Susan Walsh, Associated Press
Editor's note: This article originally ran on Five Cent Nickel. It has been reprinted here with permission.
Tax season is in full swing. Thanks to tax preparation software, a lot of the common mistakes (i.e., missing Social Security numbers) are now automatically detected. Still, they are only capable of checking for math accuracy and missing fields. They can’t optimize a tax return to get the maximum amount possible or compensate for our misunderstanding of the complicated tax code.
I have been using tax software and tax professionals since I started filing in 2003. In these 10 years, I have learned that no matter what software or tax professional I use, the onus is on me to know what is best for me and what mistakes to avoid.
Here is a list of dos and don’ts based on the mistakes that I have personally made or have come across in recent years. Use this as a checklist to make sure you avoid them too.
- Don’t assume you can’t itemize: When I started filing taxes as a student, I spent a total of 10 minutes filing my taxes. I didn’t know anything about itemized deductions. I just assumed it is for people who have a lot of expenses, like a mortgage or kids.
When I started working, I continued with my belief that the standard deduction is the best for a single-filer without a home. When I got my first job, I decided to use one of the “professionals” at a big tax-preparation chain. After a few nightmarish meetings with so many mistakes that I could spot, I decided to spend a weekend doing my taxes by hand. That is probably the best thing I did for my finances. It was an eye-opening experience to actually read all the IRS publications to see what I qualify for and didn’t. The professional never asked if I ever donated to charity; she just assumed I don’t.
That weekend I understood there is much more to itemized deductions than just a mortgage. Just because you are single, don’t assume you can’t itemize. Read up on the itemized-deduction publication and start collecting the relevant supporting documents throughout the year. You might be surprised to see a lot of small things adding up to a total of more than the standard deduction.
- Don’t assume a deduction is not worth the effort: This mistake almost cost me over $500 last year. I knew the medical deduction had a floor of 7.5 percent. (This year it is 10 percent.) I mentally calculated 7.5 percent of our income (our gross income) and assumed our expenses wouldn’t cross that limit. In a desperate moment, I decided to collect all the medical receipts and calculate the amount just to make sure. I earned over $500 in those few hours of effort. First, it is 7.5 percent of our AGI, not gross income; second, all the doctor co-payments, prescription drugs, eyeglasses, parking and travel costs added up to an amount I didn’t think we had spent. So never assume you can’t take a deduction. Always make sure.
- Don’t choose a tax preparer based on promises to get the maximum refund: I know a certain tax preparer in the area where I used to live who claims regular groceries and a whole range of regular living expenses as deductions for his clients. (Yes, I have reported him to the IRS, but nothing seems to have happened and he is still in business.) His business is booming because he promises the maximum return and charges a percentage of the return as his fee. It is an audit waiting to happen for these clients.
- Don’t overestimate the value of your donations: Keep the receipts and use a standard guide for the value of your donations.
- Don’t forget to claim all the deductions for which you are eligible: You don’t have to fear an audit to claim the deductions for which you are legally entitled. Many audits are in the form of a letter requesting supporting documentation. So if you have your paperwork in order and fulfill the eligibility criteria, the fear of an audit shouldn’t prevent you from taking a deduction.