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Top 5 Tax Mistakes You Should Avoid

Top 5 Tax Mistakes You Should Avoid

As tax season approaches, you’ll want to make sure your finances are in order to properly report your income and expenses to the IRS. Unfortunately, a lot of households make the same mistakes–and they’re entirely avoidable!

Simple mistakes can lead to a tax audit. That means the IRS will double check that your individual account and tax information is correct. To avoid the headache of a tax audit, be sure to report your income and expenses properly the first time.

This starts by avoiding these common tax mistakes:

Choosing the wrong filing status

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    The IRS uses five different filing statuses to determine things like your correct tax rate, eligibility on certain credits, and your standard deduction. These filing statuses include:

    • Single
    • Married Filing Jointly
    • Married Filing Separately
    • Head of Household
    • Qualifying Widow(er)

    It’s not always easy to determine which filing status you should choose. For example, if you recently separated from your spouse but are still legally married, should you choose Married Filing Jointly or Married Filing Separately? It’s also common for people to claim Head of Household when they do not meet the requirements.

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    The IRS can help with that. Take a quick five-minute survey, What is My Filing Status?, on the IRS website to ensure you’re filing correctly. Be sure to have the following items on hand:

    • Marital status
    • Spouse’s year of death (if applicable)
    • Percentage of costs your household members paid toward keeping up a home

    Failing to file taxes for household workers

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      One of the biggest mistakes individuals make is failing to file taxes for household workers. It’s not because people are trying to cheat the system, just that they are misinformed.

      If you pay household workers, such as nannies, home health aides, housekeepers, house managers, etc., over a certain amount each year, you are considered a domestic employer. The threshold changes each year as the national average wage index changes.

      According to the IRS, the threshold for 2015 is set at $1,900, but will increase to $2,000 in 2016. That means that if you paid your household workers more than $1,900 in 2015, you will have to pay Social Security and Medicare taxes. These rates are currently at 6.2 percent for Social Security and 1.45 percent for Medicare.

      Homeowners often misclassify domestic workers as independent contractors. Making this mistake may lead to fines and imprisonment. Independent contractors set their own hours, supply their own tools/machinery, and offer services to the general public. If this does not sound like your workers, do not send them a 1099! This point is incredibly important: don’t let someone tell you that you can just pay your domestic workers with cash–this is illegal! The IRS has clear guidelines for what a domestic worker is and if you fail to pay their taxes properly, you could face fines and penalties.

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      Talk to your accountant or a domestic taxes expert if you suspect workers, like your nanny, fall into this “household worker” category. Be sure to provide your financial records and payment information to ensure your taxes are filed accurately.

      Failing to report additional income

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        Too often individuals report only what they see on their W-2s and 1099s. However, you may have income from other sources that aren’t on these forms. By law, you still have to report it.

        This can include income like tips, self-employment income, income from rental properties, etc.

        Not only is this mistake avoidable if you’re proactive and keep track of your income, but omitting any additional income from your tax forms can result in fees and other penalties from the IRS.

        Claiming ineligible dependents

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          Claiming dependents on your taxes gives you certain exemptions that will lower how much you have to pay. It is common for individuals to misinterpret what is meant by “dependent.” For example, you can claim children and relatives as dependents, but you can’t claim your spouse.

          A dependent is someone you support financially, usually a child or relative that lives with you.

          Unfortunately, the rules for claiming someone is often misunderstood. For instance, if someone can claim you or your spouse (if filing jointly) as dependents on their tax return, you cannot claim someone else as a dependent. This is true whether or not the person actually claims you.

          For example, if you live with your parents and also have your own child, your parents may be able to claim you as a dependent. In that case, you can’t claim your child on your tax return.

          You can claim dependents if:

          1. They are a U.S. citizen, U.S. national, resident alien, or resident of Canada or Mexico. The only exception is for adopted children.
          2. The dependent is not married or filing jointly.
          3. The dependent is a Qualifying Child or Qualifying Relative according to the IRS.

          If you’re unsure, visit the IRS website and take a short survey, Who Can I Claim as a Dependent?

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          Be sure to have the following items on-hand:

          • Marital status, relationship to dependent, and amount of support you provided them.
          • Income information, including your adjusted gross income.
          • Terms of a multiple support agreement you may have for the dependent.

          Making mistakes on paper tax forms

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            While taxes were once filed exclusively through paper forms, the Internet has made filing taxes easier than ever. The benefit to filing electronically is that the system can check for miscalculations or mistakes, like forgetting to sign your name. Unfortunately, the IRS won’t even accept returns that aren’t signed, and making a single math mistake can cost you, either in a reduced refund or in various fees.

            It’s tough to catch mistakes like this with the human eye, but they can be easily mitigated when you eFile through the IRS.

            Tax season can be stressful for both individuals and accountants. However, you can relieve some of that stress by paying attention to these common mistakes. That way, you know you’re not headed down a path toward incurring fees, penalties, and even jail time. If at any point you’re unsure of what’s expected of you or whether you qualify for certain categories or not, talk to a professional to get expert advice on your personal situation.

            photo credit: Pinterest

            Featured photo credit: El Nariz via thumb9.shutterstock.com

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            Co-Founder, HomeWork Solutions

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            Last Updated on January 2, 2019

            How Personal Finance Software Helps You Get More Out of Your Money

            How Personal Finance Software Helps You Get More Out of Your Money

            Do you know what mental health experts point to as the biggest cause of stress in the United States today? If you said “money,” then ding, ding, we have a winner!

            Three out of four adults today report feeling stressed out about money at least part of the time. People are either worried about not having enough money or whether they’re putting the money they do have to use in the best possible way.

            Your money is either in charge of you or you’re in charge of it, there’s no middle ground. Using some type of personal finance software can help alleviate some of that money stress and better allow you to manage your money effectively. Without it, you may just be setting yourself up for constant financial worry. Life is already tough enough and there’s no need to make it more difficult by simply hoping your money issues will all work out in your favor. Hint: they won’t.

            This guide will help you to understand how personal finance software can better assist with both accomplishing long term financial goals and managing day-to-day aspects of life.

            Whether it’s tracking the savings plan for your child’s college fund or making sure you won’t be in the red with the month’s grocery budget, personal finance software keeps all this information in one convenient place.

            What Exactly is Personal Finance Software?

            Think of it like the dashboard in your car. You have a speedometer to tell you how fast you’re going, an odometer to tell you how far you’ve traveled, and then other gauges to tell you things like how much gas is in the tank and your engine temperature. Personal finance software is essentially the same thing for your money.

            When you install this software on your computer, tablet, or smartphone, it helps to track your money — how much is going in, how much is going out, and its growth. Most personal finance software programs will display your budget, spending, investments, bills, savings accounts, and even retirement plans, levels of debt, and credit score.

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            How It Leads to Financial Improvement

            It shouldn’t come as a surprise, but people who regularly monitor their finances end up wealthier than those who don’t. When you were a kid, keeping track of all of your money in a porcelain piggy bank was pretty easy. As we get older, though, our money becomes spread out across things like car payments, mortgages, retirement funds, taxes, and other investments and debts. All of these things make keeping track of our money a lot more complicated.

            Some types of personal finance software can help make things a little less complicated, setting you up to meet financial goals and taking away some of the stress associated with money.

            Even if you already have a Certified Financial Planner (CFP) some type of personal finance software can be of great benefit. Whereas CFPs focus on the big picture of your money, they don’t handle the day-to-day aspects that determine your overall financial health.

            It’s also not nearly as complicated as you might think and can take out a lot of the tedium that comes with doing everything on an Excel spreadsheet or with a pad and pencil.

            Types of Personal Finance Software

            When it comes to personal finance software, it generally fits into two categories: tax preparation and money management.

            Tax preparation software such as Turbo Tax and H&R Block’s software can help with everything from filing income taxes to IRS rules and regulations and even estate plans. Plus, there’s the benefit of filing online and getting your refund check a lot faster than if you were to mail off your forms after waiting in line at the post office.

            For the purpose of this article, however, will be focusing more on the personal finance software that aids with money management.

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            Money management personal finance software will help you to see the health of your cash flow, pay down debt, forecast for expenses and savings, track investments, pay bills, and do a host of other things that 30 years ago would have practically required a team of accountants.

            When to Use Personal Finance Software

            So far we’ve gone over what exactly personal finance software is and how it can be a benefit to your money. The next logical step in this whole equation is determining when it should be used and how is the best way to go about getting started using it.

            Below are four of the most common and practical ways to use personal finance software. If all or any of these apply to you and your money, then downloading some type of personal finance software is going to be a smart move.

            1. You Have Multiple Accounts

            There’s a good chance that when it comes to your money, it’s in more than one place. Sure, you probably have a checking account, but you may also have a savings account, money market account, and retirement accounts such as an IRA or 401k.

            If you’re like the average American, you probably have two to three credit cards as well. Fifty percent of Americans also don’t have loyalty to just one bank and spread their money across multiple banks.

            Rather than spending hours typing in every detail of every account you have into a spreadsheet, many programs allow you to easily import your account information. This will help to eliminate any mistakes and give you a bird’s eye view of everything at once.

            2. You Want to Automate Some or All of Your Payments

            Please don’t say that you’re still writing out paper checks and dropping each bill in the mailbox. While it’s noble that you’re doing your part to keep postal workers employed, we’re 18 years into the 21st century and you can literally pay every bill online now.

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            There’s no need to log into every account you have and type in your routing number either.

            With personal finance software you can schedule automatic payments and transfers between all of your imported accounts. Automatic transfers will help to make sure you have the necessary funds in the right account to ensure all bills are paid on the appropriate date. Late fees are annoying and do nothing but cost you money. It’s time that you said goodbye to them once and for all.

            3. You Need to Streamline Your Budget

            Perhaps the best feature of personal finance software is that it allows you track everything going in and out of your virtual wallet.

            Nearly every brand of personal finance software out there has easy-to-read graphs and charts that allow you track every cent you spend or earn, should you choose. You might be pretty amazed when you see just how much you spent on eating out last month or if you splurged a little more than you should have on Christmas gifts last year.

            Every successful business on the planet has a budget and using personal finance software can help you trim the fat on your spending in ways that affect your everyday life.

            4. You Have Specific Goals to Meet

            Maybe it’s paying off debt or saving for up something like a European vacation. Whatever your financial goal is, whether it’s long-term or short-term, personal finance software programs are one of the savviest ways to go about reaching those goals.

            You can do everything from set spending alerts to notify you when you’re over budget to automating what percentage of your paycheck goes to things like retirement investments. The personal finance software that you choose should show you exactly how close you are to hitting those goals at any given time.

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            How to Get Started

            From AceMoney to Mint and Quicken, there ’s no shortage of personal finance software apps out there. Many of these programs are free to download and will allow you to pay bills, invest, monitor your net worth and credit profile, and even get a loan with the swipe of a finger.

            Other programs may only offer you limited services and will require a one-time fee or subscription to unlock all that they offer. These fees can often vary from as little as two dollars to 50 bucks a month.

            It’s best to start off with the free version and then gauge whether you’re able to accomplish everything you’d like or if it’s worth exploring one of the paid options. Often times the subscription programs come with assistance from financial planning and investment experts — so that can be a real benefit.

            When deciding which personal finance software program to use, it’s also important to look at how many accounts you wish to monitor. Certain programs limit the number of accounts you can add. Be sure that if you have checking, credit card, and investment accounts to monitor, that you choose a service that can monitor them all.

            Finally, when looking around for the right personal finance software that meets your needs, make sure that you’re comfortable with the program’s interface. It shouldn’t be expected that you recognize every single feature instantly, but if the features don’t seem readable and manageable to you, then you’re not as likely to use it and get the full benefits.

            Final Thoughts

            Personal finance software can go a long way in helping you to take control of your money and meeting your financial goals. It’s important to note, however, that some focus more on budgeting and expense tracking while others prioritize investing portfolios and income taxes. Explore several different programs and read reviews to find the one that’s right for you.

            In this day and age, managing one’s personal finances in a secure manner that allows the user to have a real-time visual representation of their money is easier than ever before. With the numerous applications that are out there — both free and subscription-based — there’s no reason that every person can’t take control of their money and ensure they’re making smart money moves.

            Featured photo credit: rawpixel via unsplash.com

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