9 Costly Tax Mistakes to Avoid – Motley's Fool

Many mistakes, such as entering the wrong word in a pen crossword or calling someone by the wrong name, can be annoying and even annoying. Some mistakes, however, can be extremely expensive. Many tax errors fall into this category.

Here is a set of common tax mistakes that can cost you hundreds or even thousands of hard earned dollars. If you can avoid making them, you can reduce costs and hassles and increase your financial security.

No. 1. Do not track your expenses and your receipts

You will regret it if, throughout the year, you do not keep receipts for expenses that you may be able to deduct. During the tax preparation time, you will spend much more time searching for this documentation than you would like or need to do it, or you will just do it without losing any deductions.

Make your financial life easier by keeping a "tax" file throughout the year, in which you will file any receipts or other documents that can support your tax return. For example, keep receipts for your charitable donations and medical expenses to support any deductions, as well as child care receipts and travel receipts for deductible expenses. At tax time, you will be ready.

No. 2. Do not take advantage of retirement accounts

An easy way to lose hundreds or thousands of dollars in tax savings is to not use tax-advantaged retirement savings accounts, such as ARIs and 401 (k). There are two main types – the Roth and the traditional – which offer two types of different tax breaks. The traditional IRA or 401 (k) reduces your current taxable income and gives you immediate tax relief, while the Roth IRA or 401 (k) offers tax free withdrawals in retirement. For 2018, the contribution ceiling for both types of IRAs is $ 5,500 for most people and $ 6,500 for those 50 and over. Meanwhile, a 401 (k) has a much more generous contribution limit. In 2018, the limit is $ 18,500, plus an additional $ 6,000 for those 50 and over.

The table below shows what you could accumulate over different periods if you fundraise aggressively and your investments have an average annual growth of 8%:

Calculations by author.

If you contribute $ 10,000 to a traditional 401 (k) and you are in a 24% tax bracket, you will avoid paying $ 2,400 in initial taxes. If you accumulate $ 400,000 in a Roth IRA for many years, you can withdraw it without paying taxes.

No. 3. Ignore your holding periods when you invest

We tend to think a lot when buying a stock and sell it, but we often ignore How long we held it. Your holding period counts in the world of taxation. At present, most of us are facing long-term capital gains tax rates (for eligible assets held for at least a year and a day) 15%. Short-term capital gains are in line with your regular tax rate, which could be more than double. Do not base your sales decision solely on taxes, but include taxes in your thinking. If you are considering selling a stock you have held for 11 months, ask yourself if it makes sense to stick to one month and one more day.

No. 4. Do not compensate for gains with losses

Would you believe that capital losses have a slight advantage? Well, they can often be used to reduce your taxable earnings – potentially to zero. For example, imagine that you made $ 7,000 in gains and sold enough stocks to generate a loss of $ 5,000. This would leave you with taxes on only $ 2,000 in earnings. If you have a lot more losses than earnings, you can eliminate all your earnings and reduce your taxable income by up to $ 3,000. then carry forward the remaining losses in the following year. This strategy applies best throughout the year, not just at tax time. A particularly good time to sell a credit for a gain or loss may be in February or August, but not at the end of the year.

Note that if you plan to buy back one of the lost titles you sold, be sure to wait at least 31 days to avoid a "laundry sale" that does not count.

No. 5. Do not take tax credits at your disposal

Tax credits are sometimes less well understood than tax deductions, which is a shame because they are much more powerful. A deduction of $ 1,000 can save you $ 240 if you find yourself in a tax bracket of 24%, but a $ 1,000 tax credit can reduce your tax bill by $ 1,200. $ 1,000.

There are tax credits for all sorts of activities, such as education fees, improving energy efficiency in homes, adoption of children, child care, and people with disabilities. charge, and much more. The earned income tax credit, which could reduce your income by more than $ 6,000, is a particularly valuable credit if your income is low enough to qualify. If you have children or other dependents, you have more opportunities for tax credit: The Child Care and Dependent Credit provides credit up to $ 25,000. $ 3,000 for the care of an eligible dependent and $ 6,000 in total for two or more persons. And the child tax credit offers $ 2,000 for each eligible child under the age of 17 (at the end of the taxation year) – subject to certain rules and restrictions, although sure.

No. 6. Do not use a Flexible Expense Account (FSA) or a Health Savings Account (HSA)

If you have a lot of health care expenses – and even if you only have a modest amount, consider using a flexible spending account. It accepts pre-tax dollars and allows you to spend them tax-free on eligible health expenses. Note that you must use most of your contribution each year, otherwise you lose it. Nevertheless, if you plan well, it can save you a lot of taxes. For example, if you expect to pay $ 2,000 in orthotics for your child this year, insert as much into your FSA and avoid paying taxes. The contribution ceiling for ASF Santé is USD 2,650 for 2018.

Better yet, a health savings account requires you to purchase an eligible health insurance plan with a high deductible. You finance it with pre-tax money, which reduces your tax bill. This money can be used tax-free for eligible health expenses and can accumulate over the years, be invested and increase. As soon as you turn 65, you can withdraw money from an HSA for all purpose, by paying ordinary tax rates on withdrawals. In other words, it ends up turning into an additional retirement savings account. HSA's contribution ceiling for 2018 is $ 3,450 for individuals and $ 6,900 for families. Those aged 55 and over can contribute an additional $ 1,000.

No. 7. Do not take your required minimum distribution (RMD)

If you are close to age 70 and have retirement accounts, such as traditional IRAs and 401 (k), with the minimum distributions required, make sure you start taking them on time and then take them each year. . The deadline to receive your distribution each year is December 30th, except for the year in which you reach the age of 70 and a half. For that year, you have until April 1 of the following year to take your RMD. (It may be better to take it before the end of December, anyway, otherwise you could be taxed on two distributions in one year, which could push you into a higher tax bracket. Many people like to create their account so that RMD is sent to them automatically every year.

If you do not comply with the rules of the DMA, you risk costly penalties. The penalty is 50% of the amount you did not withdraw on time. If you had to withdraw $ 8,000, you are thinking of losing $ 4,000! (Note that the IRS allows you to appeal for a waiver.)

No. 8. Increase your chances of being audited

You may not realize it, but you may be doing various things that increase your chances of being audited. For example, not filing a return or declaring no income can trigger an audit. If you fail to file a tax return for any reason, the IRS may contact you and ask you questions. You must file a return even if you have no income or taxes to pay.

Being messy with your tax return or having errors can also increase your chances of being audited. If computers or employees of the IRS can not determine if a certain scribble is a 6 or an 8, your statement may be flagged for further examination. If the IRS calculations differ from yours, this can also trigger an audit. Check your calculations and make sure you enter the correct numbers and park them in the right boxes. One way to improve the accuracy of your return is to use tax preparation software instead of preparing your return by hand – and filing your return electronically. Do not forget to also sign your statement because unsigned statements may also attract the attention of the IRS.

Do not forget the required information, such as the 1099 forms that your brokerage and other financial institutions have sent you. If you fail to report income or omit any other information, you may raise flags at the IRS and have you checked. The entities that pay you usually send a report about it, not only to you, but also to the IRS, that they report salary payments, dividend income, interest paid or something else. The IRS then expects your return to include all these payments.

No. 9. Do not hire a professional

A last common mistake – and potentially costly – that many people commit is not to hire a tax professional to prepare their tax returns. Of course, it will cost something – but the benefit can largely offset the cost. After all, most of us do not know the tax code and we only think about taxes for a few weeks a year at most. A savvy taxman follows the tax code's course, is a good strategist and finds ways to reduce taxes, and is immersed in the world of taxation throughout the year.

Do not hire anybody either. Ask for recommendations and consider using a "registered agent", an IRS-certified tax professional, who is authorized to represent you before the IRS, if necessary. You can find one on the National Association of Enrolled Agents website.