Top 6 Costly Tax Mistakes to Avoid
We’re in the midst of tax season, and whether you’ve organized and prepared your taxes all year long or you’re just now gathering your essential documentation, now is the time to refresh yourself on tax mistakes and updates.
Mistakes and missed opportunities when it comes to your tax return can be costly. In addition to missing out on a bigger refund, you could end up:
Owing more taxes
Paying interest and fines
Being selected for an IRS audit
Staying on top of the latest tax reform, understanding all deductions available to you, keeping your financial and tax documents organized, and maintaining an eye for detail can help you avoid expensive blunders—and potentially increase your refund.
However, complex tax statutes and regulations combined with annual changes make this easier said than done. And if you’re an entrepreneur responsible for business taxes, things can get even more complicated!
Beware of these common tax mistakes as you prepare to file your 2023 taxes.
Not claiming your child in college
We see this a lot—parents assume that they can no longer claim their college-age kids. But this is a common misconception! In fact, you can claim your child up to age 24 if they are in college and meet the following requirements:
They are your child, stepchild, foster child, sibling, stepsibling, or a descendant of any of them (e.g., grandchild, niece, nephew).
The child has lived with you for more than half the year (there are exceptions for temporary absences, such as for education).
They are under age 24 and a full-time student for at least five months of the year.
The child does not provide more than half of their own support, including costs such as tuition, room and board, books, and other living expenses.
If the child earns income, it is less than the amount of the standard deduction ($X for 2023 and $X for 2024).
The child does not file a joint return if married except to claim a refund of taxes withheld.
They are a U.S. citizen, national, resident alien, or resident of Canada or Mexico.
So yes, even if your child is in college, you can claim them as a dependent as long as they meet the above criteria.
Not running payroll as an S-Corporation
If you’re a business owner who formed your business as an S-Corporation, you’ll typically have to pay payroll taxes for any employees and shareholder-employees. This means you will need a payroll system.
Anyone who provides services to the company—including shareholder-employees—must receive reasonable compensation. This refers to the amount that an unrelated third party would pay for similar services in an above-board transaction. This compensation is subject to employment taxes such as Social Security and Medicare.
Running payroll for your S-Corporation ensures compliance with tax laws and proper documentation and reporting of compensation paid to all employees. It also helps ensure that appropriate taxes are withheld and paid to the IRS and state, where applicable.
If your S-Corporation does not run payroll for shareholder-employees and fails to pay reasonable compensation, it could trigger an IRS audit. The same goes for owners who take a salary below market value or take shareholder distributions as their entire income. The IRS could then reclassify distributions paid to shareholder-employees as wages, potentially resulting in additional taxes, penalties, and interest.
Bottom line: Protect your company with a formal payroll system! It will help you manage compensation and ensure proof of salaries and employment taxes you’ve paid.
Filing your tax return before receiving your W-2
Another unfortunate tax mistake is believing you can file your taxes using your last paycheck stub. Instead, wait to receive your Form W-2 from your employer before filing. This form summarizes your earnings and the taxes withheld throughout the year. It’s also essential for claiming any eligible deductions or credits on your tax return.
Why do I have to wait? Doesn’t my last paycheck reflect my total earnings?
While your last paycheck stub may contain similar information to your W-2, we don’t advise using it as a substitute because there could be discrepancies between the info on the stub and your actual tax reporting documents. Plus, the IRS requires you to attach your W-2 to your tax return when filing electronically or mailing it in.
Filing your tax return using incomplete or inaccurate information can lead to delays in processing your return, potential penalties, or the need to file an amended return later. It’s typically safest to wait until you have received all your tax documents, including your W-2, before filing your tax return. Check with your employer if you haven’t gotten it by mid-February.
Failing to claim your business expenses
If you’re a business owner, have you been tracking all of your business expenses? Every penny spent on your business can help offset your taxable income!
This is one of the most frequent tax mistakes we see business owners make: Thinking they can’t or forgetting to deduct certain items—or neglecting to track business expenses altogether. Remember, you can deduct business expenses such as supplies, equipment, rent, and utilities.
That app you need to do your work? Your project management software? Your next professional development course or event? Those pesky transaction fees? All deductible.
So be sure to:
Retain receipts of all business-related expenses and maintain organized documentation so you can substantiate your tax write-offs
Keep your personal and business expenses separate to ensure you only claim legitimate expenses and don’t overlook any
Understand tax laws that expand or restrict deductible expenses to ensure you don’t miss opportunities
Missing out on business deductions and credits
In addition to not tracking and deducting business expenses, many business owners fail to take advantage of tax benefits like the home office deduction. If you’re a contractor or business owner who uses your home for business purposes, you can deduct costs like mortgage interest, property taxes, and utilities.
The home office deduction offers the regular (i.e., itemized) method and the simplified option. The regular method is best for those with a lot of deductible expenses, while the simplified option is ideal for those with less detailed books or fewer expenses.
And don’t forget about business tax credits, either. The Employee Retention Credit (ERC) is still available to employers who retained employees during the COVID-19 pandemic in 2020 and 2021. Additionally, there are credits for activities like research and development or hiring certain employees. Research which tax credits and deductions are available to you and gather all the necessary documentation to claim them. Or, talk with your tax professional, who will help you take advantage of as many tax benefits as possible.
Making errors and omissions on your tax return
Common tax mistakes for both individuals and business owners are simple errors and omissions on their tax returns. From misspellings to miscalculations to incorrect or missing data, these mishaps may seem obvious—but we’re all human!
So be sure to take your time when filling out tax forms and review everything carefully to catch potential mistakes. Some of the most frequent errors include:
Basic information such as names, Social Security numbers, and filing status
Income information including wages, dividends, and bank interest earned—ensure these numbers match what is reported on your information returns (e.g., W-2, 1099, K-1)
Entries made on the incorrect lines
Typos—accidentally transposing numbers can be extremely costly!
Making math mistakes—double check your calculations or simply use a tax preparation software.
Not providing your bank account information for a faster refund (the default is a physical check mailed to you, which takes much longer!)
Payment mistakes that could cause your tax payment (if you owe) to not be credited to you
Skip the Common Tax Mistakes
In conclusion, as you face tax season, it's essential to be proactive and diligent in preparing your tax return. Mistakes and missed opportunities can have costly consequences, from owing more taxes to facing penalties and audits by the IRS.
By staying informed about tax laws, understanding available deductions and credits, and maintaining accurate records, you can avoid expensive blunders and potentially increase your refund.
Remember to:
Claim your child in college if they meet the eligibility criteria
Run payroll if you're an S-Corporation owner to ensure compliance and avoid IRS scrutiny
Wait for your W-2 before filing your tax return to ensure accuracy and compliance with IRS requirements
Track and deduct all legitimate business expenses to reduce taxable income
Take advantage of available tax deductions and credits, such as the Employee Retention Credit
Review your tax return carefully to avoid common errors and omissions
At JLS Accounting, we understand the complexities of tax preparation and are here to help you navigate through them. Contact us today to learn how we can assist you in maximizing your 2023 taxes and ensuring compliance with tax laws. Don't leave money on the table—let us help you optimize your tax situation and achieve your financial goals.