The New Year’s bubbly has just stopped flowing, and it’s time to start thinking about tax season. Filing federal income taxes can be complicated. Even the simplest returns take time, and mistakes can be costly, resulting in delayed refunds, penalties, or Internal Revenue Service (IRS) scrutiny. During the 2023 fiscal year (FY), the IRS processed more than 163.1 million individual tax returns, and millions contained errors. Knowing what to look for when filing a tax return and the proper steps for completing it can help a taxpayer avoid common mistakes and the consequences that come with them.
Here’s how to ensure a smooth and successful tax return this season.
1. Confirm details: When filing taxes, accuracy is everything. Basic information must be correct, including names, filing status (single, married filing jointly, etc.), Social Security number (SSN), and bank account number. A simple typo can cause a delay or, worse, a refund misrouted to the wrong account.
2. Double-check math: Math is the most common mistake among taxpayers. The IRS issued 2,217,754 math error notices in FY 2023. Tax software and professional tax preparers reduce these risks, but reviewing the calculations for credits and deductions, especially manual results, is important in preventing taxpayer headaches.
3. Be honest and accurate when reporting income: The IRS will inquire about discrepancies between reported income and what it has on file. Freelance income is a common area of inconsistency, where the 1099-NEC form from a contractor does not match what the supplier has declared on their tax return. Taxpayers must ensure accurate reporting from all W-2s and 1099 forms, including wages, salaries, contract work, dividends, bank interest, and side hustles. If something doesn’t match up, a filer should contact their employer or financial institution to resolve before filing to obtain the appropriate corrected form.
4. Determine the appropriate deduction: When filing taxes, the standard deduction ($14,600 for single and $29,200 for married filing jointly in 2024) is the default for many taxpayers. However, the standard deduction may not be the best route for taxpayers with significant expenses. Here are some instances where itemized deductions may be appropriate.
- A taxpayer has made substantial mortgage interest payments.
- A taxpayer has incurred high uninsured medical expenses exceeding 7.5% of their adjusted gross income.
- A taxpayer has made significant charitable contributions
- A taxpayer has paid state and property taxes up to $10,000
Circumstances may be that more than one of these situations applies, for example, an individual may have donated $5,000 to charity and paid $12,000 in mortgage interest, in which case, the amount surpasses the standard deduction. Tools like the IRS Interactive Tax Assistant or consulting with a tax professional can help individuals determine the most advantageous approach to deductions for their situation. Finally, a financial advisor’s tax planning expertise takes tax preparedness to the next level with beneficial strategies for the year ahead and beyond.
5. Avoid early withdrawals from retirement accounts: 401(k) or individual retirement account (IRA) stores can be an attractive resource during tough economic times or when large unexpected expenses arise, However, individuals under age 59 ½ should resist the temptation. Early withdrawals from retirement can result in the following:
- A 10% early withdrawal penalty
- Taxes on the withdrawn amount at the individual income tax rate
To illustrate, a $10,000 withdrawal could carry a $1,000 penalty, plus additional income taxes. Individuals who do make early withdrawals must report it on their tax return to avoid further IRS penalties and interest. Early withdrawals are a waste of money, so individuals should seek other cost-effective alternatives before tapping into retirement savings.
6. Conduct a final review: It may feel exhausting to go back through everything at the end of tax preparation, but those filing their returns absolutely should. It’s the simplest way to avoid issues, and reviewing with fresh eyes when everything is complete instills confidence and ensures accuracy. Here’s a quick checklist:
- Review names, SSNs, bank account numbers, and addresses
- Search for missing signatures
- Assess credits and deductions for anything that may have been forgotten
The Earned Income Tax Credit (EITC) can save families up to $7,830 in 2024, yet the IRS reports that 1 in 5 eligible taxpayers overlook it on their return. To avoid leaving money on the table at tax time, filers should take the extra time to carefully review their return and consult a tax professional with questions.
A commitment to achieving the best personal economic health possible should appear on your New Year’s resolution list. Careful and comprehensive tax preparation and planning can make it come true. Maximize your refund by staying organized, thoroughly checking details and calculations, and exploring all potential credits and deductions. If you are looking for tax strategies or hoping to take it further with tax planning, we can help at SHP Financial. We’ll put you in touch with one of our recommended tax professionals and start your tax plan with a complimentary review of your finances. Contact us today.
