13 common mistakes to avoid when filing tax returns

13 common mistakes to avoid when filing tax returns

Tax laws are complicated, often leading to several errors when filing returns. These mistakes could cost more money in the form of taxes, interest, and penalties or lead to an audit from the IRS. One must meticulously fill out and proofread their tax return forms to avoid this hassle. Here are 13 of the most common mistakes people make while filing tax returns; the articles also lists ways to avoid these mistakes.

1. Filing too early
While tax returns must never be filed late, filing them too early may not be a good idea either. Prematurely sending in one’s tax returns could lead to missing out on important tax documents, leading to mistakes in computing and processing delays. Since taxes are due by April 15 each year, it is advisable to have all documents ready and filed by the end of March.

2. Mistyping the Social Security Number (SSN)
This may seem like a no-brainer, but it is a common error across many tax returns. The Social Security Number should be mentioned as it appears on the Social Security card.

3. Making typos
Similarly, special attention must also be paid to one’s name and those of one’s dependents. Making typos here may lead to unnecessary delays and legal hassle.

4. Entering incorrect information
Information about one’s wages, dividends, bank interest, and other income received that has already been reported to the IRS must be carefully entered so it aligns with government records. In cases of disputes or complaints, one must contact the business and request a corrected form or call the IRS to initiate a Form W-2 complaint.

5. Failing to enter the information in the correct line
One must always ensure that their entries appear where they are intended to. Making errors could have legal consequences while filing returns. To avoid this issue, people often turn to tax-filing software.

6. Taking the standard deduction
Itemizing deductions may take a lot of time and effort, but opting in for standard deductions may cause one to lose out on their hard-earned money. Use tax software or hire a professional to determine which alternative is more likely beneficial.

7. Choosing the wrong filing status
Some taxpayers also choose the wrong filing status, leading to future complications. The filing status impacts one’s tax bracket, credits, deductions, and final tax owed to the government. There are five distinct categories to choose from. These are single, head of household, married filing jointly, married filing separately, and qualifying widow(er).
There are special rules governing who can file under each of these categories. Use the Interactive Tax Assistant on the IRS.gov website to determine which category to file under.

8. Making calculation errors
Over the years, the IRS has found millions of mathematical errors in tax returns. This could be related to addition, subtraction, multiplication, division, or even selecting the wrong number from tax tables.

Generally, the government mechanisms catch these errors and send a notice to let one know that their refund has been changed. Although rectification of these errors is simple, they can delay return processing. Use tax software that makes these calculations on the filer’s behalf to avoid these errors.

9. Failing to understand credits and deductions
People often make mistakes when figuring out details such as Earned Income Tax Credit, Dependent Care Credit, Child Tax Credit, and Recovery Rebate Credit. For more details, one must work with a tax professional or use the Interactive Tax Assistant on the IRS website to determine their eligibility for credits and deductions. Be sure to double-check these before the final submission.

10. Not telling the IRS how to handle the refund
Those who overpaid their taxes and are due a refund must clearly mention how they would like it to be issued. If no details are mentioned, the IRS sends a paper check via mail. To make this process quicker, mentioning one’s account information on the tax returns is advisable. These refunds may also be used towards next year’s estimated taxes or contributions to retirement accounts. More details can be found under the instructions for Form 8888.

11. Entering the wrong routing or account number
Taxpayers who want the returns deposited directly into their bank accounts must carefully enter their routing or account number.
The IRS generally works to verify routing and account numbers. If the number is invalid, a paper check is sent instead of a direct deposit. However, the return may be deposited into their account if the account number belongs to someone else. As a result, one will have to work with the bank to recover the money.

12. Forgetting state healthcare individual mandates
While the Affordable Care Act (ACA) mandate was scrapped in 2019, some states have individual health insurance mandates, which may impact filing.

13. Sending an unsigned form
Unsigned tax return forms are considered invalid. In cases of joint returns, both spouses must sign the form, except where there is a valid power of attorney. Alternatively, consider using digital signatures to file returns electronically.

Lastly, one must always save a copy of their signed returns and proof of filing. Hold on to these returns and supporting documents for three to seven years. This can help protect one from any IRS claims in the future.

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7 common CD investing mistakes to avoid

Investors looking for a high fixed rate on their savings can consider a Certificate of Deposit (CD). However, note that a CD usually locks up the investor's funds for a certain period, ranging from a few months to several years. While CD rates offer attractive interest rates of up to 5%, it's vital to understand that all investments carry some degree of risk. Here are some mistakes to avoid when opening a CD account. Not considering penalties Most certificate of deposit accounts require the investor to hold funds in the account until it matures. So, if one takes out money too soon, they might be subject to an early withdrawal penalty. And like other CD terms, the charges may differ based on the financial institution one picks and the length of the CD's term. For example, if a CD term is lower than 12 months, the investor might be charged 90 days' worth of interest or more. Moreover, if the account has not earned enough interest to cover the penalty, some financial institutions may take the difference from the principal balance, causing the individual to lose money. Therefore, before opening a CD, one should make sure they understand the penalties for early withdrawal and avoid committing cash that they may require before the account matures. Signing up for the wrong term The rate rendered by a CD may vary depending on the term one picks. As of today, the best CD rates are reserved for terms ranging from 6 to 18 months. However, if one opts for a term based primarily on the APY, they may encounter issues if they require the case sooner. Most banks and credit unions charge early withdrawal penalties if an individual takes out money before the term expires. But if one picks a term that's too short, the original rate may not won't carry over to the new term. Further, if interest rates go down, one might be looking at lower interest returns. Not shopping around for rates Several banks and credit unions offer CDs, but not all accounts have the same benefits. So, while it might be easier to go through one's current financial institution, one should remember that they might be investing money that gives them a lower annual percentage yield (APY). So, one should take the time to research the top CD rates across banks and credit unions to ensure they get the most for their savings. The investor should also check for minimum deposit requirements to ensure they qualify for the account based on how much they intend to save. Forgetting to withdraw at the end of the term While one might invest in the ideal CD, one often forgets to withdraw the money at the end of the term. An individual usually gets seven to 10 days to renew the account for another term or to withdraw the funds. Moreover, a bank or credit union is required by law to notify the investor ahead of the maturity date. So, if one forgets or does not make a decision to withdraw in time, the financial institution may automatically roll over the funds into a new CD. This might compel one to keep the money in the account for longer than planned or to take an early withdrawal, which may incur an unnecessary penalty. Neglecting diversification A single CD is a great way to earn high APY on savings. But putting all the money into one could cause problems if the individual experiences a financial emergency. One could keep some of their savings in a high-yield savings account or money market account so they will have cash easily accessible when it is needed. Playing it safe with cash A CD offers a guaranteed, safe return on one's money. However, based on one's current financial situation and goals, it might be better to invest some of the cash instead of putting it in a CD. While the stock market might be volatile in the short term, and there's a risk of losing some of the money, it might be a better place to invest money for long-term needs and goals. Picking the incorrect CD type Various types of CDs offer special features. One should stick to a variety of types and understand the pros and cons of each. A standard CD does not offer any special features. When an individual deposits money and holds it until the account matures, there is no change in the interest rate during that period. Early withdrawals usually result in penalties, and the terms of the CD may range from one month to 10 years. A no-penalty does not charge the investor if they need to withdraw funds before the account matures. Terms are typically around 12 months or less, but some institutions may offer longer terms. A step-up CD is where the account's interest rate increases in regular intervals over the term. For instance, one might have a 28-month term with a rate that increases every seven months. People who invest in a bump-up CD benefit when interest rates rise over time. The CD allows users to raise the interest rate on the account once during its term to take advantage of rising APYs. A brokered CD is offered by a brokerage firm instead of a bank or credit union. The investor might be able to secure a term of up to 30 years with a brokered CD. Furthermore, since brokers can hold accounts at multiple banks, one might be eligible for a higher FDIC insurance coverage limit. The individual can also sell a brokered CD on the secondary market if they want the money before the account matures. However, one should note that the value might rise or drop based on market rates. Lastly, no-penalty, step-up, and bump-up CDs usually offer lower interest rates than standard CDs. However, one can get a higher APY with a brokered CD than a CD offered by a bank or credit union.

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7 mistakes to avoid when paying off debt

Debt repayment is akeen to the feeling of drowning under strong currents. According to reports, a significant portion of the adult American population is carrying some form of debt, which poses a threat to their financial stability and that of their families. These debts can include credit card bills, student loans, car payments, and home mortgages. Becoming debt-free can be a complicated process and one that also proves to be a landmine of potential mistakes. Unregulated spending habits There is no scope for changing results if the habits stay the same. Keeping up with the same spending habits that got individuals into debt in the first place cannot produce any alternative outcomes. To get out of debt, and maintain, individuals first need to figure out their affordability and their needs. Making a list of their income, the amount they can spend each month, and then making way for change in habit is how they can get out of this hole. If they keep spending at the same speed, even the prospect of an increased income would fail to produce different results. One of the easiest ways of getting out of this rut is by putting thought into a realistic budget. Review the expenses that are listed down and then decide on the ones that are necessary and the ones that can be handled. Reducing unnecessary day-to-day expenses and choosing cheaper alternatives can make a significant change. Signing up for debt relief programs Getting out of debt is not as simple and straightforward as some programs might make it out to be. It is therefore necessary to be vary of the programs that offer fast solutions. Check the fine print of these debt relief programs and look for any probable unsavory caveats in the policies. Head over to credible companies or organizations to sign up for a program. Sign up for options that provide detailed, realistic, and sustainable debt relief plans. Remember, working out of a debt requires patience and continued monitoring. Not saving for retirement When trying to get out of debt, many people ignore putting aside money for retirement. However, ignoring the future can be a grave mistake and may result in higher costs later on. Retirement savings are essential for those who plan to live off of their savings after they stop working. These savings are a primary source of contributions to an individual’s financial stability, so it's important to start thinking and working on a retirement fund as soon as possible. Despite debts at the current stage of life, individuals should focus on finding ways to cut unnecessary expenses and prioritize saving for retirement to ensure a prosperous future. Ignoring emergency funds A single unexpected expense can leave one scrambling for the next paycheck to pay the bills. This could include something as common as a car repair or a faulty phone. Financial gurus suggest putting aside funds that amount to 3 to 6 months of expenses aside so that it would help cover any unexpected expenses or future emergencies. Leaving this area unaccounted for can open individuals to falling further into debt in case of an emergency. It is undoubtedly a time-consuming task, especially when looking at debt payments. Consider putting aside even a small amount of the paycheck that can make a substantial difference in the long run. Focusing on several debts at the same time When dealing with multiple debts, it's tempting to focus on all of them equally, but not all debts are created equal. Take the attention away from making equal payments each month for all the debts and concentrate on debts with the highest rate of interest. One by one, keep targeting the next debt with the highest payable amount after finishing the first one. This will leave one with more manageable expenses. This does not mean that individuals ignore making the minimum necessary payments on each existing debt. After paying off the minimum loan amounts and bills, put all the extra money into repaying the loan with the biggest interest amount. Failing to budget Another common mistake individuals make when trying to get out of debt is ignoring to make a monthly budget. Sure there is nothing exciting when one sits down to put together a sensible spending plan, but it is also a necessity to get out of debt. The basic rule of 50/30/20 is a good place to start. According to this financial thumb rule, 50% post-tax income should cover necessary expenses, 30% should be allocated to wants, and the remaining 20% should be split between savings and debt reduction. Not verifying credit reports Going through credit reports and varying their accuracy can go a long way in reducing debt. One of the common missteps people make is not checking their credit reports, leaving them open to vulnerabilities and errors. Individuals can get one free credit report annually from all of the major bureaus. It is better to take advantage of these than to pay higher debts. Periodically check these reports and verify that there are no inaccuracies. If individuals find debts or delinquencies that are not theirs, it is best to report them immediately. This could save them from being a victim of fraud. Some financial bodies also let users check their credit scores for free on a monthly basis.

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