#1: Not Withholding Enough
Witholding taxes are amounts that your employer holds back from your paycheck. It goes right to the government for programs like Social Security and Medicare. But it can be difficult to pin down the proper amount to withhold (which you do when filling out your W-4): Social Security withholdings, for example, change each year. You want to aim for about 90% of your estimated income taxes so you don’t fall behind or face overtaxing.
To steer clear of this mistake, check your withholdings after you file your taxes: we can help. You can then adjust, if necessary, by filling out a new W-4.
#2: Withdrawing Funds from Retirement Plans
When you take funds out of pre-tax plans (e.g. 401(k), IRA), you create taxable income. This can happen inadvertently; for instance, if you roll over monies from one plan to another incorrectly, this could be considered taxable income.
It’s best if you do not touch your retirement accounts, unless you are 70.5 years of age (you may have to meet minimum distribution rules). If you must, make sure you take the right withholdings out when you withdraw funds. If you roll over, do so directly instead of transfering the monies yourself.
#3: Not Keeping Accurate, Complete Records
You want to claim every deduction to which you are entitled — but if you don’t have the proper documentation, the IRS can disallow them. Whether you put on miles for work, donate to charity, or incur medical expenses, for example, make sure you keep accurate records.
Start fresh at the beginning of the year: create a digital folder (secure cloud-based is best because you’ll backup your data) and paper folders for income and expenses. If you drive for work or donate to charity, keep a log with dates and amounts — and file away those receipts!
#4. Neglecting Tax-Deferred Retirement Programs
Tax-deferred retirement options allow you to reduce your taxable income. Take a look at different plans and contribute as much as possible. And if your employee has a match program, take advantage!
#5: Direct Deposit Errors
If you have your tax refund direct deposited (which you can do in up to three different banks), there is a risk that you will enter your account numbers incorrectly. If you do, there is no good way for the IRS to correct it. It’s not as easy as cancelling a check, and some people have even lost their refunds.
If you choose to have your refund direct deposited, do so in only one bank. Then double- and triple-check that you’ve entered your account number correctly.
Many of the most common tax mistakes can be successfully avoided with diligence, good record keeping, and knowing some basic ins and outs that can help reduce your taxable income. If you need help with tax preparation to minimize taxes and maximize refunds, contact the experts at Faw & Associates. We are here to make the process as seamless and streamlined as possible.