How to Avoid Frequent Tax Mistakes in 2022
Don’t make costly mistakes that can cost you your refund, delay processing and even lead to a letter from the IRS.
Below is a summary of the more in-depth discussion in the Boost Your Tax IQ book. This is a bite-size checklist of the main points covered to help you feel confident about filing for the tax year 2021.
Who says your taxes can’t be simplified? ٩(ˊᗜˋ*)و
Key Takeaways from Part I: Avoid Tax Mistakes
• Don’t procrastinate and wait until the last minute to file. Even if you can’t pay, file your tax returns.
• The tax penalty for not filing your taxes is higher than for not paying, so make sure you file even if you can’t pay. Filing your taxes also starts the statute of the limitation period.
• Make sure you don’t file more than one original tax return each tax year.
• You have only 3 years to get your refunds from the IRS.
• Consider free in-person VITA sites for filing your tax returns or free IRS-approved tax software.
• Double-check everything on your tax return: SSNs, DOBs, EINs, bank account numbers to avoid e-file rejections and refund delays.
• Renew your ITINs before filing your tax return to receive all the benefits you qualify for.
• Don’t file tax returns with a new name if you haven’t changed it with the SSA.
• Organize your tax documents in an annual folder where you keep all your forms, receipts, and tax records.
• Keep cost information for all your investments (e.g., stocks, property, real estate) until you sell them.
• Double-check the qualification for Head of Household (HOH) filing status.
• To claim dependents as a non-custodial parent, include Form 8332 with your taxes.
• If your spouse has individual debts, consider Injured Spouse Relief to receive a portion of the refund.
• Double-check credits and deductions for the current year.
• Single taxpayers with SSN and earned income below $21,430 for the tax year 2021 qualify for EITC.
• Don’t underestimate your income when applying for Marketplace Health Insurance because you may have to repay some subsidies when you file your taxes.
• If you qualified but didn’t receive the stimulus checks, claim RRC on your tax return for 2021 (3rd stimulus) or 2020 (1st & 2nd stimulus).
• You can’t claim the same expense for two different deductions or credits.
• Withdraw your retirement funds as a last resort only, but if you have to, review if you qualify for any of the 10% penalty exceptions.
• Taxpayers who have owned and lived in their primary residence for more than 2 years could qualify for the $250,000 home gain exclusion (per person).
• Electronic filing is easier, faster, and more accurate than paper filing. It is also a preferred method by the IRS.
• If you decide to paper file, make sure everyone on the tax return signs and dates the filing. Check the amount of postage and the address where it needs to be sent.
• Never ever mix personal and business expenses. Get separate accounts and credit cards. Keep track of business expenses in an annual folder/envelope (i.e., Tax Year 202X).
• If you are filing Schedule C, check what expenses you can claim. 309 Tax Mistakes
• If you owe more than $1,000 for your federal taxes, you may want to pay quarterly estimated taxes to avoid an underpayment penalty.
• Some businesses, farms, pass-thru entities, and rental property owners may qualify for a 20% QBI deduction.
• If this is your first year starting a business, you may qualify for investigation, preparation, or organization start-up expenses.
• Before you claim your hobby as a business, verify it against the IRS 9 factors that it would qualify.
• Most rental income has to be reported unless you rent for less than 15 days during the year.
• You can’t classify a worker as an independent contractor if you control how, when, and where they perform the work.
• Just because you trade a few stocks from time to time, that doesn’t make you a trader.
• If you don’t report your income, the IRS has 6 years to audit you for missing more than 25% of the gross income. If you had income and didn’t file, the IRS can examine you indefinitely.
• Virtual currency transactions are taxable. IRS is increasingly reviewing taxpayers’ compliance.
• If you can’t pay all your tax liability at once, set up a payment plan with the IRS.
• If you have any large tax debts outstanding, reach out to TAS and request an offer in compromise.
• If you have any foreign bank accounts with a balance of over $10,000 at any time, you need to declare them by 310 Boost Your Tax IQ filing the FBAR form. Failure to do so is a 50% penalty of the account balance.
• Don’t ignore IRS letters.
• If you pay any of your babysitters, maids, nannies, or other domestic workers over $2,300 in cash in 2021, they are considered your employees. You will need to withhold social security and Medicare taxes and file Schedule H with your taxes.
• Tax avoidance is considered a legal method and loophole to minimizing tax liability. Some can be borderline illegal and considered tax evasion.
• Tax evasion is illegal and considered a fraud. Intentionally failing to file or pay are the two most frequent tax evasions.
• The IRS can prove tax evasion by checking your bank account transactions, estimating living expenses, reviewing spending patterns, and even examining social media posts.