Common Mistakes People Make When Preparing Their Own Taxes
Taxation is not an easy subject, with its complicated procedures and new rules. It gets even tougher at the financial year-end when books have to be compiled and returns filed. However, the difficulty level rises based on the way accounts and investments are handled throughout the year and your knowledge of taxes.
If you try to manage your taxes single-handedly, mistakes may be made during calculations. Tax credits, depreciation, and deduction rules experience regular revisions. If you don’t keep up with the latest regulations, you could be relying on old and outdated information.
Errors like this can delay your refund and invite penalties. To navigate you through some basic but costly errors Federated Tax Service, Inc. has put together a list of the most common mistakes people make when preparing their own taxes.
1. Forgetting to claim the Illinois 5% property tax credit when preparing your taxes.
We amend many returns, claiming this credit for new clients because they forgot, or the software they were using never claimed the credit. Remember, you can only amend up to three years, so anything beyond that is lost money.
2. Not reviewing your bank statements for errors.
The best way to do this is to handle bank reconciliations on a monthly basis. We have found multiple bank errors when preparing bank reconciliations for clients. For example, one of our clients dropped off several bank statements that were never opened or even looked at. When we did the bank reconciliations for this client, we found a check cashed for several thousand dollars more than the check amount. The client immediately picked up the information and went to the bank to resolve this issue that occurred several months earlier. The client was able to recover their money this way. How closely are you looking at your bank statements? Did you miss anything? Please reconcile your bank statements!
3. Forgetting the home office deduction for home-based self-employed businesses.
Recently, changes have been made that simplified the process of claiming this credit. You can take a $5 per square foot deduction up to 300 square feet or $1,500. Make sure you have the exact square footage of the office space. Also, this space must be used only for your business.
4. Not claiming depreciation on your taxes.
If you had a profitable year, you may consider purchasing equipment before year-end and taking advantage of 100% depreciation by claiming the 179 deductions. The Section 179 depreciation is an excellent way to lower your tax obligation. Doing some tax planning could save you hundreds or even thousands of dollars in the long run.
5. Forgetting to save for retirement.
You can defer tax now by putting money into an IRA or other retirement accounts with pretax dollars. You can put away after-tax dollars also and have your money grow tax-free with a Roth IRA account. Either way, please save money for retirement, don’t rely only on your social security when you retire. Consider these options, and you may even qualify for a credit. See the IRS Form 8880 for more details.
6. Not issuing a 1099 when required to do so.
Many new small business clients are not aware that when you hire and pay a subcontractor over $600 you are required to issue a 1099 form to an unincorporated subcontractor by January 31 of the following year. This is also the case for work done on a rental property that you own and are renting. Please get all the information from subcontractors before hiring and making any payments to them and issue the 1099 form as soon as possible after year-end. Doing so will allow you to claim these expenses when you file your tax return.
To overcome these and other mistakes while filing your taxes, reach out to the experts at Federated Tax Service, Inc. for guidance. With over twenty years of experience as a tax preparation and bookkeeping firm, in Chicago, we helped many individuals and businesses with their taxes, bookkeeping, and business needs. We provide exceptional customer service in a professional environment, by not only preparing tax returns but also advising and educating our clients on taxation rules and tax saving strategies, which we tailor to their personal and business needs.