Don't make these 3 big mistakes when filing your taxes early
Filing taxes early means receiving tax refunds early, and who doesn’t want that? But eager taxpayers, beware. A mistake can mean owing more money to Uncle Sam, incurring a penalty and causing yourself a big headache.
Taxpayers were allowed to file their 2017 returns beginning Jan. 29. More than 152,000 people filed 2016 returns by Dec. 29, 2017, and more than half (55%) were filed between Jan. 23 (when the Internal Revenue Service began accepting returns last year) and the end of February, according to IRS filing statistics.
Filing early not only gets you a refund sooner, but could mean having more time to pay taxes you owe, getting together your paperwork in a calm manner and avoiding having to file for a tax extension, according to tax preparation software provider TurboTax.
But there’s another important reason to file a tax return sooner this year: The Equifax data breach of 2017. The breach potentially exposed the personal information of 145 million adults in the U.S., and if hackers have access to credit reports with sensitive information (addresses, Social Securities, bank accounts), they could use stole identities to file a fraudulent tax return under the victim’s name.
If you want to file early, here’s what to avoid:
Forgetting tax forms, or filing the wrong ones
Rushing to file taxes may mean forgetting some important ones. It’s also not uncommon to have issuers of tax forms send over amended versions of a form a few weeks after the initial document was sent, said Michael Chen, chief executive officer and founder of Henry.tax, an online tax preparation program.
Taxpayers should think carefully about all the activities they did the year before that would require tax documents, such as an investments with financial institutions, charitable donations and paying for school tuition (especially when claiming tax credits with the American Opportunity Credit) or paying student loans or a mortgage.
Filing incorrectly or forgetting documents altogether could result in owing additional taxes or penalties and interest, Chen said, so wait a week or two after receiving forms such as a 1099 (the form for miscellaneous income) before filing.
“Filing an amended return for a corrected 1099 is not ideal, so it’s usually best to wait until you are confident the final 1099 has been produced before filing the returns,” said Seth Corkin, a financial adviser and personal chief financial officer at Single Point Partners in Boston.
Help yourself for this year and all future years by creating a binder to hold all important financial information and necessary documentation for tax filing.
Not fully contributing to an IRA
Taxpayers may not know they have until Tax Day (April 17, 2018) to contribute to the previous year’s individual retirement account. Annual contribution limits for IRAs in 2017 are $5,500, with catch-up contributions for people 50 and older at an additional $1,000. Contributing more than the limit would incur taxes.
Just make sure to tell the financial institution where your account is located that any extra contributions you’re making before Tax Day are intended for last year’s account, or they’ll be automatically count toward this year’s contributions.
Forgetting to take required minimum withdrawals
This one is for older taxpayers. Some accounts, such as traditional individual retirement accounts and employer-sponsored retirement plans, require a minimum distribution after the accountholder turns 70 ½ years old. Taxpayers have until April 1 after they turn 70 ½ to begin withdrawals (calculated by dividing the account balance by a life expectancy factor the IRS publishes).
So, if the taxpayer turned 70 on Jan. 1, 2017 and therefore 70 ½ on July 1, 2017, he would have to take withdrawals by April 1, 2018. There’s a catch: Taxpayers only have until April 1 for the first year of withdrawals, thereafter they must make them by Dec. 31 of every year. So while taxpayers can wait until April 1 of the year after they turn 70 ½, they may want to take those distributions as soon as they turn 70 ½ to avoid forgetting and risking a penalty. Failing to take an RMD means the amount not withdrawn will be taxed at 50%.