10 tax blunders that can cost you
Plenty of Americans bungle their return every year and pay extra in penalties as a result. Here's how you avoid making those same mistakes.
NEW YORK (CNNMoney.com) -- It's virtually guaranteed to happen every year - the IRS gets a slew of tax returns loaded with errors.
These mistakes can range from the petty - failing to sign your tax return - to pretty substantial, like neglecting to report all the income you earned over the past year.
Whether intentional or not, these tax goofs can delay your refund or end up leaving you on the hook with a bigger-than-anticipated tax bill or additional penalties.
So with the deadline for filing your tax return less than three weeks away, it might be worth checking and even double checking to make sure your return is error-free.
Claiming ineligible dependents. If you plan on claiming a dependent this year, make sure they qualify under IRS standards.
For example, you wouldn't be able to claim your recent college grad who lives on his own and now files his own tax return. And a divorced couple should remember that only one parent is eligible for the child tax credit every year.
By claiming an ineligible dependent or failing to include both the dependent's name and Social Security number you could be shortchanging the IRS, or worse, missing out on the Earned Income Tax Credit if you meet the income requirements.
'Oh, you mean that hired help...' If you hired a nanny or a caregiver for an ailing family member and paid them over $1,500 in 2006, that should be included on your tax return. The 16-year-old baby sitter that watches Junior doesn't count, but forgetting to mention the housekeeper that cleans your home every week could mean additional taxes and penalties for you.
And don't assume that your hired help will take care of reporting their income, warns Kurt Trimarchi, a partner at the Harrisburg, Penn. accounting firm McKonly & Asbury LLP since the burden is on you the employer.
Forgetting about the AMT. Taxpayers often times forget about a little item on their return called the Alternative Minimum Tax, or AMT.
Often times taxpayers will calculate their return without taking the tax rule into account because it can mean a bigger tax bill. But don't think that that IRS won't notice, says Martin Kaplan, a certified public accountant and the author of "What the IRS Doesn't Want You To Know."
"There are still a lot of people out there under the impression if you conveniently forget about AMT that the IRS will forget about it," says Kaplan. "There are only handful of things they (the IRS) do very well and one of them is the AMT."
Leaving out other income. If you earned a little extra cash during the past year outside your day job, the IRS wants to know about it. It's a temptation to stay quiet about that extra income especially since you aren't obligated by a W-2 or a 1099, but if you get caught, expect to get stung by additional taxes, interest and penalties.
Don't assume about IRAs. Every year a number of Americans try to minimize their tax bill by opening up an IRA, or an individual retirement account. But they often forget two key items: you have to have earned income to qualify and there are income limits to contributing to an IRA.
So you take the deduction off your tax return - no big deal. Right? Not true, explains Jason Sweatt, a CPA at the Greenville, South Carolina-based accounting firm Elliott Davis.
Besides paying penalties, the IRS will force the taxpayer, in some instances, to close out their account, says Sweatt, ultimately shrinking their retirement savings.
Counting employees as independent contractors. It's a common practice, particularly among small business owners, to classify their employees as independent contractors. And it's done, more often than not, for one simple reason: lower taxes.
"What happens is people think they can find ways around paying Social Security tax by doing that," said Jeff Stubbe, a partner with the Wisconsin-based accounting firm Wipfli LLP.
Keep up with capital gains. Dividends. Capital gains. If you have to cope with those calculations on your return this year, make sure you start correctly by filling out the right paperwork.
Often times taxpayers fail to complete the right worksheet (Schedule D, in case you were wondering), according to the IRS, and end up getting their refund rejected or they are told they owe more.
Sweatt also encourages taxpayers to be extra careful reporting their capital gains if they sold stocks or other assets last year. That means including both the purchase and sale price of the asset. Otherwise you could be overpaying the IRS.
No return, no refund. It's pretty straightforward, but some taxpayers still just don't get it: if you are owed a tax refund, you must file a return. And if you fail to do so within 3 years, that money belongs to the U.S. government.
Right now the IRS has $2.2 billion worth of unclaimed refunds for about 1.8 million people who failed to file a federal income tax return for 2003, which will disappear after this year's tax season ends.
Keeping your Social Security benefits straight. When filing out their annual tax return, some Americans often neglect to include the total amount of their Social Security benefits, as well as the correct taxable amount. Failing to do so could not only mean a heftier tax bill, it could also result in interest and penalties.
Forgetting the telephone tax refund. If you paid taxes on a land line, cell phone, fax or Internet phone service from March 2003 to July of last year, you're eligible for the telephone excise tax refund whether you itemize your return or not.
Granted, it's not much (it ranges between $30 and $60), but a lot of people aren't aware of it. According to a recent survey by H&R Block, only about 40 percent of taxpayers know about it.
And make sure you don't try to claim an excessive refund - the IRS is keeping an eye out for tax cheats trying to take advantage of this one-time refund.