Most Americans have a love-hate relationship with the tax season. You hate the hassle of filing, but love the refund when it comes. You do not want to pay the IRS one penny more than you owe, but you don’t want to trigger an audit. The most effective way to combat these emotions is to educate yourself on common errors to ensure you owe the least amount of money while getting the largest refund possible.
This year when you file your return, double check for these common errors, before pressing the send button.
Choosing the wrong filing status. You may qualify for multiple filing statuses, allowing you to choose the most beneficial one, leaving you with the smallest tax liability. There are five ways you can file, and the tax bracket, exemptions, and deductions vary based on which one you choose.
The IRS establishes your filing status based on the status as of December 31c and applies for the entire year.
Single includes anyone who has never married, is currently single due to divorce or death of a spouse, or legally separated. When you have no dependents, do not have another option outside of the single filing status.
Head of Household offers single filers with qualified dependents to get additional tax consideration in the form of a higher standard deduction and lower tax bracket. Supporting any qualified dependent while single will allow you to file as a head of household.
Married Filing Jointly offers married couples a higher standard deduction and lower tax bracket. To qualify, you must be legally married as of December 31. You may also choose the married filing jointly status if you became widowed in 2016.
Married Filing Separately is an option for married couples. Some deductions require expenses above a percentage of your adjusted gross income (AGI) to qualify for the deduction. When one person incurs higher expenses for items such as medical bills or travel, you could receive a higher tax benefit if you filed taxes separately. It is easier to reach the required threshold with only one income. The downside of this strategy is that you may forfeit tax credits and other tax breaks that require a joint filing.
Qualifying Widower offers benefits for recent widows with dependents. In the year of a spouse’s death, you may file a joint return. For the following two years, you may use the qualified widower status and receive similar taxation as a married couple filing joint returns.
Missing qualified dependents. Personal exemptions reduce income by $4,050 per dependent. Leaving out someone you support could cost you not only in the personal exemption, but also in the Earned Income Tax Credit. Here’s how the IRS defines dependents:
- A person is living with you for at least six months of the year.
- You pay 50% or more of the dependent’s support.
- The dependent earned less than $6,300.
You might claim a dependent, for whom you provided more than 50% of their support, even if they did not live with you, under certain circumstances. A few of the exceptions include supporting parents who live in a senior care center, college-aged children under the age of 24, or supporting children in a divorce if you have a signed agreement allowing you to claim the children.
Leaving out volunteer expenses. You know to count cash donations and getting rid of unwanted goods or clothes throughc your favorite charity. However, you can also deduct miles to and from volunteer work, money spent while volunteering, and any unreimbursed costs directly related to your volunteer service. Such expenses could include paying for parking or tolls, mileage (at a lower rate than business miles), or a percentage of the actual cost to maintain your vehicle. You may also deduct the cost of materials used in volunteer service. For example, if you bake cookies to sell at your child’s school or buy supplies for your son’s scout troop car wash, you may deduct these purchases for the materials. You must maintain a record and receipts to qualify for these additional deductions.
Failing to claim the cost of a job search or move. Unemployment is hard on finances, and fortunately, you may deduct the cost of the employment search on your tax return provided you kept good records. Deductions include all associated costs with your search which can include help writing your resume, payments to placement agencies, and the cost of travel to interviews, provided the travel was primarily for finding employment. When you land a new job, if it is further than 50 miles from your current job, you may also deduct the costs of the move. These expenses can include packing, the moving truck or hiring movers, and travel expenses to the new location. To qualify the new job must be in the same field and does not include the cost of moving to your first job.
Do not capitalize on all your deductions. Itemizing deductions can lead to a higher refund than your standard deduction. You can deduct interest paid on student loans and mortgages, property taxes on your primary home, and charitable contributions. There is also a wide range of tax deductions you could qualify for including some little-known deductions such as gambling losses, as long as they offset gains, or state and local sales taxes on a large purchase like a vehicle. The self-employed may subtract the costs of health insurance premiums, and everyone qualifies for the deduction of medical expenses when they rise above 10% of AGI. Seniors get the medical expense deduction when they reach 7.5% of adjusted gross income (AGI).
Carefully review the events in 2016 along with your receipts to get the most deductions possible. When you have a choice of taking a deduction or benefiting from a tax credit, take the tax credit, which is almost always worth more than a deduction, because it reduces tax liability dollar for dollar.
Tax season can give you a financial jumpstart to your year by giving you extra funds needed to reduce debt, save for retirement, or buy something you need or want but have been unable to afford.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website.