I often hear that potential clients want to save a few bucks and try to prepare their own tax returns using an online or computer-based program. Even with the simplest tax situations, there are plenty of mistakes that can be made when preparing your own return. I am happy to discuss the following tax mistakes that I see most often when speaking with clients. Keep in mind that any mistakes can end up costing you much more than you saved in professional fees.
Improper Business Expense Tracking
Starting and continuing a business can prove to be a daunting task. Hiring employees, inventory management, and keeping clients happy can make you question if it is all worth it. However, there is one area in which you can avoid the headaches.
Proper expense tracking and proof can take away a lot of the problems in the future. In case of an audit (although very unlikely) all expenses should be traceable to bank or credit card statements and receipts. It is okay to scan and save the receipts as long as you have a backup copy and they are clear. They should generally be saved for seven years (although that can vary), and they should be kept in an organized manner.
If you plan on taking an auto mileage deduction, a log should be kept for each business trip (this should include mileage driven and purpose of the meeting). These suggestions can save a lot of a headaches down the road.
Improper IRA Contributions
Often times, the ability to contribute to an IRA depends on your income level (this goes for Traditional, Roth, and SEP IRA contributions). Your exact income is usually not known until you file your tax return. So, contributing throughout the year can cause issues if you are above the threshold. Your best bet is to put the money aside in a savings account and contribute if you can.
Failing to Claim Unreimbursed Employee Expenses
If you are a W-2 employee of a company, you might think that you are out of luck with business expenses. Lucky for you, that thought might be wrong. If you itemize, any unreimbursed employee expenses (summarized on the form 2106) above 2% of your adjusted gross income will be deducted from your taxable income. It would be a good idea to keep receipts which can include driving to clients, use of your cell phone for business purposes, buying supplies for your classroom, and working from home if it is for the benefit of your employer.
Choosing the Wrong Filing Status
When it comes to filing your taxes, there are a handful of choices. However, that is narrowed down based on your marital status. For example, if you are married as of December 31, your only choices are married filing jointly or married filing separately. If you have never been married, your only option is single. If you were married during the year but not married as of December 31, you might be able to choose single, qualifying widower, or head of household. It is important to discuss your specific situation with your tax professional to determine the correct filing status. There could be interest and penalties if the incorrect method is chosen.
Failing to File or Pay on Time
Last but not least is the importance of filing and paying your taxes on time. Most business taxes are due the 15th day of the 3rd month after the year-end (March 15th for calendar year businesses). Personal tax returns are generally due April 15th. That being said, if you will need extra time to file your returns, you are able to file for an extension. Just keep in mind that this is an extension of time to file, not an extension of time to pay your taxes. You and your accountant will have to estimate the amount of tax that you will owe to determine if you should make extension payments. If you fail to pay by April 15, you will receive failure to pay penalties and interest.
It is important to discuss your tax situation with a seasoned professional. I know that it is tempting to save a few dollars, but it can often cost you in the long run. Speak to your trusted tax professional to make sure that everything is taken care of by the book while still saving you the most money possible. It will be worth it in the long run.