Yahoo Finance 6 Tax Mistakes the Middle Class Makes (And How Not To)
With the exception of accountants and tax attorneys, most people do not look forward to tax season. In fact, they loathe it so intensely that a recent GOBankingRates survey of more than 1,000 adults found that nearly half the country would rather have jury duty, take a standardized test, spend a weekend with their in-laws, miss a trip due to a canceled flight, get a root canal or even spend a night in jail than do their taxes.
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That may be, but they’ll like it even less if they have to submit an amended return or endure an audit later on because they made avoidable errors when filing their returns.
While the rich have teams of specialists who charge hefty fees for flawless work, middle-class earners mostly use e-filing software platforms because they make it easy to DIY — but those same services also make it easy to commit errors.
Here are the most common tax mistakes among middle-class filers and how to avoid them.
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Procrastinating
If a dentist’s chair or even jail is preferable to something, it’s natural to put that something off for as long as humanly possible — and many will do just that this spring. More than 1 in 5 of the study’s respondents don’t plan to file their returns until the week of April 15 or even on Tax Day itself. Another 5% will request an extension.
While some people might work better under pressure, most are more error-prone when they rush — particularly with complex and weighty tasks like analyzing an entire year of their financial lives. That makes procrastinating the mistake that’s most likely to cause more mistakes, and the study’s respondents worried more about making an error on a form than any other Tax Day concern.
TurboTax says the remedy is to break the overwhelming prospect of doing your taxes into smaller, more manageable tasks — inputting your personal information one day, your income the next, handling deductions and credits on day three, etc.
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Hoping — but Not Confirming — That You Have All Your Documents Before You File
The desire to get it over with — and to collect a refund quickly — makes some people do the opposite of procrastination. But by rushing through it, you risk filing while important documents are still trickling in.
“This could lead to amended tax returns or tax penalties in the future,” said Johan Garcia, a CPA with a master’s degree in tax, founder of After Tax Cash and principal of JG CPA & Advisory. “Make sure you do an inventory of the tax documents required. Ask your CPA for an organizer or inventory list of what you had the prior year.”
Underreporting Income
In the era of side hustles and gig work, it’s easier than ever to let a few 1099s get lost in the shuffle — especially when your tax software shows your refund shrink in real time with every new income source you report.
“Common mistakes made by middle-class filers include not reporting all taxable income, such as income from freelancing or side gigs,” said attorney and Brillant Law Firm founder David Brillant, a certified estate planning and probate law specialist with a master of laws degree in taxation.
The consequences include penalties, interest, audits and, in the rarest and most egregious cases, criminal charges. If you get a little money from a lot of places, Brillant said that basic tax law research and meticulous record-keeping are the secrets to success at tax time.
“Many are unaware that even minor side incomes need to be reported, and they fail to keep adequate records of such income throughout the year,” he said.
Forfeiting Lucrative Credits and Deductions
Many in the middle class pass up opportunities to reduce their taxable income, lower their tax bills and increase their refunds by using the tax code to their advantage.
“Another frequent error is incorrect or missed deductions and credits,” Brillant said. “For instance, not claiming state and local taxes (SALT) up to the $10,000 limit can result in paying more taxes than necessary.”
He also mentioned the earned income tax credit and education credits, which many in the middle class assume they don’t qualify for or simply don’t know about — and he’s not the only one who has seen taxpayers leave money on the table.
“Missing potential deductions and overlooking deductions such as state sales taxes, reinvested dividends or out-of-pocket charitable contributions can lead to a higher tax bill as these were not properly optimized,” Garcia said.
Brillant said to avoid these mistakes by brushing up on changes to tax rules and laws regarding credits and deductions before you file.
“For example, the IRS frequently updates its regulations and thresholds for tax credits like the EITC,” he said. “Being proactive in understanding these changes can help filers maximize their returns or minimize their liabilities.”
Omitting Alternative Income Sources
Not all income comes from employers or contract work, and Brillant said he’s seen many middle-class taxpayers get into trouble by leaving out earnings that they might not think of as income but that the IRS requires them to report.
“For example, in one case, a client did not realize that selling stocks resulted in capital gains that significantly increased their tax liability for the year,” he said. “This could have been mitigated through more strategic planning and possibly utilizing strategies such as harvesting losses to offset gains.”
Going It Alone
Modern tax software makes it fairly easy and inexpensive for average people to do their taxes — but not always to do them right. Offsetting gains through tax harvesting, to use Brillant’s example, isn’t something that TurboTax advises you to do — and that’s just one of many ways that professional help can pay for itself.
Even so, three out of four of those who responded to the GOBankingRates survey will file themselves or use tax software, while only 25% will hire a CPA or a tax attorney — and many DIYers will wind up paying more in the long run.
“Consulting with a tax professional — especially if you’ve had significant life changes like marriage, buying a home, or starting a business — can provide personalized guidance and prevent costly errors,” Brillant said. “Understanding and navigating the intricacies of tax law requires both attention to detail and an awareness of ongoing changes in legislation. By staying informed and seeking professional advice when necessary, taxpayers can better position themselves to make the most of their filings and avoid common pitfalls.”
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This article originally appeared on GOBankingRates.com: 6 Tax Mistakes the Middle Class Makes (And How Not To)
