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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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            Kathleen Webb

            Co-Founder, HomeWork Solutions

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            Last Updated on April 3, 2019

            How to Nix Your Credit Card Debt in Less Than 3 Years

            How to Nix Your Credit Card Debt in Less Than 3 Years

            Debt is never a fun thing to be in. But, there are many actions that you can take that will help you rid yourself of the burden of debt once and for all.

            By coming up with a set plan, eliminating your debt can feel much easier than constantly thinking about it.

            This post will provide some tips on how you can do this to help you nix your credit card debt in less than 3 years.

            Hint: there are ways that are easier than you think.

            1. Consider Consolidating Multiple Credit Cards If Possible

            This may not be applicable to you, but if you have multiple cards – it is something to consider. Keeping up with multiple bills is time consuming.

            It will depend on the balance you have on each. Consolidate ones you can but do not do it to the point that you get too close to the maximum limit. Also, it is ideal to pick the card with the lower interest rate.

            Consider if there are any fees or alternatively, rewards, with transferring a balance to another card. Watch out for fees. Note that some cards offer rewards for transferring a balance to them. This is extra cash that can help go towards paying off your debt.

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            Having one or two cards can make nixing your debt much simpler than keeping up with the balance of a bunch of cards. Keeping track of paying the minimum towards a bunch of cards is time consuming. Spend the time to consolidate instead to make the overall process simpler going forward.

            My tip: Have one main credit card. Have a second one that you use for necessities – such as groceries or gas – that offers rewards for those purchases (a lot of cards do) and set the second one on auto-pay. You should be able to pay off a smaller amount on auto-pay if it is a necessity. If you think you cannot, then you may need to cut down a lot on expenses.

            Why do I suggest doing this? Having one thing set to auto-pay is one less thing to think about. One less thing to waste time on. Same idea with consolidating to one main card. Tracking down too many is a hassle.

            2. Try to Pay the Full Balance You Spent Each Month at the Very Least

            You need to pay off the amount you are spending each month when that bill comes in. This is the amount you spent THAT month.

            Do not let the debt keep accruing while you work on paying any unpaid debt that has accrued. It will become a never-ending battle. Try as best as you can to be current on paying for each month’s expenses when that month’s bill comes out.

            If this is a strain, consider why. You may need to cut expenses. Or you may need to consider other cards. Or look at where this money is going.

            3. Pay Extra When You Can – Every Small Amount Counts

            This cannot be emphasized enough. If you are looking at a lot of credit card debt, it can look daunting, but each extra amount that you can put towards the debt will really add up – no matter how small it is.

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            It does not just reduce the principal amount that you have left to pay off, but it reduces the amount that is collecting interest. You will always save money with that reduced interest.

            4. Create a Plan on How to Pay Extra

            Back to the main point, having this plan is giving you one less thing to think about.

            This plan should be a plan that works for you. If it does not work for you, your spending habits, and your views on debt, then it will not be an effective plan.

            For instance, if a set plan of an extra $50 (or another amount that you know you can afford) works for you, then do that. Set that aside every month and pay that extra amount. Treat it like a bill. Choose an amount that works for you and pay it like clockwork as though it was a bill you had to pay each month.

            Little amounts will not nix it entirely, but they will help tackle it and having a set plan can make it less of a chore. Creating a new plan of how much to put towards it each month is an unnecessary added stress.

            5. Cut out Costs for Services You Do Not Use

            If you are signed up for subscriptions that you do not use because of some free trial or for some other reason, cut it out. Your overall financial position will look better.

            In turn, that will make cutting your credit card debt easier. Look at your statements to find these expenses. If you do not use them, you may forget you are paying some unnecessary amount each month. Cutting it out can really add up in savings that you can put towards other needed expenses.

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            6. Get Aggressive About It

            Consider these points:

            Depending on the interest and the level of debt, you may need to give up a few indulgences. For example, instead of ordering delivery or going out to eat, cook at home. Everything adds up.

            Other things may be more of a sacrifice. It may be a trip you wanted to go on, or a daily latte habit you’ve picked up. In these instances, consider how important it is to you and if it’s worth the sacrifice. And if it is a costly expense, think whether you can wait to indulge.

            Cutting an extravagant expense can really help make a dent in your overall debt. Try not to add to debt when you are trying to pay it off. It will be a never-ending battle. Make it less of a battle with these tips and it will feel easier.

            Bottom line: Do what you can to make this process easier for you. Implement steps that do this. It takes time now, but will help overall. Also, keep track of your spending and paying down of your debts. Which is the next point.

            7. Reevaluate Your Progress at Set Intervals

            Doing a regular check-in can help you see your efforts pay off or maybe indicate that you need to give this a bit more effort. If you check every 3-6 months, it will not feel so much like a chore or feel so daunting.

            By doing this, you will be able to better understand your progress and perhaps readjust your plan. Bonus: if you see it pay off, it will feel great to do this check-in. You will get there.

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            Finally (and most importantly)…

            8. Keep Trying

            Do not get discouraged. Pushing it off will make it worse. Just keep trying.

            Once your debt becomes lower, each monthly payment will reduce the balance more. Why? You are paying less towards interest. It will be a snowball effect eventually and it will become much easier to manage. Just get to that point. And know once you do, it will feel easier and motivating.

            Start Knocking out Your Debt Today

            The best way to eliminate debt is to get started right away. Begin by implementing the above steps and watch your debt just melt away. Try out some of the above strategies and see what works best for you. Soon you’ll be on your way to a debt free life.

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