Running your business can be a task all by itself, but when you add on filing taxes for both business and personal, the job seems impossible.
Tax preparation is perhaps one of the most complex tasks that the average American encounters on a regular basis, and the tangled web of the IRS code can confuse even the most seasoned tax preparer.
The applicability of the deductions and credits in many cases is debatable and trying to use them is even worse. Many common misperceptions exist in society to further lead people astray during their tax preparation.
Don’t let yourself miss out on some opportunities to save because of this! Here are five of the most common tax mistakes people make when preparing both their personal and/or business taxes and how to avoid them.
1. Make Sure Your Information Is Accurate. One of the first steps in filing your tax return is figuring out what your “status” is. Beyond married or single, there are some other options for filing. For example, while the term head of household may have other meanings in common language, there is a strict set of guidelines for who actually qualifies to claim such a status. Married only counts if the marriage took place before December 31st of the preceding year, and married spouses don’t have to file together (although it’s frequently more beneficial). Choosing the correct status can be very important to getting the most out of your tax return because inaccuracy can result in losing child tax credits or even the exemptions for dependents.
2. Working Children Can Be Dependents. Parents may think that once children begin working, they are no longer dependents in terms of the tax code. However, this is mostly inaccurate. As long as a parent or parents continue to provide more than half of the child’s support, that child continues to be a dependent regardless of whether the child works or not. The only key here is that if the child is working and using that money to support himself, the parents must continue to provide half (or more) of the support in order to claim the child as a dependent. If the child merely puts the money earned in a bank account and doesn’t use it while the parents pay for support, then the child is still a dependent.
3. Buying and Selling Your Home Can Save You. Selling your home and moving can be a stressful ordeal but after all is said and done, it may result in some favourable tax consequences for you and your family. If you sold the home that served as your principal residence for at least two of the last five years, you can exclude up to $250,000 of the gain you received from the sale. If you are filing a joint return, that amount is up to $500,000. When buying your new home, you may qualify for a credit of up to $6,500 if you lived in the principal residence for at least five consecutive years out of an eight year span, the time frame ending on the date of the purchase of the new home.
4. Account For All Your Income And Employees. While it’s easy to remember the employees you pay taxes for on a regular basis, it may be similarly easy to forget those employees you don’t pay regular taxes for. Cleaning staff, domestic help, gardeners, basically anyone you employ that makes more than $1,700 a year is considered an employee for payroll taxes purposes. As a result, you should be filing Schedule H and withholding Social Security and Medicare on those employees. In addition, you should be accounting for all the income you receive, regardless of whether you get a W-2 or 1099 documenting it. One of the biggest targets of the IRS currently is unreported income. The IRS can match your bank deposits with your reported income to determine whether there is extra money coming from an unreported source. Getting caught in a situation like this can result in civil and even criminal sanctions.
5. Keep Your Receipts. This is one of the most important things to do throughout the year and will save you trouble while preparing your taxes. To claim deductions for charitable contributions, the receipts are a necessity in case of an audit or even just to determine how much you contributed annually. Receipts are also beneficial for documenting your medical expenses. If your health care expenses total more than 7.5% of your adjusted gross income, the excess is deductible. Expenses can include health insurance premiums and long-term care plans.
While some mistakes may land you in jail or paying a hefty fine, most of the tax mistakes really just end up costing you money in the end. These five common mistakes may not apply to you in every situation, but they can serve as examples for other mistakes that may be made in filing your taxes.
The most important key to answering the tax preparation riddle is to do research and potentially seek outside tax help if necessary, whether it’s with an accountant or tax filing software. Don’t let yourself fall in to the pitfalls of tax preparation! Just document as much as possible, look up some important deductions, and focus on how you can lower your tax bill, one step at a time.
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