8 Biggest Mistakes Young People Should Avoid During the Federal Tax Extension
First-time filers may be leaving money on the table.
Mistake No. 1: Filling out incorrect withholdingsThe most common mistake happens long before tax season. When you start a new job, you must complete and submit Form W-4. One spelling mistake or wrong number and you’ll pay for it come tax time.A W-4 form lets your employer know how much in taxes to withhold from your paycheck. The amount you choose to withhold is then sent to the IRS. When you go to file your tax return, you will be given a credit for the amount you paid during the tax year. This is where human error can happen. “If you don't complete the W4 correctly, you could end up owing a lot of taxes when you go to file – a very unpleasant surprise that could have been avoided if the W-4 was properly completed,” said Brad Paladini, owner of Paladini Law.How to avoid it: Enter every piece of information on your Form W-4 carefully. Income, including wages, dividends, and interest, must be reported in full. Double- and triple-check your information at every point in the process.
Mistake No. 2: Forgetting to file as a dependentAre you a dependent? A change to this filing status affects the way you file taxes – if you even need to file.A dependent is defined as a qualifying child or relative of a taxpayer who the taxpayer can claim for a dependency exemption. Each exemption decreases the income that is subject to tax. For example, if a parent has a child who is a college graduate and living at home, the parent can claim that child as a dependent in order to receive a tax deduction. That college graduate then has a few options for how to file their own taxes.“Most people filing for the first time make the major mistake of claiming themselves when their parents are still taking them as a dependent,” said Paul Miller, the founder of Miller & Company, a full-service CPA firm. “We then have to amend more returns for this error.”How to avoid it: If your parents can claim you as a dependent on their tax return, you may still want or need to file your own taxes in order to receive a refund. Check the IRS to see if you qualify as a dependent and if you need to file a tax return. Typically, your earned or unearned income must exceed certain limits to do so. If you are filing taxes, make sure to clearly state that you are a dependent.
Mistake No. 3: Claiming the wrong filing statusOften the first step to filing taxes is selecting your marital status:
- Married and filing jointly
- Married and filing separately
- Head of the household
- Qualifying widow or widower with a dependent child
Mistake No. 4: Not claiming all streams of incomeAll income is fully taxable and must be reported, unless it’s specifically excluded by law. Yes, even money earned from a side gig.“A common mistake among young and first-time filers is not including all of their income,” said Krystal Pino, founder of Nomad Tax.Money earned through a full-time job isn’t the only income that you need to report. Pino suggests including other small earnings, too. “Doing work for cash, debt forgiveness, and even prizes are considered taxable income, and if the payer reports it to the IRS, the receiving party (in this case, the filer) better include it as well,” Pino said.If you under-report income -- whether intentionally or out of oversight -- the IRS will likely send you a mail audit. They’ll ask you about the discrepancy in reported income. No need to panic. Provide receipts and explain your circumstances. Worst case scenario, you’ll end up owing more taxes.How to avoid it: When you file, make sure to include all streams of income. Organize all of your financial documents and report every item.
Mistake No. 5: Filing too earlyWhen it comes to taxes, patience is key. Filing too early may cause you to leave out crucial information.“Far too often, young people expecting a tax refund want to get their money back as quickly as possible,” said Brandon Pfaff, a CPA who serves on the advisory board for Wealthy Living Today. “When you file your tax return before you receive all your documents, you will need to file an amended return to correct for the missing forms.” It doesn’t cost any money to amend taxes as far as three years back, as long as you file yourself. Once a tax professional is involved, they will likely charge a fee.Avoid the time and energy of refiling. File correctly the first time by gathering all of your financial documents. Every taxpayer’s situation is unique, but there are a few documents that most first-time filers will need, including:
- Federal and state tax return copies from the last three years
- Personal information, such as Social Security number or ITIN number
- Dependent information, such as childcare or alimony payments
- Income statements, including W-2, 1098, 1099, and/or schedule K-1 forms
- Deductions, including mortgage interest, charity donations, or moving expenses
- Investments, such as stocks
- Education information, such as scholarships or fellowships
- Retirement contributions, such as to a 401(k), IRA, or HSA account
Mistake No. 6: Filing too lateSending in tax returns late is another mistake filers should avoid. July 15, 2020, is this year’s deadline to file federal tax returns or to request an extension. State deadlines may vary.“Often new filers will leave [filing taxes] to the last minute and so they have issues paying the tax, as they are close to the deadline,” said Alistair Bambridge, the founder of Bambridge Accountants.How to avoid it: Give yourself more time than you think you’ll need. This will make it easier to correct any last-minute issues that arise without missing the deadline.
Mistake No. 7: Structural errors for status and deductionsYour form of business will determine the income tax form you need to file. A sole proprietorship, partnership, corporation, and S corporation (S Corp) are different business entities. For example, an S corp operates as a corporation, but is taxed on each shareholders’ individual tax form.The owners of the S corp pay income taxes based on their distributive share of ownership, and report them on their individual Form 1040. The owners of a corporation are shareholders and they receive dividends as a return on their investment. The owners of an S corp pay regular income tax on their distribution, but they are not considered to be self-employed, so they pay no self-employment tax on this distribution.“The biggest and most common mistake is not electing S corp status and then having to pay excess self-employment taxes, which are over 7%,” said George Birrell, the founder of Taxhub. Beyond filing for a business status, the industry of the filer may determine how they complete their taxes.“Another mistake is not knowing what deductions are allowable for their specific industries,” Birrell said. For instance, filers in the media and advertising industry may be eligible for a cable bill deduction. Why? Keeping up with trends is part of the job -- and an educational expense, he said.How to avoid it: Young people who have a side hustle should let a tax professional file their taxes at least once, Birrell said. Catching structural mistakes early on will prevent a headache in the long term. For subsequent years, the filer can confidently follow the template set by their tax professional.
Mistake No. 8: Forgoing professional helpEnsure that your taxes are error free by relying on professional assistance. Tax professionals can eliminate mis-structuring, spelling mistakes, and other errors.“The biggest mistake young people make when doing their taxes is doing it on their own,” said David DiNardo, the founder of accounting firm Envolta Inc. “The last thing anyone wants to deal with is an audit or tax implication, let alone leave money on the table,” DiNardo said. If you’re unsure of a tax form answer, don’t guess. Connect with a professional to greatly reduce mistakes and your stress level.“Trained accountants can provide you with the advice you need on tax planning strategies to minimize the amount of taxes you pay and maximize your deductions,” DiNardo said. “A professional tax consultant can also supervise all your accounts to ensure that you don’t miss important deadlines or make costly mistakes.”Professional services are also liable for any errors made on their end. In fact, a tax preparer who makes mistakes is subject to an IRS penalty.How to avoid it: To file on your own, you need a basic understanding of taxes. In the meantime, outsource your return to a professional. Want to compromise? The IRS offers a free file online option.
Bottom lineIf this is your first year filing taxes, make sure you do it right — whether you take advantage of the federal extension or not.Are you ready for tax season? Let us know @OppUniversity.[blog-cont]
Samantha Rose has been a copywriter with OppLoans since 2018, and developing her writing expertise since 2011.
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