Ten Last Minute Tax Mistakes to Avoid
With the April 15 tax deadline looming, many folks have sweaty palms and heart palpitations. At times like these, though, remember what you probably learned in the first grade: When you hurry, you're more likely to make mistakes. Here's a look at 10 last-minute errors that could delay your refund or attract unwelcome attention from the IRS:
1. Incorrect Social Security numbers
In 1987, the IRS started requiring parents to provide Social Security numbers for children who were claimed as dependents on their tax returns.
If you omit Social Security numbers for any of your dependents - or use a wrong SSN - the IRS may disallow the exemption. You also could lose some valuable credits, such as the child tax credit, the child and dependent care credit and the earned income tax credit.
When you enter a dependent's last name, make sure it's the exact name that appears on the child's Social Security card. Likewise, if you got married and changed your name, make sure you notify the Social Security Administration before you file your taxes.
Whenever a name doesn't match a Social Security number, "It will raise a red flag and delay processing" of your refund, said Amy McAnarney, executive director of H&R Block's Tax Institute.
2. Incorrect bank account information
The IRS strongly encourages taxpayers to file electronically and arrange for direct deposit of their refunds. E-filing reduces errors and enables you to get your refund in a couple of weeks, vs. four to six weeks for paper-filed returns. But if you go this route, take extra care when you plug in your routing and account numbers. Otherwise, your money could end up in someone else's bank account.
This year, you can arrange to have your refund deposited in up to three accounts, including an individual retirement account. You can also use all or part of your refund to buy inflation-adjusted Savings Bonds.
3. Overlooking charitable contributions
If you itemize, you can deduct donations to qualified charities. But many taxpayers who give throughout the year fail to claim all of their contributions, said Mary Canning, dean of the School of Taxation and Accounting at Golden Gate University in San Francisco.
Not all charities send letters acknowledging contributions, Canning said, so review bank statements and credit card receipts for donations you may have forgotten.
In addition, you don't have to wait until next year to deduct contributions to charities that provided relief to victims of the Jan. 12 earthquake in Haiti. Contributions made Jan. 12 through Feb. 28 can be deducted on your 2009 tax return.
4. Missing deductions on tax breaks
About 65 percent of taxpayers claim the standard deduction because they don't believe they have enough deductions to justify itemizing. But even if you claim the standard deduction, you could be eligible for tax breaks available to non-itemizers:
- Taxes on the purchase of a new car. You can deduct state and local taxes paid for a new vehicle purchased after Feb. 16, 2009, and before Jan. 1, 2010. You can deduct taxes on up to $49,500 of the purchase, even if the vehicle cost more than that.
- State and local property taxes. This tax break primarily helps homeowners who have paid off their homes or don't have enough mortgage interest to itemize. You can increase your standard deduction by up to $500, or $1,000 if you're married, to cover your property taxes.
This deduction isn't limited to your principal residence.
5. Missing the Making Work Pay credit
Last year's economic stimulus package provided a tax credit of $400, or $800 for married couples.
Most workers who have taxes withheld from their paychecks received the credit throughout the year through an adjustment to their withholding. But when you file your tax return, you will still need to claim the credit. Otherwise, your refund could be delayed. The IRS says more than 2 million taxpayers have made errors in connection with the credit.
6. Not reporting the stimulus payment
As part of last year's stimulus package, Social Security beneficiaries received a $250 one-time Economic Recovery Payment. This payment isn't taxable. However, if you had earned income last year, you may have also received a Making Work Pay credit. In that case, you're supposed to reduce your credit by the amount of your recovery payment. Failure to do this could delay your refund.
Seniors who receive their Social Security benefits through direct deposit also received their Economic Recovery Payment that way and may have forgotten by now, McAnarney said. The IRS didn't send out a notice about the payment, so if you're not sure if you received one, check your bank records. The IRS recently launched an online tool to help seniors track their payments. Go to www.irs.gov and search under "Did I Receive A 2009 Economic Recovery Payment?" or call 866-234-2942.
7. Misunderstanding medical expenses
You can only deduct the amount of unreimbursed medical expenses that exceeds 7.5 percent of your adjusted gross income. That's a high threshold, but rising health care costs have put this deduction within reach of many taxpayers, Canning said.
Eligible expenses include deductibles, co-payments, unreimbursed dental costs and even eyeglasses, she said. Transportation costs, such as mileage and parking when you go to the doctor, are also deductible. You must itemize to claim this.
8. Paying unemployment benefits taxes
You may have heard that unemployment benefits are taxable, and that's usually the case. But for 2009, up to $2,400 in unemployment benefits are tax-free, McAnarney said, so you'll need to subtract that amount from your total benefits when calculating your taxable income.
9. Thinking you're late for 2009 savings
If you qualify, you can still make a deductible contribution to your 2009 individual retirement account, said Gary Lundberg, product management director for CompleteTax, an online tax software program. Eligible taxpayers can reduce their 2009 taxable income by up to $5,000, or $6,000 if they're 50 or older. The deadline for 2009 IRA contributions is April 15.
For 2009, workers who are covered by an employer-provided 401(k) plan or pension must have modified adjusted gross income of $55,000 or less to deduct the full IRA contribution. Those with MAGI of between $55,000 and $65,000 can deduct a reduced amount. If your MAGI exceeds $65,000, and you're covered by a retirement plan, you can't deduct your IRA contribution. For married couples who are covered by a retirement plan at work, the deduction phases out between $89,000 and $109,000.
If you're not covered by a retirement plan at work, you can deduct the full contribution, as long as you earned at least the amount of your contribution. The same goes for married couples when neither spouse is covered by a retirement plan. If your spouse is covered by a retirement plan but you're not, you can deduct a full contribution to your IRA as long as your combined MAGI is $166,000 or less. If your MAGI is between $166,000 and $176,000, you can deduct a partial contribution.
IRA contributions are an above-the-line deduction. You don't have to itemize to claim them.
10. Forgetting to sign your return
If you file on paper, make sure you sign your return before you mail it in. An unsigned return, the IRS says, is invalid. Even if your return was prepared by someone else, you're still required to sign it, McAnarney said. Your preparer should sign it, too.