Many taxpayers had an unpleasant surprise after filing this year. Their refund amount was lower than expected and, in some cases, filers ended up owing money at the end of the year.
While some taxpayers benefited from the Tax Cuts and Jobs Act of 2017, others didn’t fare as well from the tax reform. The tax law instituted significant changes, such as larger standard deductions, lost personal exemptions and new tax brackets. And with confusion and uncertainty over the updates to the tax code, not everyone was prepared for how the reform would affect their bottom line in 2018.
But there’s a silver lining: Next year’s tax-filing season may be better. “Now that we’re going into the second year of it, people have more idea of what to expect,” says Joanna Powell, managing director with accounting firm CBIZ MHM, LLC in Boston. Still, if your tax experience wasn’t positive this year, it’s crucial to make sure you don’t commit common filing pitfalls.
[Read: 7 Last-Minute Tax Tips to Lower Your 2018 Bill.]
Here are tax-filing mistakes to avoid next year:
— Withholding too little from your paycheck.
— Filing before all your forms arrive.
— Missing lucrative deductions and credits.
— Forgetting how life events affect taxes.
— Neglecting to seek help.
Withholding Too Little From Your Paycheck
The biggest mistake filers made last year was not adjusting their withholding after the tax reform bill was passed. “A lot of people last year were surprised that they were under-withheld,” says Grey Merryman, senior director of planning at Wells Fargo Private Bank.
Those who previously had large itemized deductions were most likely to be negatively impacted by the new withholding tables issued in the wake of tax reform. It fell to workers to proactively make adjustments to how much their employers were withholding for income tax, a step that many people failed to do. As a result, more than 20% of taxpayers were estimated to be in danger of under-withholding and owing taxes, according to a July 2018 report from the Government Accountability Office.
“Some people like to be over-withheld and have a forced savings plan,” says Tim Spiess, partner-in-charge of the personal wealth advisors practice with the accounting firm EisnerAmper LLP in New York City. If that’s your approach to taxes and you didn’t get the refund you wanted this year, now is the time to talk to your employer’s human resources office about adjusting how much is withheld from your paycheck.
Filing Before All Your Forms Arrive
Some tax forms, such as a 1099 form for health savings account payouts, may come later in the tax season. However, by the time they arrive, some early filers have already finished their returns.
“A lot of these forms might not have a tax effect,” Powell says. However, the government will receive a copy of the form and if they don’t see it listed on your return, you could get a notice from the IRS. “That’s a little scary,” Powell says.
Avoid making this misstep next year by creating a list of all tax documents you received for 2018. Then, you can use that as a guide next year to ensure you have all necessary documentation before submitting your return.
[Read: The Pros and Cons of Standard vs. Itemized Tax Deductions.]
Missing Lucrative Deductions and Credits
Start setting money aside now in 401(k) and IRA accounts which can offer significant tax savings. Money placed into traditional retirement accounts is eligible for an immediate deduction and is then taxed in retirement. Meanwhile, Roth accounts are funded with after-tax dollars, but can be used tax-free in retirement.
Those with qualified high-deductible health insurance plans are also eligible to open a health savings account, which offers a deduction now as well as the opportunity to use funds tax-free for health care costs in the future. “A lot of people missed out on some tax savings because they under-contributed (to these accounts),” Speiss says. In 2019, workers can contribute up to $19,000 to most employer-sponsored retirement funds. Contributions to tax-advantaged IRAs is capped at $6,000 for those younger than age 50 and $7,000 for those age 50 and older. Health savings accounts can be funded up to $3,500 for those with individual health plans and $7,000 for those with family health plans. In both cases, those age 55 and older are entitled to $1,000 catch-up contributions.
Small business owners should be sure they also don’t miss out on the qualified business income deduction, which allows them to deduct 20% of their business income from their personal taxes. However, they may also want to consider incorporating in 2019. “The corporate tax rate is now 21%, and this is a big deal,” Speiss says. That means some business owners may be able to see significant tax savings by changing the structure of their business.
Forgetting How Life Events Affect Taxes
While reviewing your 2018 taxes can be useful in preparing for next year, “Individuals’ tax situations can change from year to year,” Powell says.
For instance, getting married at any time this year — even at the end of December — will mean you’ll have only two filing options next year: married filing jointly or married filing separately. Buying a house, having a baby or starting a business can also affect how much you owe in taxes, and you may want to review and adjust your tax withholding accordingly.
[Read: 10 Tax Write-Offs You Shouldn’t Overlook.]
Neglecting to Seek Help
As someone’s income and assets increase, it becomes more important to use appropriate professional help. Having a CPA and a financial advisor is beneficial, but ideally, a single person will be looking holistically at your accounts. That person will then be able to advise on the tax implications of certain investment strategies or how to reduce taxes by making smart use of income and savings. “The overarching theme is that you have someone looking at your overall financial plan,” Merryman says.
Having the right professionals in your corner can ensure you don’t make these common tax-filing blunders next year or commit any other money mishaps in the months to come.
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5 Common Tax-Filing Mistakes to Avoid Next Year originally appeared on usnews.com
