult with a tax professional if you're uncertain about which filing status to choose. Tax rates, deductions, and eligibility for tax credits vary by filing status so understanding those implications is crucial.
Retirement Contributions: Misunderstandings about the limits and rules for IRA contributions can lead to excess contributions and penalties. Familiarize yourself with the contribution limits for different types of retirement accounts, such as Traditional IRAs, Roth IRAs, and 401(k) plans. Keep in mind that contribution limits may vary depending on your age, income level, and other factors.
Errors in Data Entry
Simple data entry errors can have significant repercussions, including delayed refunds or even audits.
Social Security Numbers: A transposed digit can cause a return to be rejected.
Mathematical Errors: Mistakes in calculations can lead to incorrect tax liabilities or refund amounts.
So make sure you triple check all of your data before hitting submit!
Not Knowing Your Rights in an Audit
If you are audited, knowing your rights and how to proceed can significantly impact the outcome. Many DIY tax filers are unaware of how to handle audits, leading to feeling a lot of stress and overwhelm as well as sometimes very costly expenses.
Representation: Tax professionals can represent you in discussions with the IRS, which often leads to resolving issues more favorably.
Audit Triggers: Common triggers include high deductions relative to income and inconsistent reporting across years. Working with a professional helps avoid these red flags.
Failing to Plan Ahead
Tax planning is an essential aspect of financial health that continues to impact your life year over year. Planning now can significantly impact both your short term and your long term future.
Long-term Tax Planning: Strategies such as retirement planning and financial forecasting can help to minimize long-term tax liabilities but are often hard to understand and utilize without the help of a professional.
Changes in Life Circumstances: Life events like marriage, divorce, or the birth of a child can have significant tax implications. Without planning, you might miss important considerations.
While DIY tax preparation can sound appealing, the nuances of tax law and the risk of making mistakes that could cost you a lot of money-or worse, even legal trouble-are truly significant. By understanding these pitfalls that can come with self-preparation, you can better assess whether seeking professional help might be the smarter choice for your individual situation.
Working with an expert not only ensures compliance and helps to have a better tax outcome but also provides a huge relief, making tax season change from being a season of stress and anxiety to one of financial ease and opportunity. And contrary to popular belief taxes are year round, so it's never too early to seek out professional support. We would love to serve you, check out our services!
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DISCLAIMER: We are accountants but we aren't your accountant. For tailored guidance on your individual accounting and tax matters, it's best to consult with a professional. They can provide personalized advice that suits your unique situation.