We all make mistakes. But gaffes in your taxes can prove costly. That’s why it’s important to educate yourself and find a quality tax planner who can help navigate you through the daunting process.
Before you start tax planning, consider these five pitfalls and how to avoid them:
1. You don’t claim all your deductions and credits
Many people fear that they’ll get audited, fined, or otherwise out of good graces with the IRS if they claim “too many” deductions and credits.
But this is not the case, and it’s a very good argument for hiring an excellent tax planner (or at least a tax preparer): A pro can comb the tax code to find all the deductions and credits you can legally claim, getting you the savings you have earned. No fear of the IRS necessary.
2. As a business owner, you don’t pay yourself fairly
A common misstep that business owners make is failing to pay themselves enough. In doing so, they end up paying below the appropriate amount of self-employment tax, which can incur penalties from the IRS.
It’s essential that, if you are a business owner, you pay yourself a fair salary and pay your full taxes on that salary. No one wants to hear from the IRS that they didn’t pay enough taxes.
3. You are disorganized
We all have a lot going on in our daily lives. Organizing tax documents is hardly at the top of anyone’s list of things they want to do with their spare time.
But it’s essential to keep your past tax returns, invoices, and important receipts sorted and in a designated place for when tax season rolls around. If you fail to do this, you risk being unable to verify itemized deductions. Worse, if you procrastinate, you’ll rush the process and potentially make mistakes.
Organize your tax documents as you receive them. Begin the process of filing months ahead of time. Again, a professional can make this process significantly easier for you.
4. You neglected to adjust your withholding amounts
If you’ve made a major life change in the past year, you need to adjust your withholding amounts. Life changes that will affect your taxes include getting married, changing jobs, having a kid (or another kid), or getting a raise.
Don’t assume that you don’t have deductions or credits because you didn’t have them last year—recheck your eligibility if you’ve made major life changes, and adjust your withholding amounts accordingly so you don’t miss out on what you are owed.
5. You hired the first tax preparer or tax planner you met
When you’re hiring a tax professional, shop around for someone who fits your needs and understands your finances. Don’t be tempted to choose someone who promises a high refund—they may not be able to make good on that offer.
Be forthcoming with anyone who is going to be intimately familiar with your taxes and finances. If you withhold important information, it will bite you where it hurts down the road. This is a big decision—one not to make rashly.