As a young working professional, you might strive to make wise financial decisions. Therefore, you may save 10% of your check each pay period, start retirement planning and avoid all unnecessary debt. These are excellent moves to keep your finances on track. But while you’re improving your finances, it’s important that you make wise choices regarding taxes.
Taxes might be the last thing on your mind; and you may not think about taxes until April 15 of each year. If you lack tax knowledge, there is a chance that you’ll make a few costly mistakes. And unfortunately, a seemingly innocent tax mistake can have a major impact on your finances.
There are ways to avoid these types of issues. However, before you can handle your taxes wisely, you need to identify 10 common tax mistakes made by young professionals.
1. Hiring the wrong tax preparer
Using a tax preparation service is okay and often more affordable than hiring an accountant. However, make sure that this professional understands your tax needs. If you have a complicated return, such as multiple schedules, an inexperienced tax preparer may not fully understand the instructions for your forms. Therefore, he or she might make costly mistakes on your return.
Using an accountant is best for complicated tax returns. For that matter, if you run into an issue with the IRS, don’t handle these issues alone, and don’t ignore the issue. Dealing with a tax problem can be scary and stressful. However, “prolonging the issue only makes matters worse,” reports the tax attorneys at Authority Tax Services. Therefore, seek the help of an experienced tax attorney to resolve your complicated issues and avoid IRS collections.
2. Completing a tax return by hand
There is no rule that says you have to use software program to complete your own return. Just know that completing a return the old-fashioned way — with a pen and paper— might introduce costly math errors.
3. Waiting until the last minute to file taxes
If you anticipate a tax refund, waiting until April 15 (or anytime after March) to file your return can delay your check. If you need your money sooner, consider filing as soon as you receive your W-2 from your employer.
4. Choosing the wrong filing status
You can choose to file as a single person, head of household, married filing jointly, or married filing separately. As a single person, you may choose this filing status each year. However, filing as head of household might result in additional tax savings. Speak with your accountant or a tax preparer for advice.
5. Rushing the filing process
If you prepare and file your own tax return, always double check the forms before submitting. Understandably, this isn’t the most exciting task. However, inverted numbers or missing digits on your return can introduce problems, which can potentially delay a refund, or result in owing taxes when you anticipated getting money back.
6. Being careless with information
Tax identity theft is a real problem. This is when someone steals your tax information and files a fraudulent return, thus claiming your refund. Although you can resolve this issue, it can take several months. To avoid being a victim, file your taxes as soon as you receive your W-2 and keep your tax information in a safe place.
7. Not keeping a copy of your tax return
If you lose your tax return, there is a $50 fee to request a copy from the IRS. This document is important if you plan to buy a home. Your mortgage lender will request copies of your return from the past two years. If you cannot provide this information, it might prevent a mortgage approval.
8. Choosing not to itemize your return
If your write-offs are less than the standard deduction, there isn’t a need to itemize your tax return. However, automatically assuming that you don’t need to itemize is a huge tax mistake. If you have a business, own a home, or if you’re eligible to deduct certain employee-related expenses, your write-offs might exceed your standard deduction, which can reduce your taxable income and potentially result in a bigger refund.
9. Not keeping accurate records
If you’re self-employed or have deductions, it is important that you keep accurate records throughout the year. Do not estimate write-offs, and only list a deduction if there’s a paper trail. If you’re audited, the IRS will not accept estimations — they need proof of expenses. Guessing might result in owing additional taxes.
10. Not withholding enough at work
You might limit withholdings at work to receive a larger paycheck, but this move can result in a larger tax bill at the end of the year. To avoid this headache, increase your withholdings at work and take advantage of other options to lower your taxable income, such as enrolling in your employer’s 401(k) plan.
A tax issue can be overwhelming and stressful. But if you make smart decisions now, you can potentially reduce how much you owe, plus avoid costly issues with the IRS.