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Expensive tax mistakes to avoid

By Suba Iyer

For Five Cent Nickel

Published: Wednesday, April 2 2014 12:00 a.m. MDT

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.

Susan Walsh, Associated Press

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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.
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