It is no secret that the risks of committing avoidable tax flaws, particularly towards the tax filing deadline, are abnormally high, some with completely negative consequences that may even end up beckoning needless delays in returns-processing or a tax audit. Explained below are the five most common errors and bad assumptions individuals make.
1. Not being able to Pay Estimated Taxes – Actually, I see this very often because most self-employed individuals don’t really understand all their filing requirements in relation to self-employment taxes. Therefore, they end up not paying them and are hit with underpayment penalties for not paying them in the first place and/or a heavy tax bill at the end of the year. Income tax is actually a pay as you go system and individuals who works for themselves and do not pay all the federal taxes through the standard payroll wage deductions are supposed to pay into the tax system through estimated taxes quarterly all through the year. It is also vitally important to note that the all self-employment taxes paid via estimated tax payments is the process by which all self-employed persons pay into the social security system. This means that it is very vital that self-employed individuals actually understand all their estimated tax filing requirements and be meticulous about paying them to escape costly tax bills down the line. In case you need help in such a situation, it is advisable to find a tax preparer.
2. Being Excited About Big Refunds - Each and every year I see many people come in to have their taxes one; to find out exactly how much of a refund they are going to finally get. Normally just any check from the government is a very good thing but it is clear that in the majority of taxpayers’ circumstances, the check they might receive signifies the cash they have worked very hard for throughout the year and allow the government to hold, interest free, for the entire year. It is true that the only good refund to get from the government usually comes in the form of refundable credits like the additional child tax credit or the earned income credit. Most credits that the government allows are totally non-refundable which simply means that they only serve to lessen your liability to a maximum of zero. And any excess credit remaining is never refunded. However, in the situation of refundable credits, the government permits you to use the credit to significantly lessen your liability to zero and then retain whatever is left over right after the credit. I always teach my all clients in their tax planning that we just want to give the IRS all their due, nothing more. So as a tax preparer and with proactive management and planning of their payroll withholdings during the year, I’m in a position to keep a handle of just any feasible excess withholdings and make necessary adjustments so they can retain as much of their income in their pockets as possible.
3. Making very Early Withdrawals from Retirement Plans - With the current state of the economy, I have been able to frequently see that tax payers are comfortably cashing out all their retirement plans just to make ends meet not realizing that they have only shaped a taxable event that can turn out to be very costly at the end of the year. Any withdrawal that is made from a retirement plan by any taxpayer who is younger than 59.5 years is subject to an early withdrawal penalty that is normally figured on the tax return at the end of every year, and not at the time when the withdrawal is made. However, there are particular exceptions to this rule and taxpayers have to properly understand them to see if indeed they fall under one of those outlined exceptions. In general, taxpayers think that by paying the withholding they are well covered in terms of the tax that they must pay and are unaware or simply forget the penalty associated with the distribution. Considering that sometime you really have to do what you have to do just to survive in these hard economic times, my suggestion to all my clients is to always before you decide to cash out your plan, please book a appointment with me so that so we can table and discuss all the repercussions of doing that and what other different avenues they have in their existing life situation that can lessen that sting of the imminent tax bill to come. Good, proactive tax planning is best solution to all these situations. And this is in fact where a tax accountant comes in handy.
4. Thinking That a Tax Return is a product instead of a service - Tax preparation is undeniably a service and the tax return is subsequent to that service. Each and every year I normally get the tire-kickers looking for the discounted price on their tax preparation fees. This is just the opposite of the attitude and approach tax payers should take when it comes to dealing with their financial lives. Tax payers should always think of their tax experts in the same regard as their medical doctor. The tax expert should take a positive stance in assisting that client retain the most beneficial tax position they can all through the year. In case things go haywire (i.e. very large tax liability) the client should make an effort and consult with the tax professional to identify the problem and take necessary steps to make sure the problem doesn’t occur again. There is certainly no substitute for the knowledge of a skilled and professional tax preparer.
5. Not Asking Questions - It is very crucial that every single taxpayer understands the number presented on their tax return because the IRS will hold the taxpayer solely responsible for the return after it is filed. If you do not properly understand the numbers on your return, then simply ask exactly what they mean. An experienced and professional tax prepare will always welcome the question and take time to fully explain instead of pushing papers in your face and telling you to sign. If it still does not make sense after it has been explained or you are not very comfortable with the return, then you can always get a second opinion. Two prepares presented with absolutely the same tax information from a particular client should always have similar if not identical (certain tax laws tolerate slight interpretations within reason) returns. There is a big problem is they don’t.
Lastly, feel free to always apply for a tax filing extension when you are not able to file the return right in time. This will make certain that you not only avoid common tax mistakes, but also the IRS penalties and interests.
Are you in Benton and looking to find a tax professional who will give you proper guidance on the common mistakes to avoid? Then call me today and get it all sorted.
Williams Tax & Bookkeeping