Top 7 Tax Mistakes to Avoid

What are the top 7 tax mistakes to avoid?

Tax season is one of the most dreaded periods of the year and for good reasons. After all, there probably isn’t one single person on this Earth who enjoys scouring through receipts and filling out never-ending paperwork. And people who are living in one of these 10 countries with the highest tax rates must be especially happy when handling them. But we can’t change the laws and taxes rates for that matter. There is only one thing we can all do –  avoid making tax mistakes.

This doesn’t just sound simple – it is simple. If you make yourself follow the procedures, get to know all the paperwork from the beginning, you don’t have to make neither one of these most common tax mistakes people usually make. Knowledge is, once again, the strongest weapon we can have. That’s why we have prepared this list – to help you get familiar with some of the many tax mistakes people make when they first start dealing with those annoying taxes. We sincerely hope this list will come handy to you.

In order to compile the list of top 7 tax mistakes to avoid, we took a look at many suggestions coming from credible sources like US News, Forbes, and The Fiscal Times to name a few. We took a few most common tax mistakes from these sources and added a couple of more, which we got from our personal experience.

So, if you’re thinking doing taxes on your own for the first time, these are the top 7 tax mistakes to avoid!

 

7. Not staying updated with the laws

As you may or may not know – many laws change each year. One of the most common tax mistakes people do is forgetting to check whether some tax requirements have changed or not. And be sure – this is your responsibility. No one will call you and tell you to pay attention because the tax requirements have changed. After all, in these modern times, checking any changes, even the ones regarding the taxes and laws, it’s easier than ever. And, of course, if you don’t do it, you will only hurt yourself, or should we say – your budget (as you will most probably end up paying more for your screw-up than you should have in the first place).

6. Not selecting the correct filing status

Although, this may sound like a mistake you wouldn’t do, be careful about it, because it is among the most common tax mistakes people make. For example, if you are a single parent, maybe the better choice for you would be to select the status – “head of household” instead of “single” because you may end up having lower taxes. Also, couples should check further if the best option is for them to file jointly or separately as the best choice is not the same for every couple. It all depends on many factors, such as immigration status,  finance history (if someone had some problems), etc. Be sure to inform yourself the best before filing anything, as it turns out, you may have a better, and still legal, option.

5. Not reporting stocks or other entities

Any stock or interest in a company or partnership has to be reported to the IRS, whether we’re talking about domestic or foreign entities. In some cases, such entities can also have an influence on your personal return, so make sure you don’t forget to file in this very important piece of information.

4. Not mentioning foreign incomes

Even if your foreign income is not substantial and you might already be paying taxes for it in the specific country, you still have to report these earnings to the IRS. If you’re already paying taxes elsewhere, you might not be required to pay them in the US too, but not filling this information to the IRS can land you in trouble for no good reason. Equally, the amount you’re making doesn’t bear any importance – any sum of money can potentially have taxable interest. Many people are unaware of the importance of the mentioning every single income they have, which is why not mentioning foreign incomes takes the 4 place on our list of the top 7 tax mistakes to avoid.

3. Claiming unfounded deductions

Unfortunately, there are still many business owners who are inclined to deduct a whole bunch of things, none of them related to their line of work. But even if you might fool the IRS and make a small buck here and there, this practice can easily put you in big trouble. Be careful about what you choose to deduct, even if you label them as office supplies, as these may also be audited. Nothing is worth being audited by the IRS or, in the worst case scenario prosecuted, so don’t waste your time deducting something you didn’t really use for your business.

2. Not separating business from pleasure

Even though you run a small business for which you do your own accounting, this is never an excuse to mingle your business tax information with your personal one. Don’t deduct lunches, holidays, or other expenses with clients and associates unless they actually had something to do with your business. Not only will this keep things clear and straightforward, but you will also have a lot less explaining to do if the IRS comes knocking. Also, it is preferable to do your personal and business taxes on different days, so as to not mix up the information.

1. Not keeping clear and organized records at all time

The easiest way of ensuring you’re ready when the tax season comes is by ensuring you keep organized records at all times. Not only will this help you a lot with filling in your paperwork, but you’ll also be able to justify your actions in case the IRS comes to audit you. Not being organized all the time with the bunch of paperwork is definitely one of the most common tax missteps people make. Hence, it is our number one of all top 7 tax mistakes to avoid!