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All Contents © 2019The Kiplinger Washington Editors
By Sandra Block, Senior Editor
Kevin McCormally, Chief Content Officer
| Updated February 2016
For as much as Americans complain about paying taxes, we sure leave a lot of money on the table—thanks to poor tax planning, sloppy filing and the sheer complexity of the tax code. Last year, the IRS reported that it was holding on to $1 billion in unclaimed refunds for folks who didn't file a tax return in 2011.
Some taxpayer mistakes, such as providing the wrong Social Security number on your return, will simply delay processing of your return (and, potentially, your refund). But other mistakes, including the nine featured here, may cost you more than time. Plan ahead and take extra time with your return to avoid these expensive taxpayer errors.
Each year, about 75% of all workers receive tax refunds in the spring, proof positive that too much was withheld from their checks during the previous year. In so doing, you’ve given the government an interest-free loan when you could have been putting that money to work for you throughout the year.
To fix your withholding, just ask your company’s payroll office for a Form W-4, or download a W-4 form here. The more "allowances" you claim on the form, the less tax will be withheld. After you give a W-4 form claiming extra allowances to your employer (not the IRS), your take-home pay should rise on your next payday.
Exactly how many allowances should you claim? Answer our easy-to-use Tax Withholding Calculator’s three simple questions, and we'll estimate how many additional allowances you deserve. We'll even show you how much your take-home pay will rise starting on the next payday if you claim the allowances on a new W-4.
If you can’t get your act together by the April 18 deadline (April 19 if you live in Massachusetts or Maine), file for an extension via Form 4868. You can request the extension by phone, online or by mail. An extension will delay your filing deadline until October 15. It’s important to remember, though, that while an extension gives you more time to file, it doesn’t give you more time to pay what you owe. That isn’t a problem if you, like most taxpayers, are due a refund.
But if you owe, filing for an extension buys important protection. If you fail to pay the amount due with your request, you'll start racking up underpayment penalties of 0.5% a month on the unpaid amount, up to 25% of the unpaid balance, plus interest (currently 3%). Still, that's a lot better than the consequences of failing to file altogether, which entails a more onerous penalty of 5% a month on the unpaid amount, up to 25% of the unpaid balance, until the return is filed.
The IRS says math mistakes are some of the most common filing flaws. The IRS usually corrects these errors, but, in the meantime, your return (and refund) could be delayed. If a math error results in an underpayment, the IRS will require you to pay the additional amount, plus interest accrued since the due date of your return.
If you file on paper, double-check your math before you file. For e-filers, your tax software will do the math for you. (See Which Tax Software Is Best for You?)
This is another common error that can delay your refund. There are five filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. Filing as head of household? You must claim at least one dependent on your return. As married filing jointly? Be sure to include your spouse’s information on the return.
Using the wrong status could cause the IRS to reject your return, delaying your refund or triggering interest and penalties on the amount you owe.
This year, for the first time, same-sex couples who are legally married will be treated as married for purposes of filing their tax returns on the federal and state level. Previously, couples who lived in states that didn’t recognize same-sex marriage had to file as single individuals, even if they filed as married couples on their federal returns. Last June, the Supreme Court ruled that states were required to recognize same-sex marriages that were legally performed in another state, even if the state didn’t recognize same-sex marriages.
If you worked for an employer last year, you probably had taxes withheld from your paycheck. But don’t overlook other sources of taxable income, such as gambling winnings, canceled debt and unemployment benefits. If you received a Form 1099-MISC from a casino or fantasy football Web site, the IRS received one, too. Ditto for 1099-DIV and 1099-INT forms from your financial institutions for income from savings and investment accounts. (See 9 Surprising Things That Are Taxable and our Is It Taxable? quiz to learn more.)
The IRS will adjust your return to reflect unreported income, and you could be hit with a penalty that’s equal to 20% of your underpayment. For example, if your omission caused you to understate your tax liability by $500, your penalty would be $100.
A former IRS commissioner told Kiplinger that missing out on this one break costs millions of taxpayers a lot in overpaid taxes.
If, like most investors, you have mutual fund dividends automatically used to buy extra shares, remember that each reinvestment increases your tax basis in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends—once when they were paid out and immediately reinvested, and again when they are included in the proceeds of a sale.
If you're not sure what your basis is, ask the fund for help. (Funds must now report to investors the tax basis of shares redeemed during the year. For the sale of shares purchased in 2012 and later years, funds must also report the basis to the IRS.)
Did you owe state tax when you filed your 2014 returns in the spring of 2015? Then, for goodness' sake, remember to include that amount in your state-tax deduction on your 2015 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments during the year.
Direct deposit will allow you to get your refund more quickly, and you won’t have to worry about your check getting lost in the mail. Just make sure the account and routing numbers are correct. If your refund ends up in someone else’s account because of an incorrect account or routing number on your return, you’ll have to work with your financial institution to track it down, and there’s no guarantee you’ll find it. The IRS accepts no responsibility for misdirected refunds.