Tips for Next Year: How to Avoid Common Mistakes when Filing your Taxes
Many people unknowingly make mistakes when filing their taxes. However, before you file for your taxes you should always ask yourself if you are completely prepared to file them. It’s also smart to double check your returns and ensure that they are complete and accurate before you file. While these are more general guidelines to keep in mind during the tax filing process, I’d like to review three of the most common mistakes the average person makes when filing taxes.
1. Know your 401(k)
One of the biggest mistakes people repeatedly make is not contributing to their employer’s 401(k) plans. Forgetting to fund your 401(k) is a costly mistake. One reason is because if the company you work will match your 401(k) contributions, then you are literally leaving free money on the table. If your company matches your 401(k) contributions then they will match a certain amount of every dollar that you contribute to your 401(k) plan up to a certain amount. Also, on the tax side, 401(k) contributions are taken from your paychecks before taxes are even deducted. This means that if you contribute to the 401(k) plan, the contributions taken from your paycheck do not require you to pay taxes on them. As such, if contributing to a 401(k) is an option for you, invest in your future and pay less in taxes; it’s a win-win.
2. Think twice before withdrawing funds from your retirement plans
Many people also make the mistake of taking unnecessary withdrawals from their retirement plans. According to recent studies, more than one in four homes will dip into retirement accounts, such as their 401(k) plan, for funding things other than retirement. They choose this despite the fact that dipping into these retirement accounts can cause substantial damage to those savings tax-wise. Withdrawals for purposes unrelated to retirement taken out by account holders under 60 years of age add up to $60 billion dollars per year. This comes out to 40% of the $176 billion dollars that employees contribute to retirement accounts each year according to recent reports. You may want to hold off funding retirement plans until you have an emergency savings account to pay for unexpected expenses that pop up. If you are one of the people who are considering taking funds out of your retirement account to help your children pay for college, then you may want to rethink that option. Your kids always have the choice to take out student loans for school but you cannot always secure a loan for your retirement.
3. Consider (and record) Charitable Donations
Donating to a charity could decrease your income and drop you into a lower tax bracket, decreasing your yearly tax burden. You should check with a CPA before utilizing this strategy to decrease your tax burden, and the amount you are able to exclude from tax filing can sometimes be staggering. Last year the federal government lost approximately $200 billion in revenue it could have otherwise accumulated but did not due to charitable deductions.
Not getting receipts for tax-deductable donations to charity is also a common mistake. It is recommended that you always keep a receipt from the organization that you contributed clothing donations to, especially for deductions of less than $250. Information you should have along with the receipt from the organization is the name, location of the charity, a description of the property, a picture of what you are donating and the date of the donation.
When heeding these three guidelines in approaching next year’s taxes, not only will your taxes decrease but you’ll also be saving more for retirement and contributing to great charitable causes.