Common Tax Errors You May Have Made

Posted by Rebekkah On May - 6 - 2013 0 Comment

There are a number of common errors that taxpayers make when completing tax returns on their own. Obviously, you must enter the correct social security number and filing status, spell your name correctly, and properly enter the routing and bank account numbers if making or receiving electronic payments. These are clerical errors that can happen, but there are also common mistakes resulting from a lack of tax knowledge.

Rental Properties

Given the decline in housing values, many homeowners have opted to place their property for rent rather than to sell. If you own residential rental property, you should know the proper basis upon which to calculate the annual depreciation deduction. While tax software can correctly calculate depreciation, it cannot tell you the depreciable basis. It’s easy to mistakenly enter the purchase price of the property instead.

The proper basis is the lesser of cost or market. If the purchase price was $400,000, but the value was $300,000 at the time the property was readied for rent, then the figure of concern is $300,000. You must then subtract the value of the land to arrive at the depreciable basis.

Roth IRA Contributions

While the annual contribution to a Roth IRA is not deductible, you should know if you are eligible for the retirement savings contribution tax credit. A quality software product will make this calculation, but for those who complete a paper return, this credit is easily overlooked. Refer to the instructions for IRS Form 8880 for more information.

Remain Organized

Individuals who have their return prepared professionally can save on preparation fees by providing their tax documents and papers in an organized manner and, if possible, all at the same time. This is particularly important if you have a complicated financial life. If you use the same accountant each year, it is likely that he or she will question whether items have been overlooked that were present the previous year. The fee clock is ticking while the accountant plays detective attempting to obtain or clarify information from the client, financial advisor, or broker.

Sometimes it is Wise to Wait

If you anticipate receiving consolidated brokerage statements reporting dividends, interest, and stock sales, it may be wise to file later in the tax season. It is common for brokers to issue corrected or revised statements at least once prior to April 15. You will either have to amend the recently filed return or pay an accountant to do so. In this case, filing early is not a mistake, but it can be annoying and costly.

Form 1099-MISC

If you pay more than $600 for services or rents, you must file Form 1099-MISC reporting these payments to the recipient. There are penalties for neglecting to file.

When filing Schedule E to report rental income and expenses, the taxpayer should note the question in Part I asking if any payments were made during the year that requires the filing of Form 1099. Software programs often default to a “no” response. You may easily forget the payments for work the neighborhood handyman completed. This filing requirement also applies to sole proprietor taxpayers who file Schedule C, “Profit or Loss from Business.” You will note the same question on this form regarding payments to others.

Taxpayers who are required to issue Form 1099-MISC can find services online that, for a reasonable fee, will prepare the forms, mail them to the recipients, and electronically submit them to the Internal Revenue Service.

Form 1099-C

Normally when a creditor cancels a debt, the taxpayer-debtor has income. The provision in recent years allowing the exclusion of cancelled debt from income has helped many taxpayers who experienced job losses or other financial setbacks. Many taxpayers mistakenly assume that debt cancelled on a primary residence is automatically excluded from income. The mortgage debt must have been for the purchase or improvement of the residence, and the debt must have been secured by the residence. If the proceeds of the debt were used to purchase an automobile or pay down credit cards, the debt cancellation does not qualify for exclusion from income under the “qualified principal residence” provisions. Refer to IRS Publication 4681 for more information.

Tax laws can be complicated and change frequently. Consult a tax professional concerning individual tax circumstances.

ABOUT THE AUTHOR:

This article was written by Richard Craft, an MBA student who loves helping people make better financial decisions for their future, both short-term and long-term. He writes this on behalf of Global Tax Services, the number one provider of IRS tax relief services. Check out their website today to see how they can help you!

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