Ten stupid things smart people do to mess up their taxes

After every April 15th we kind of shake are heads and wonder why.  How can really smart people, our clients, do such stupid things to their taxes.  Each year we compile of list of mistakes our clients made with one purpose in mind.  Don’t make the same mistake. Learn from their lessons.

Here is our current list of things to avoid this year.


1.    Take money out of their IRA or pension plan and don’t have any money withheld for taxes. If you have to take money out of your tax sheltered plan don’t forget that there is a 10 percent penalty in addition to Federal tax owed on the distribution if you are under age 59 1/2.  Don’t ever take money out of these plans without having the most Federal tax withheld from the distribution.  Call our office. We can help.

2.    Take money out of their IRA or pension plan or 401 K and not roll it over to another tax deferred plan.  Back on this subject again. Leaving your job usually means cashing in a pension plan or 401 K.  We understand that sometimes the money is needed to pay for day to day activities until you can find a new job.  But if you don’t need the money don’t spend it roll it over. We can help you if you don’t know what to do.  We can refer you to very competent people that can help with the rollover.  Taking the money if you don’t need it means additional tax liability.

3.    Sell stocks or mutual funds and not know what they paid for it. If you are dabbling in the market, you need to keep track of what you paid for the security and when you bought each security.  We suggest keeping a permanent stock purchase file, and filing the confirmation each time you buy a security.  That way, when you sell it you can easily locate the purchase price and purchase date.  Remember that you only pay tax on the gain and you can deduct the loss of each security you sell.  Stockbrokers are now required to provide you a basis statement each year.  However, they may be wrong or are missing information.  The best tip is to keep your stock purchase records.

4.    Don’t keep any records. Records are very important in our imaginary tax world.  Especially for business tax deductions like car expenses. Jotting down on a daily basis in a daily planner or pocket calendar is all you need.  Keep a file nearby for tax deductible receipts.  Better yet get a credit card that you use only business tax deductions.  That way you all the receipts organized for you.  Your credit card along with your milage calendar is all you need to make April 15th very less taxing.

5.    Give charitable deductions, especially non cash and don’t make an attempt to value the donation.  A note about the date and time of your deduction and a short list of the description of the deduction in your tax deduction file is all you need.

6.    Not  filing your taxes because you don’t have the money to pay. 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. You can apply for an "offer in compromise," make monthly payments through an IRS installment agreement, or temporarily delay paying. Whichever is best for you, we will help you contact the IRS right away to let them know you cannot pay. You should pay as much as you can when you file because the IRS assesses penalties and interest on the amount not paid.

7.    Ignore those letters from the IRS. Do not ignore mail from the IRS. If you owe taxes, the IRS will collect. Persons 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. In lien terms, this is a lien about the size of Alaska. Few 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!

8.    Signing. It's not the toughest part of the tax return, but we have found that one of the most common mistakes occurs on the bottom of the tax form: the place where you're supposed to sign your name. A lot of taxpayers simply forget to do it. And, a return without a signature is like no return at all. Although the IRS won't send back your forms (it doesn't want them to get lost in the mail), everything is put on hold while you're sent a special form to sign certifying that your return is accurate. Only after you sign and send in that form, and the tax agency matches it up with your other forms, can your return be processed -- and any refund check issued.

9.    Big refunds.  Isn’t that the point of filing? Big refunds. In fact some clients rate the expertise of their tax preparer with the size of their refund.  The bigger the refund the better the tax preparer.  Nothing can be farther from the truth.  Refunds are nothing more than interest free loans of your money, even earned income credit which can be advanced to you from your employer throughout the year, to the government.  Then you have to go through the expense and the wait of getting your refund when you file your taxes. Extra withholding doesn’t benefit you, only the government. Don’t stand for big refunds.  Stand for bigger paychecks.  Your goal should be break even on April 15th.

10.    Assuming the wrong filing status.  Single taxpayers should be singled out for assuming that they should file as single tax payers when in fact they qualify for the much-more-favorable head-of-household (HOH) filing status. Say you're single and your non-adult child lives with you and pays for less than half of his or her own support. If you pay more than half the household's costs, you qualify. You may also qualify if you are still married and lived with your child but apart from your spouse for at least the last half of 2006. Finally, if you are single and can claim your parent as a dependent, you can probably file as HOH. This is true even if your parent has his or her own place. You are the HOH if you pay more than half the cost of your dependent parent's home.