As the conclusion of the tax season arrives, it’s crucial to reflect on common tax mistakes that can have significant consequences.
In this blog post, we’ll explore three epic tax return fails that have shocked the financial world. From unreported income to late payments and missed tax savings opportunities, we’ll provide insights on how to avoid these pitfalls and keep your financial affairs in order.
1. Failure to Report All Income Can Lead to Audits and Penalties
The Importance of Reporting All Income Accurately
The IRS receives records of your income from sources like W-2s and 1099s. Failing to report all of your income can trigger an audit and result in penalties and interest charges.
In some cases, these penalties and interest can be as much as 25% or more of your actual tax liability. To prevent sleepless nights and unexpected tax bills, ensure that you report all of your income accurately.
Lower Threshold for Reporting Non-Traditional Payment Networks Starting in 2023
Non-traditional payment networks such as Venmo and PayPal have a lower threshold for reporting received payments, decreasing from $20,000 per year to $600 per year. If you receive $600 or more in payments from a single payment network, it will be reported to the IRS as income.
Make sure to include this income on your tax return to avoid potential issues with the IRS.
2. Avoid Late Payments and Penalties
Debunking the Extension Misconception
Many individuals mistakenly believe that filing an extension allows them to delay their tax payments until October 15th. However, this is not the case. To avoid late payment penalties, it’s essential to pay 100% of your estimated tax liability by the original due date of April 15th.
If you’re unsure about your exact tax liability, make an informed estimate and pay more than what you expect to owe. By doing so, you can avoid penalties and interest charges.
Want to learn more about how tax extensions really work and whether one makes sense for your situation? Check out our full guide to filing an extension.
The Importance of Quarterly Estimated Payments
For those subject to quarterly estimated payments, it’s crucial to make timely payments in the correct amounts. Failure to do so may result in an estimated tax penalty. Stay on top of your estimated tax payments and adhere to the required schedule to prevent any penalties.
3. Maximize Tax Savings Opportunities
Don’t Overlook Deductions and Credits
Take advantage of all available deductions and credits that you may be eligible for.
Self-employed individuals can consider deductions such as home office expenses, mileage, and cell phone usage. W-2 income earners should explore deductions like charitable contributions and medical expenses.
Additionally, consider tax credits for investments in electric vehicles or solar energy. Learn more about the Residential Clean Energy Property Credit. Make sure you optimize your tax savings by taking advantage of these opportunities.
We’ve put together a collection of blog posts all around tax deductions and credits to help you explore these topics in more detail.
Optimize Retirement Savings
One significant area where taxpayers often fail to maximize their tax deductions is retirement savings. Whether you have an employer-sponsored retirement plan or a self-employed retirement savings plan like a SEP or solo 401(k), ensure you make the most of the tax benefits available.
Optimize employer matches, strike a balance between Roth and traditional savings, and explore the IRA deduction beyond your employer plan.
For those with higher incomes, there are even more opportunities to reduce tax liability through strategic retirement planning. Explore our guide to tax-advantaged retirement accounts for high earners to learn how to make the most of your income today and in retirement.
Roth IRA plans offer tax-efficient growth and tax-free withdrawals, providing substantial long-term tax savings. Learn more in our article: Why Roth IRA Conversions May Make Sense.
Conclusion
Avoiding epic accounting failures is essential for maintaining a healthy financial outlook. By accurately reporting all income, making timely payments, and capitalizing on tax-saving opportunities, you can navigate the tax landscape with confidence.
Remember to stay informed, consult professionals when needed, and make strategic financial decisions that will lead to long-term success. Contact one of our team members today to get your finances in order!