As tax season comes around, filing taxes can feel complex and overwhelming for some taxpayers. With confusing forms, complicated deductions, and the fear of making costly mistakes, taxpayers struggle to file accurately and on time. However, you can simplify the tax filing process and avoid common errors by being organized, thorough, and seeking professional help when needed. Here are some key tips to avoid tax mistakes and ensure a smooth filing experience:

Know Your Filing Status

Your filing status is one of the most important factors affecting your tax liability. It determines your tax bracket, standard deduction amount, eligibility for certain credits, and tax benefits. With five possible options, it is important to choose the one that accurately reflects your situation to minimize your tax liability. The options include:

Single - For unmarried taxpayers who do not qualify for any other filing status. Single filers receive the lowest standard deduction.

Married Filing Jointly - This is the most common filing status. It allows married couples to combine their income, exemptions, deductions, and tax liabilities on a single return. Filing jointly generally results in a lower tax bill.

Married Filing Separately - In limited cases, it makes sense for married couples to file separate returns. This may benefit couples where one spouse has high medical deductions or other circumstances. However, the standard deduction is lower.

Head of Household - This status is for unmarried taxpayers providing a home for a qualifying dependent. It offers higher standard deductions than filing single or separately. There are specific requirements to qualify for this status.

Qualifying Widow(er) - Applies to taxpayers whose spouse passed away recently. It allows utilization of the joint filer standard deduction and rates for two years following the year of death.

Accurate Income Reporting

When filing taxes, all sources of income must be reported completely and accurately. To avoid issues, here are the three most common income sources that you must understand: 

Employment Income- It includes all wages, salaries, tips, bonuses and other compensation received from an employer. This income is reported on Form W-2 which should match the amounts listed on your tax return.

Self-Employment Income- It includes all revenue from your own business or freelance work before deducting expenses. This income is reported on Form 1099-MISC. Be sure to report all earnings even if a 1099 was not received.

Investment Income- It includes interest, dividends, capital gains and other earnings from investments. This income is reported on Forms 1099-INT, 1099-DIV and Schedule D. Keep records of all investment transactions and income even if 1099s were not received.

Common Mistakes Related to Underreporting Income

While missing to file some income sources may seem a minor concern, underreporting income can lead to IRS audits, penalties, interest charges, and even criminal prosecution if found to be intentional tax evasion. You must be diligent in gathering detailed records of all your income sources and expenses. Here are some common mistakes that can lead to underreporting of income:

Forgetting to Report Some Income Sources- It's easy to overlook reporting income from side jobs, freelance work, tips, prizes and awards, hobby income, and other miscellaneous sources. However, all income, no matter how minor, is taxable and must be reported. Make sure you have records of all your income sources.

Incorrect Calculation of Business Income- If you are self-employed or have business income, it can be tricky to calculate your net taxable income. Income is reported on Schedule C. Common mistakes include deducting personal expenses, forgetting depreciation, and not keeping detailed records. Consult an accountant if you are unsure.

Improper Reporting of Investment Income- Interest, dividends, capital gains from investments, and rental properties need to be correctly reported on your return. Mistakes like forgetting dividends or capital gains, miscalculating basis, or taking distributions from retirement accounts can lead to underreporting. Use 1099 forms and investment records to report all investment income.

Unreported Cash Income- Any income received in cash for services or goods provided must also be reported. There is often a temptation to not report under-the-table cash payments. However, failing to report any cash income can lead to tax evasion charges.

Claiming Excess Business Expenses- Claiming more deductions than allowed to artificially reduce business income is illegal. All business expenses claimed must be valid, documented, and related to generating business income. If required, seek professional help to determine allowable business expenses.

Leveraging Deductions and Credits

Identify Eligible Deductions and Credits

When preparing your annual tax return, it is crucial to understand which deductions and credits you are eligible to take based on your personal and financial situation. There are several tax deductions and credits available, but you must meet specific requirements to qualify for each one. Common tax deductions include mortgage interest paid on a primary residence or second home, state and local property taxes, charitable contributions made to qualifying organizations, unreimbursed medical and dental expenses that exceed a certain threshold, and ordinary and necessary business expenses. To qualify, you must keep detailed records such as receipts, bank statements, letters from charities, and expense logs.

Tax credits on the other hand directly reduce your tax liability dollar-for-dollar. Some common credits include the child tax credit which provides money for each dependent child under age 17. Education credits like the American Opportunity Credit help offset college tuition costs. Retirement savings contributions credits can reduce taxes if you contribute to an IRA or employer-sponsored plan like a 401k. Taxpayers over age 65 may qualify for elderly tax credits. 

Determining which deductions and tax credits you can properly take is key to maximizing your tax refund and saving money each year. 

Check our blog What separates a tax credit from a tax deduction? to learn more about all credits and deductions and how you can leverage them for maximized returns.  

Keeping Detailed Records To Avail Deductions 

Taxpayers claiming deductions and credits must keep detailed records to prove eligibility and accuracy. For example, if you claim the home mortgage interest deduction, retain Form 1098 from your lender and proof of payment. If you deduct charitable contributions, keep receipts and written acknowledgments from the charity. Good record-keeping throughout the year will save time during tax preparation. Organize receipts, bank records, donation letters, and other supporting documents. Digitize records by scanning or photographing them. Deductions may be denied if you cannot produce proper documentation.

Avoid Double-dipping on Credits and Deductions 

You cannot claim the same expense as both a deduction and a tax credit. For example, if you take a child care credit, you cannot count those expenses as part of the other deduction. You must carefully compare to see which credit and deduction provides the greater tax benefit. In addition, you cannot deduct expenses and then exclude that income causing double-dipping that can trigger an audit. Consulting a tax professional can ensure you claim eligible deductions and credits. 

Organized Record-Keeping

Disciplined record-keeping habits can prevent scrambling to recreate activities during tax time. Unorganized records can lead to unreported taxable income, claiming unsupported deductions and missing out on eligible credits. Here are few tips to maintain organized record keeping: 

• Maintain digital or paper files with all income statements, expense receipts, mileage logs, donation records, and any other tax-related documentation. Set up a system to store these records that allows you to easily access what you need.
• Use bookkeeping apps and accounting software to easily capture deductible expenses, business income, and other important financial data while on the go. The transactions will be safely stored digitally.
• When saving paper receipts, note the business purpose on each one. For example, if you take a client out for a meal, write the name of the client and a few words about the discussion topic. This will support any deductions if audited.
• Keep thorough records of business mileage whether commuting, meeting clients, or traveling. Use apps to track this automatically.
• Maintain careful records of charitable donations both monetary and goods. Note what organization, the date, and the dollar value.
• Once a year, double check that you have all the needed tax documents before filing. Set reminders to request any missing forms.
• Store financial records safely for at least 3 full years for protection  in case of an audit. Back up digital files securely.

Filing with the Correct Forms

The IRS has an extensive array of forms, schedules, and worksheets for filing. Picking the wrong ones can derail your return. Here are some key form types: 

Form 1040 - The main personal tax return form that most individuals file. Works for wage earners, those with investments, business income, etc.

Form 1040-SR - A 1040 version designed for seniors over age 65. It has larger text and examples geared towards retirement income/expenses.

Form 1040-NR - Used by nonresident aliens filing a 1040 return. Accounts for special rules and regulations that apply to non-citizens.

Form 1040EZ - A simple return for single/joint filers with income under $100k that comes only from wages, salaries, tips, taxable scholarships, interest, or unemployment.

Form 1040A - A simplified 1040 with no dependents, deductions, business or rental income or foreign income requirements.

Form 1040 Schedule C - Reports income and expenses related to self-employment or freelance work as a sole proprietor. Attached to a 1040.

Form 1040 Schedule E - Used by taxpayers with income from rents, royalties, partnerships, S corporations, estates, trusts, etc. Attached to a 1040.

Form 1065 - Used to report income and loss for partnerships. Each partner receives a Schedule K-1 showing their share.

Form 1120S - An S corporation business returns reporting income, gains, losses, and deductions. Pass-through to shareholders.

Some common errors from using the wrong form include:

Overlooking taxable income - Forms like the 1040EZ limit what income you can report. Additional income may require an upgrade to 1040 or 1040A.

Losing eligible deductions - Itemized deductions are not allowed on simpler forms, resulting in a higher tax bill.

Incorrect filing status - Incorrect status can reduce deductions and incur penalties if audited. Verify you qualify for the chosen status

Not supplying required supporting forms - Situations like claiming dependents, reporting self-employment or rental income require extra forms to support items reported on your 1040, 1040A or 1040EZ.

If you are confused about the forms, you must read the instructions provided on the IRS website carefully and ask for professional help to determine the right forms to accurately file your taxes.  

Double-Check Your Information

Errors can creep in when transferring information from various forms and statements onto your return. Before filing, carefully verify:

• Personal information including your name, address, and Social Security number.
• Employer and financial institution information for income reporting.
• Social Security numbers when claiming dependents or child-related credits.
• Deduction and credit amounts match supporting documentation.
• Math computations involved in totals, balances, and percentage-based credits are accurate.

Catching minor typos can prevent delays and issues. For a second check, consider reviewing returns with a trusted tax preparer.

Electronic Filing Tips

E-filing speeds up processing and refunds, improving accuracy by minimizing manual data entry. Here are a few key things to keep in mind when filing electronically:

• Be sure that all forms, schedules, and worksheets are uploaded correctly into tax software without distortions or missing information.
• Carefully review the final return preview before submitting. Ask someone to check it with fresh eyes.
• Make sure access codes, account numbers, and contact information are entered properly, particularly for direct deposit of refunds.
• Save an electronic copy of the return along with confirmation from the IRS accepting it.

Common Red Flags and Audits

While the vast majority of taxpayers are fully compliant, returns can sometimes raise suspicion that leads to IRS follow-up letters or full audits. Issues that get attention include:

• Unusually high charitable deduction amounts that seem disproportionate to income.
• Business losses continued for years without signs of profitability.
• Discrepancies between your return and forms received from your employers and financial institutions.
• Questionable deductions like 100% business use of a personal vehicle.

While audits are scary, honest mistakes can usually be remedied by cooperating and providing reasonable documentation. Maintaining thorough, organized records helps justify items flagged in an audit. If the IRS does contact you, get representation to protect your rights.

Conclusion

When choosing a tax professional, ensure they have the proper credentials, qualifications, and expertise related to your tax needs. Enrolled agents, certified public accountants, tax attorneys, and some financial advisors have specialized tax training. Ask about their experience handling situations similar to yours regarding filing status, income sources, deductions, and credits. Verify they don't have any disciplinary issues filed against them related to professional conduct or substandard tax work. Professional tax advisors are always up-to-date on the latest provisions, forms, and deductions and advise tax-saving strategies for the best outcomes. Their fees are generally a worthwhile investment toward optimizing your tax return

While following these tips can simplify filing your taxes, errors can occur when tackling complex documentation, deduction eligibility rules, changing regulations, math computations, and e-filing protocols leading to inaccurate and delayed filings. By consulting experienced Tax professionals like NSKT for personalized tax preparation, e-filing, and audit support, you can streamline taxes to maximize returns and minimize IRS issues. Our tax professionals stay current on the latest tax codes to reduce tax liability, ensure accurate reporting, form selection, and avail the right credits and deductions, optimizing your tax position for increased tax benefits. 

The information provided here is for general informational purposes only and should not be construed as professional advice. The tax-related content on this blog is based on our understanding of tax laws as of the date of publication and may be subject to change.