Don't Be Tax Stupid: Be Smart About Filing Your Tax Returns!
Many people dread (and love) Tax Day. Whether they will owe or expect a refund, stress levels usually rise during this time of year. Tax stress can affect everyday activities such as driving. In fact, fatal car crashes increase 6 percent on Tax Day, according to 30 years of car crash statistics from the National Highway Traffic Safety Administration.
Unfortunately, when people are stressed about taxes, they may be capable of making mistakes on their tax returns. Take a deep breath and consider the following things to avoid when doing your taxes:
Then replace the stupid tax things with these smart tax tasks:
Stupid Things to Avoid When Doing Your Taxes
Avoid the following things when doing your Taxes:
Not filing a tax return or an extension because you don't have the money to pay your taxes
Always file, even if you do not have the money to pay the taxes you owe. The IRS considers not paying on time and not filing as two separate issues, and a penalty is involved for each. When you file your tax return, you have several options to pay taxes you owe. You can make monthly payments through an IRS installment agreement, apply for an "offer in compromise," or temporarily delay paying. Whichever is best for you, contact the IRS right away to let them know you cannot pay. You should pay as much as you can when you file your return because the IRS assesses penalties and interest on the amount not paid.
Report false information on a tax return to get a bigger refund or avoid paying what you owe
It is a waste of time to include income that does not exist or report tax credits that you do not qualify to claim. Not only is it wrong to lie on your tax return, it is a crime. Even if you do not get charged for tax fraud, the IRS tracks patterns of tax behaviors (filing now to avoid paying, claiming deductions that you do not qualify for), you will be flagged eventually. Not only would you face a hefty tax bill (and eventually pay what you owe plus interest and penalties), it may slow down the processing of future refunds and increase your audit risk.
Even if you cannot pay the tax you owe now, file a correct return and explore other payment options, such as installment agreements.
Pay your tax bill with a high interest credit card
Although this is a better approach than not paying your taxes at all, you should investigate the best way to borrow the money. Compare the interest rate of your credit card with that of a personal loan from your bank or credit union. The idea is to incur the least amount of money in interest. Try to pay off the loan as soon as possible and do what you can to avoid the same situation next year. To pay your taxes on time, you may need to adjust your withholding on your W-4 with your employer or put aside money each pay period in a savings account.
Not saving your receipts (or other documentation)
If you have made charitable contributions during the year, the IRS requires you to keep a record of any cash donation (a canceled check, bank statement, credit card statement, or written statement) from the charity showing the date of the contribution, the amount of the contribution, and the name of the charitable organization. Otherwise, the IRS will not allow you to claim a deduction for the donation. Generally, you should keep records of any donation you make, just in case of audit.
For cash donations less than $250, you will need to provide bank records that prove the donation (a cancelled credit card statement or check), or written communication from the qualified charitable organization. You must acquire written acknowledgment from the qualified organization for any cash donation over $250. Unfortunately, small undocumented cash contributions (money dropped in Salvation Army pots or checks placed in church collection baskets) will not be accepted by the IRS; you will need to obtain a receipt for that small donation in order to claim the tax break you deserve.
Interested in donating household items (include furniture and furnishings, appliances, electronics, linens, etc.) or used clothes? Here is a catch: the IRS will not let you claim them as tax deductions unless the items are in "good" condition or better. In other words, the IRS will not accept junk! However, here is one exception: you are allow to claim a deduction for any single item appraised at over $500 (regardless of its condition. Review IRS Form 8283 for details.
Claiming a dependent (i.e. one born during the tax year) without an SSN
The IRS will disallow your tax exemption, recompute your tax, and either send you a lower-than expected refund or a tax bill.
Not checking your entries before you file (personal information, tax document information, signatures etc.)
Entering incorrect information may delay the time you receive your refund (especially if you enter incorrect direct deposit information or mailing address). If you are not sure about the information you entered, ask a person you trust to review your return.
Waiting until the last minute to file your tax return
This would increase your chances of making mistakes on your return. Make sure you have all your documents gathered before you file (better yet, collect and organize your documents throughout the year to save time on tax planning).
When you get your refund, spend it as fast as possible
Spending your refund may not be such a good idea, no matter how tempting. If you have large credit card debt, inadequate savings or limited retirement fund, a better use of your refund may be to pay down tax debt, open a savings account or establish an IRA.
Get a tax refund anticipation loan
Tax refund products are advertised heavily during tax season (mostly off-line). However, the advertising does not tell you about the fees and steep interest rates associated with a short-term refund anticipation loan. Also, don't forget that it is a loan: if the IRS turns down any deductions or credits on your return, you will still be responsible for paying back the amount of the loan.
There is a faster way to get your refund: efile your tax return and request direct deposit into a bank account. According to the IRS, you can expect your tax refund to be deposited in your account within 21 days. Another option is to wait approximately four to six weeks to have your refund check mailed to you.
Ignore those letters from the IRS
Do not ignore mail from the IRS. If you owe taxes, the IRS will collect them. Those who do not communicate with the IRS about inability to pay can expect a "Notice of Federal Tax Lien" to be filed against their property (usually about the size of Alaska). Few liens carry more weight. The lien attaches all your property, including your house, car and any future property you might obtain. A levy, which is a legal seizure of property to satisfy a tax debt, is another legal means the IRS can use to collect taxes. This means the IRS can seize your car, boat or home and sell it to satisfy your tax debt or it can place a levy on your wages. More good news is that these liens often stay on your records long after the issue has been resolved or until the IRS gets around to removing it. So it's also the gift that keeps on giving!
Smart Tasks to Accomplish When Doing Your Taxes
Accomplish these smart tasks when doing your taxes:
File a tax return or extension on time, regardless if you don't have the money to pay your taxes
Filing a tax return or tax extension on or before Tax Day will eliminate any failure to file penalties, which are ten times more expensive than penalties for not paying tax you owe (5% vs. 0.5%). Consider installment agreements and other tax payment options if you cannot pay all the tax you owe on Tax Day.
Efile a return or extension
It is faster and more secure to efile a tax return or extension than filing a return or extension on paper. Generally, you will receive a notice within 24 to 48 hours after efiling a return or extension if it is accepted (or rejected-which is easy to fix online). In addition, if you are expecting a refund, you can expect it in as little as 7 days (according to the IRS).
Pay any taxes owed via direct bank transfer (if efiling) or check/money order
If you are preparing and efiling a federal tax return online, you can pay your taxes owed during the efiling processing via direct bank transfer to the U.S. Treasury. You can submit a direct bank transfer payment by entering your bank account information. Once you submit your tax payment, your bank statement will list "U.S. Treasury" and a PIN or access code for referencing the transaction.
Instead of using direct bank transfer, you may choose to submit your tax payment via check or money order in the mail. Your return usually includes a payment voucher, which contains instructions on how to submit your payment to the IRS and/or state tax agency.
Alternatively, you can submit an online tax payment using a credit or debit card. You can do this during or after the efiling process. The IRS acccepts MasterCard, American Express, Visa, and Discover through an authorized payment processor, Value Payment Systems. Please be aware that the processing company may charge a "convenience fee" based on payment amount (generally 1.90%-2.35% of the total for credit card payments and 1.90%-%3.95 for debit card payments). The credit card convenience and interest fees may or may not be greater than the IRS interest, so compare your options before choosing the option that benefits you the most.
Use the extra 6 months wisely to prepare and file your tax return on time (if you filed an extension by Tax Day)
Though a tax extension gives you extra time to prepare and file your tax return, do not think of the extension as an excuse to procrastinate on your taxes for 6 more months. Take advantage of the additional time by figuring out how you are going to file your return and pay any taxes owed (if necessary). However, please be aware that an extension does not give you more time to pay the tax you owe.
Take your time
Make sure that you have entered all your information correctly and completely before submitting your tax return (personal information, values, routing, and account numbers for refund direct deposit, etc).
Adjust your W-4
That way, you do not owe taxes next year, and you get more money in your paycheck!
Keep all tax documents/tax return copies for at least 3 years
Once a tax return is ready to be filed or efiled, you should make a copy of your signed return (as well as all schedules and other tax documentation, such as W-2s) for your records. That way, if the IRS sends you a notice about your tax return (such as missing or confusing information about your return), you can provide them with any documentation they request from you.
More Tax Planning Tips and Information
Tax Return Planning Checklist
Free efile.com Tax Return Planning Tools
Tax Payment Options
How to Adjust Your Paycheck Withholding on a W-4 Form
How to Get a Copy of Your Tax Return