Tax Prep Pitfalls
From missed deductions to deducting the same thing twice, the course between now and the April income tax filing deadline of April 15 can be tricky to navigate.
What are some of the most common pitfalls? Kim Walker, a certified public accountant and individual tax manager with Long & Associates in Fishers, talked about problems and mistakes she often sees people make when handling their own taxes.
Taking money out of retirement funds
It’s nice to have the cash, but that infusion comes at a cost that begins with a 10 percent Internal Revenue Service penalty. Next, the entire sum is taxable income. “People don’t realize that they can lose about 50 percent of the money,” she said.
Minors and filing
Under federal law, people who made less than $6,100 last year — that’s the standard deduction for a single taxpayer for 2013 — don’t have to file. Most teens with summer jobs easily fall under that threshold.
However, Indiana and many other states require everyone for whom taxes were withheld to file returns. Most teens should look forward to this — they’ll likely get refunds.
Where this gets complicated is, only one filer — either the parent or the child — can claim the minor’s personal exemption. Walker says it’s a good idea to have the same preparer do both returns. “I’ve amended a lot of parents’ returns over the year for this problem.”
Confusing temporary and permanent assignments
Workers who are employed out of town temporarily can deduct expenses such as lodging and meals. The caveat: The assignment has to be short term. “You can’t do this if it’s for more than a year,” Walker said.
Doubling up on expenses
Walker sees this most often with clients who use at-home tax-preparation software. Because of the way the programs ask questions, it’s easy to make mistakes. For example, TurboTax asks about health insurance payments in the section about self-employment and small businesses, then again when addressing itemized deductions. Entering the amounts in both places will land taxpayers in trouble, Walker said.
Many small-business owners don’t realize that expenses such as cell phones and home Internet service are legitimate deductions, Walker said.
Others are aware of deductions, such as those for operating a home office, but avoid them out of fear of an audit.
Audits happen, said Walker, who emerged free and clear from an audit after her husband’s home office drew IRS interest. “People are getting audited all the time, but a lot of them are cleared.”
Mistakes about legal expenses
This is another area where taxpayers often miss deductions, though it, too, is tricky. In general, legal expense due to divorce is not deductible. It might be, though, if part of it can be attributed to settling tax matters, Walker said.
Relying on tax preparation software
Walker is not a fan of do-it-yourself tax software. “The way it asks the questions can be very confusing,” she said. One woman called Walker with concerns about her son’s 529 college plan withdrawals after a commercial program repeatedly seemed to point her in an illogical, possibly illegal, direction. “For $75, I will do your son’s return,” Walker told her. “Bring it in.”
Tax law today is very complicated and difficult for most people to keep track of without professional help. “Unless all your have is a W-2, you’re probably going to miss out on something,” she said.