Avoid These 10 Common Tax-Filing Mistakes

Posted on February 7, 2013 by horizonplanning

By Kay Bell | Bankrate.com – 20 hours ago

Thanks to tax preparation software, more of us are making fewer mistakes on our annual tax returns. But still, just one slip in entering information on your computer could end up costing you, either in the form of a larger tax bill or a smaller refund.

And even if a mistake — either on your computer or paper forms — doesn’t cost you cash, it could delay the receipt of any refund you’re expecting.

To get exactly what you should from the Internal Revenue Service, as quickly as possible, look out for these tax-filing pitfalls. A few are new, thanks to recent law changes. Others are perennial problems taxpayers face each filing season. With a little care, you can avoid them all.

1. Pay your Roth conversion taxes

A lot of taxpayers have taken advantage of the tax law change that now allows anyone, regardless of income, to convert a traditional individual retirement account to a Roth IRA. But if you made such a change in 2010 when this conversion was first allowed, you have a tax task to take care of on your 2012 return. A special provision allowed individuals who moved their money into a Roth IRA in 2010 to spread the taxes due on converted amounts equally over the 2011 and 2012 tax years. The first half of those conversion taxes was due with your 2011 tax return. Make sure you pay the rest of the taxes with your 2012 return.

2. Homebuyer tax credit complications

Since its creation, the first-time homebuyer credit went through significant changes. It started as a $7,500 interest-free loan from Uncle Sam, changed into a true tax credit of up to $8,000 for a first-time buyer and added a $6,500 tax credit for a previous homeowner moving up to another house.

All the revisions to eligible buyer guidelines, purchase time frames, income thresholds, home price restrictions and payback requirements are a tax-filing minefield. If you’re not careful, a mistake here could end up costing you the credit or at least slowing down the processing of your return.

If you’re paying back the original $7,500 tax credit, the IRS has made the repayment process a bit simpler by eliminating in many cases the requirement that taxpayers file Form 5405. Now some individuals who are repaying the credit can just write the repayment amount they are including with their taxes directly on Form 1040.

3. Math miscalculations

The most common error on tax returns, year after year, is bad math. Mistakes in arithmetic or in transferring figures from one schedule to another will get you an immediate correction notice. Math mistakes also can reduce your tax refund or result in you owing more tax than you thought.

Using a tax software program to file your return can help reduce math errors. The built-in calculators do the work for you, adding, subtracting and inserting numbers on additional forms as needed. But you still have to make sure your initial numbers are correct. Entering $3,500 when the real figure is $5,300 makes a lot of tax difference. Getting the numbers right is crucial because you can be sure the IRS will be double-checking numerical entries against its copies of your tax statements (W-2, 1099s and the like). When IRS examiners find a discrepancy, they’ll definitely let you know and, in many cases, will correct your mistake and refigure your taxes for you. Don’t give them the chance. Make sure your math entries are right.

4. Direct deposit dangers

Taxpayers can have a refund directly deposited into multiple bank accounts. This option is a great way to save your refund money, but the more numbers you enter on a tax form, the more chances you have to enter them incorrectly. And a wrong account or routing number could cause you to lose your refund entirely.

You can divide your refund into three accounts by filing Form 8888 along with your individual return. It’s not a difficult document to complete, but if you put in wrong account numbers, your refund could end up in someone else’s account or be sent back to the IRS. Either way, you might not be able to retrieve your refund because there is no IRS procedure for replacing lost electronically transferred funds.

Incorrect account numbers aren’t just a problem when a refund is split multiple ways. Even if your refund is going to just one account, make very sure you enter your account and bank routing numbers correctly.

5. Additional income, additional filing work

Did you have a side job this year? If so, as a contractor you probably received a Form 1099-MISC detailing the extra earnings.

What about savings and investment accounts? For these, you should have received Form 1099-INT and Form 1099 DIV statements.

In each 1099 instance, the IRS knows precisely how much extra money, either as wages or unearned investment income, you made as soon as you did, thanks to the copies of your 1099 forms that went to the tax agency.

If you forget to include any of these earnings on your return, the IRS examiners will let you know you owe taxes on it, too. And depending on when your oversight is discovered, you also could owe penalties and interest on the unreported earnings.

6. Filing status errors

Make sure you choose the correct filing status for your situation. You have five options, and each could make a difference in your ultimate tax bill.

If this is the first tax-filing season you’ve been divorced and you now are a single parent, head-of-household probably will be more beneficial. And you’re still married, but you and your spouse are thinking about filing separate tax returns? That works in some cases, but not all.

Make sure you know what each tax-filing status entails, and choose the one that best fits your personal and tax situation.

7. Social Security number oversights

Because the IRS stopped putting taxpayer Social Security numbers on tax package labels in response to privacy concerns, some taxpayers forget to write in their identification numbers. Your tax ID number is crucial because there are so many transactions — income statements, savings account interest, retirement plan contributions — keyed to this number.

The nine-digit sequence also is vital to claim several tax credits, such as the child tax and additional child tax credits as well as ones for educational expenses and dependent care costs.

And make sure the names associated with the Social Security numbers match Social Security Administration records. A difference here also will cause the IRS to kick out or slow down your return.

8. Complete charitable contributions

Did you give to charitable groups last year? All types of donations, from cash to cars, could be valuable tax deductions, so make sure you count them all when you file. Be sure to follow the donation tax rules, the most important being that you give to a qualified organization — that is, one that has tax-exempt status with the IRS. Also be careful when calculating any gifts of clothing and household items. Tax law now requires that these donations be in good or better condition or the deduction is disallowed.

9. Signature required

Sign and date your return. The IRS won’t process it if it’s missing a John Hancock, and that means on e-filed returns, too. Taxpayers filing electronically must sign the return electronically using a personal identification number, or PIN. To verify your identity, you’ll have to provide the PIN you used last year or your adjusted gross income from your previous year’s tax return.

Your tax software should walk you through the e-signature process, but if you’re still mailing your return, don’t be in such a hurry that you stuff your 1040 in the preaddressed IRS envelope without signing it. And if it’s a joint filing, you and your spouse must sign.

10. Missing the deadline

Don’t miss the impending April 15 tax deadline. If you owe the IRS and that’s the reason you’re thinking of not filing, that’s a bad idea. If you don’t file a return, you’ll face even stiffer penalties. So send in the paperwork, pay what you cann and talk with the IRS or your tax professional about the next steps.

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New tax season hours

Posted on January 16, 2013 by horizonplanning

It’s that time of year again and Horizon Planning has extended their office hours to accommodate your schedule.

Monday – Friday
9:00am – 9:00pm

Saturday
9:00am – 5:00pm

We have five tax preparers on staff to serve your tax needs from a simple short form to complex tax situations; even trust and estate returns. Give us a call today to schedule your FREE Get Acquainted meeting!

Bigger Tax Bite for Most Under Fiscal Pact

Posted on January 2, 2013 by horizonplanning

Reprinted-By BINYAMIN APPELBAUM and CATHERINE RAMPELL | New York Times

WASHINGTON — Only the most affluent American households will pay higher income taxes this year under the terms of a deal that passed Congress on Tuesday, but most households will face higher payroll taxes because the deal does not extend a two-year-old tax break.

The legislation, which was forged in the Senate and overcame resistance in the House late Tuesday will grant most Americans an instant reversal of the income tax increases that took effect with the arrival of the new year. Only about 0.7 percent of households will be subject to an income tax increase this year, according to the Tax Policy Center, a nonpartisan research group in Washington. The increases will apply almost exclusively to households making at least half a million dollars, the center estimated in an analysis published Tuesday.

But lawmakers’ decision not to reverse a scheduled increase in the payroll tax that finances Social Security, while widely expected, still means that about 77 percent of households will pay a larger share of income to the federal government this year, according to the center’s analysis.

The tax this year will increase by two percentage points, to 6.2 percent from 4.2 percent, on all earned income up to $113,700.

Indeed, for most lower- and middle-income households, the payroll tax increase will most likely equal or exceed the value of the income tax savings. A household earning $50,000 in 2013, roughly the national median, will avoid paying about $1,000 more in income taxes — but pay about $1,000 more in payroll taxes.

Sabrina Garcia, a 35-year-old accounting assistant from Quincy, Mass., who together with her husband made about $102,000 last year, said the payroll tax increase equated to “about $200 a month for my family.”

“That’s a lot of money for us,” Ms. Garcia said. “It means we will have to cut back.” She said in an e-mail exchange that she will most likely will postpone buying a new computer. “And forget about being able to save money,” she added.

The deal will impose larger tax increases on those who make the most. It will raise taxes in two ways: by restoring limits on the amount of income affluent Americans can shelter from federal taxation, and by returning to a top marginal tax rate of 39.6 percent. The current rate is 35 percent.

For married couples filing jointly, the deduction limits apply to income above $300,000, while the top tax rate kicks in above $450,000. But both numbers are somewhat misleading, because “income” in this context is a technical term, referring only to the portion of income subject to taxation after exemptions and deductions.

Few households with actual incomes of less than half a million dollars will face a tax increase. The Tax Policy Center calculated that less than 5 percent of families earning $200,000 to $500,000 will actually pay more.

The size of those increases will be much smaller than President Obama originally proposed. The net effect, according to the center’s estimates, is that the top 1 percent of households will see an average income tax increase this year of $62,000 rather than $94,000. “The high-income people really are doing very well in this compared to what the president wanted to do,” said Roberton Williams, a senior fellow at the Tax Policy Center.

The deal passed by the Senate and the House will impose fewer limits on deductions than the White House plan. It will also tax income from dividends at a flat rate of 20 percent, rather than the same marginal rate as earned income. And there is another important point, often misunderstood: Affluent households will pay the new 39.6 percent rate only on income above $450,000. They and everyone else will still will pay lower rates on income below that threshold.

Households making $500,000 to $1 million will pay an additional $6,700 in taxes on average. Those making more than $1 million will pay an additional $123,000 on average.

Changes in the estate tax will also benefit affluent families. The tax will not apply to the first $5 million of an inheritance, extending the current exclusion rather than reverting to the $3.5 million threshold that President Obama initially favored. However, wealth above that amount will be taxed at a rate of 40 percent rather than the previous rate of 35 percent.

The Obama administration did win a five-year extension of tax breaks for lower-income families, including the child tax credit and earned-income tax credit. Those credits eliminate income tax liability for many lower-income families. In many cases, the government actually makes a direct payment to the family to help offset the burden of payroll taxation — up to $1,000 a child under the child credit and up to $5,900 total under the earned income credit.

The deal will also restore unemployment benefits for about two million Americans. People who can’t find work, and have already received government checks for the standard period of 26 weeks, have been able to stay on the rolls for up to an additional 47 weeks. But financing for that program, which is aimed at the states with the highest unemployment rates, expired Saturday. Under the terms of the deal, people who are eligible will receive any missed benefits retroactively.

The deal also includes new rules for the alternative minimum tax, which threatened this year to impose higher taxes on roughly 30 million households. The tax was created in the 1960s to set a lower limit on the taxes paid by the most affluent households, but the eligibility threshold was not indexed to inflation, so it theoretically encompasses a larger share of households with each passing year. Congress has repeatedly passed short-term increases in the threshold; the deal will make those increases automatic, obviating the annual ritual.

That is small consolation for middle-income Americans like Joe Interlandi, 61, a long-haul trucker who on Tuesday was driving a load of tomatoes from Florida to Los Angeles.

Mr. Interlandi, writing from a rest stop, said he understood the need for higher taxes. He will rather pay more now than impose higher taxes on his children and grandchildren, he said.

But Mr. Interlandi, who estimated that he worked 100 hours many weeks, added that the payroll tax increase still meant he will need to spend even more time on the road. Describing things he will have to cut back on, he wrote, “Family outings like vacations, and time together.”

An average of $1,000 more for a household at the national median income.

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