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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 August 21, 2018

            How to Pay off Debt Fast Using the Stack Method (A Step-By-Step Guide)

            How to Pay off Debt Fast Using the Stack Method (A Step-By-Step Guide)

            Whether it’s consumer debt on credit cards, student loans or a mortgage, most people find themselves weighed down by debt at some point in their lives. This can keep us working jobs we hate just to pay the bills and keep our heads above water. By learning how to pay off debt fast you can release this burden and remove some of the stress from your life.

            Today I’m going to show you how to pay off your debt fast using the Stack Method:

            Step 1: Stop creating new debt

            Most people do not receive training in handling money and how to live within their means. If you’re in debt then you’re probably one of these people and it’s time to bite the reality bullet.

            It’s going to be impossible to get out of debt unless you retrain your financial habits right now.

            You must make a stand against all the marketers trying to take your hard earned money or offering easy finance. You don’t need more stuff to make you happy. What you need is financial peace of mind.

            So cut up your credit cards or freeze them. I mean this literally. Put them in a container of water and stash them in your freezer. T

            hen when there’s an opportunity to spend, you have time to thaw out (you and the credit cards) and really decide if you need that purchase.

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            Step 2: Rank your debt by interest rate

            Make a list of all your debt with amounts and the interest rate. The highest interest rate should be at the top as this is what you’ll pay off first.

            Paying off your high interest debt is the key to the Stack Method and paying off debt as fast as possible.

            Interest is a powerful weapon and right now the bank or other financial institutions are using it against you. Interest significantly increases the amount you need to pay back and often we’re completely unaware of how much that is.

            For example, if you have a $10,000 credit card debt at 20% interest where you pay a minimum payment of $200 a month, you will end up taking 9 years and 8 months to pay off the actual amount of $21,680 including $11,680 in interest!

            Step 3: Lower your interest rates

            You can often lower your credit card interest rates by doing a balance transfer. This means moving your credit card to another bank and they will lower the interest rate to get your business.

            Shop around and try to get the lowest interest rate for the longest duration (preferably until it’s paid off completely). Just make sure you’re reading the terms and conditions carefully so you don’t get stung by the new bank in other ways.

            Once you’ve done this you can order your list of debt again if things have changed.

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            Step 4: Create a strategic spending plan

            This is where we improve your financial control from Step 1. Take a piece of paper and write down your income after tax and all the expenses that you have. This will include the minimum payments on all your debt.

            Look at your expenses and then rank them in order of importance to you. Look at the items on the bottom of your list and decide whether you’d rather have them or be financially stable. The objective is to create a Strategic Spending Plan where your expenses are lower than your income.

            You also decide how much you are willing to spend on each area of your life. You can allocate amounts for rent, groceries, eating out, buying clothes and other activities however realize that once you’ve spent your allocated money there’s no dipping into other areas.

            It also helps to have a Fun Account that you can spend on what you like and an Emergencies Account in case your car breaks down etc.

            You also want to include in your Strategic Spending Plan as extra amount you’re going to use to pay off debt.

            Can you afford $20 a week? $50? $100? $200 or more? It’s important that you get a realistic number that you can commit to each week without fail and this is your Stack Repayment.

            Step 5: Create a repayment schedule

            The first part of the Stack Method is to cover the minimum payment on every single debt you have. Any time you miss a payment, you incur fees and these add up quickly. This also includes making the minimum payment on the debt with the highest interest rate.

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            Then for the debt with the highest interest rate (your Target Debt) you’re going to add the Stack Repayment from your Strategic Spending Plan. You apply this Stack Repayment and the minimum payment until that debt is paid off in full.

            As your official minimum payment decreases, you add that extra amount to your Stack Repayment. So as your minimum repayment drops, your Stack Repayment increases equally. This will compound how fast you pay off the Target Debt by adding even more to the repayments you’re making.

            Step 6: Reward your progress

            You want to track your Target Debt so you can see your progress along the way. You can also decide on milestones that you’re going to celebrate and reward yourself on.

            A reward doesn’t have to cost money but if it does then it comes from your previously allocated Strategic Spending Plan.

            This is an important step as it will keep your motivation going when you feel your willpower fading.

            Just like you’ve trained yourself to brush your teeth and shower, you can train yourself to manage your money. Feel great that you’re now entering the 10-,20% of people who are actually responsible with money.

            Step 7: Compound your results

            Once you pay off your Target Debt, you have a huge celebration and congratulate yourself. Then you move the Stack Repayment (which includes the previous minimum payment as well now) to the next debt with the highest interest rate.

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            This becomes the new Target Debt and you are using your Stack Repayment amount plus the minimum payment for the new debt.

            This is why the Stack Method is so powerful. As you decrease a debt you actually increase your Stack Repayment amount. This means the second debt will get paid off even faster, the third even faster than that, and so on and so on until you are completely debt free.

            Step 8: Be kind to yourself

            During this process, your resolve is going to be tested multiple times. Maybe you’ll have an emergency like your car breaking down or the need to travel for a sick relative. The important thing is to not throw up your hands in despair while going back to your old habits.

            Life will test your commitment to your new responsible money attitude and it’s up to you how you respond. When things go wrong (and I guarantee they will) you need to shrug it off and get back on track.

            Show compassion when you accidentally go over your Strategic Spending Plan and decide to do better next week.

            The bottom line

            The Stack Method is a powerful tool but it’s up to you whether you use it.

            If you really want results, then bookmark this article immediately and start working through the steps.

            It’s only by the decision you make right now that you will enjoy a debt free future and live a financially responsible life.

            Featured photo credit: Unsplash via unsplash.com

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