Money Saving Mondays: Tax Mistakes

If the mail has been making it to your snow-bound home lately, chances are it’s had a steady string of tax forms and statements and documents you’ll need to make the April 15 filing deadline.

And even more so than many other parts of life, mistakes you make on your taxes can be costly mistakes – including missing out on credits or deductions or refunds or getting in trouble with the Internal Revenue Service and owing big penalties, back taxes, and interest.

We talked to Norman Posner of Samet & Company in Chestnut Hill, Massachusetts, a member of the Massachusetts Society of Certified Public Accountants, who said some of the most common mistakes he’s seen people make over the years are forgetting to include for their tax return an income or dividend or alimony or expense statement that the IRS has and will never forget.

"Keep in mind that all of this information that you receive gets reported also to the government, and so they will match it up," Posner said. "They’re going to have it in their system, and they will run it against your return, and they will match it up. So if you get it, you better report it."

Poor recordkeeping generally is a leading cause of tax mistakes and tax mistake expenses, Posner said, like not keeping clear documentation of charitable contributions, not subtracting the non-deductible value of a dinner or auction item you got at a charity event from the net charity deduction you can claim, or over-stating or under-stating business expenses for self-employed people. Posner said he has seen people be both too aggressive about what they claim, and also too timid, leading to paying unnecessary taxes. "It has to be ordinary, necessary and reasonable, and as long as it is, then you'll be able to deduct those expenses," Posner said.

Another mistake is not claiming the right kind of filing status, single or head of household or married filing jointly or separately. Most commonly, Posner said, married couples reflexively think they need to file jointly, without testing the numbers. "Married filing separately works, every once in a while," Posner said. “Not often, but every once in a while” such as years in which one spouse had unusually high or low expenses or income for the year that can lead to the two spouses paying, separately, less total tax than they would by filing jointly. A tax professional running preparation software should, Posner said, as a rule have it kick out two returns just to be sure a couple picks the most financially favorable filing status, because the nuances are so complicated there’s often no way to be certain which filing status will yield lower taxes without completing two returns.

Two things to look out for this year particularly: If you took the first-time homebuyer tax credit in 2008, don’t forget about your responsibility to pay back some of the tax credit with this year’s return. And likewise, if you converted an IRA to a Roth IRA in 2010, when it became more financially advantageous, that likely will have a tax impact this year and next.

Ultimately, Posner said, these hundreds, if not thousands, of "what ifs" are why people with anything more than minimally complicated tax returns are well advised to pay for tax-preparation software or tax-preparation professionals. "People are foolhardy to try to do a tax return manually, sitting there with a pencil and an eraser, because you'll burn out the eraser, and you'll probably tear the paper," Posner said. "There are so many calculations that go on, and sub-calcuations, and you don't stand a chance."

With video editor Lauren Kleciak and videographer Daniel J. Ferrigan 

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