Karen Cheney for Money writes: Slipping
up on your taxes can exact a high price. Some of the most frequently
made blunders—silly things like entering the wrong Social Security
number, spelling your name incorrectly, or putting in the wrong account
numbers for direct deposit—hold up processing your return and any refund you might be due. That’s bad enough.
Other
common mistakes cost you more than time. They cost you real money. Just
by overlooking deductions, taxpayers give up an average of about $600
at tax time, according to research
by Youssef Benzarti, an economics Ph.D. candidate at the University of
California at Berkeley. He found that many people don’t itemize when
they should—therefore passing over breaks such as the write-off for
investment-related expenses. “Or,” says Benzarti, “they take only the
easy deductions like mortgage interest and state taxes” and not
harder-to-prove ones, such as charitable donations and use of a home office.
With
April 15 fast approaching, MONEY consulted with a slew of tax pros to
find out what other savings taxpayers like you typically miss. Review
your return to make sure you don’t commit any of these costly errors.
1. Taking the wrong tax write-off for college
There are two mutually exclusive breaks you can use to ease the pain
of paying for higher ed. People sometimes automatically take the $4,000
tuition and fees deduction because it sounds like the most money. But
the $2,500 American Opportunity Tax Credit is typically a better deal,says Melissa Labant, director of tax advocacy for the American Institute
of CPAs. Here’s why: The tuition and fees deduction lowers the portion
of your income subject to tax. “But a tax credit yields a
dollar-for-dollar reduction in the taxes you owe,” says Labant.
You’re eligible for the full AOTC if you spend $4,000 on tuition and
fees, as you can slash your taxes by 100% of the first $2,000 and 25% of
the next $2,000. Also, your adjusted gross income must be $80,000 or
less if single, $160,000 or less if married and filing jointly. (Partial
credit is available for incomes up to $90,000 for singles and $180,000
for couples filing jointly.)
One caveat: You can’t take the AOTC for more than four years for any one dependent. So if your kid takes longer to graduate, you’ll be glad to have the tuition and fees deduction for year five.
2. Paying too much tax on investments you sold
At its simplest, your cost basis for figuring out the tax liability
on an investment you’ve sold is the original price you paid for that
investment. It’s subtracted from the price at which you sell in order to
calculate capital gains or losses. Where it gets thorny is when you
have to adjust your shares for such things as stock splits, reinvested
dividends, capital gains distributions, and sales commissions.
Brokerages and mutual fund companies have been required to track cost
basis for their customers since 2011 and 2012, respectively. But you
have to calculate cost basis yourself on shares bought before those
dates. Unfortunately, many investors forget to do that and end up paying
more capital gains than they owe when they sell, says Kris Gretzschel,
CPA and manager of the tax and financial planning team for Wells Fargo
Advisors.
Say you purchased 100 shares of a stock for $100 per share and paid a
$20 commission; your original cost basis is $10,020. Let’s assume you
then received a $3-per-share dividend each year for five years that you
automatically reinvested. Your new cost basis is $10,020 plus $1,500 ($300 times five years) for the dividend, or $11,520. Now say you sell
the stock for $18,000. Using the original cost basis instead of the
adjusted one, you’d be paying taxes on $7,980 in gains vs. $6,480.
Online calculators like the one at CalcXML.com can help you tally up your cost basis. Or you can use a service like Netbasis.com, which charges $25 per transaction.
3. Leaving money on the table when changing jobs
High earners who had more than one employer during the year, this
one’s for you. In 2014 each employer had to withhold 6.2% in Social
Security taxes on the first $117,000 in income (the limit is $118,500 in
2015). “But that could lead the employers to withhold more taxes than
you’re required to pay,” says Suzanne Shier, chief wealth planning and
tax strategist for Northern Trust in Chicago.
Let’s say you worked for Company A for half the year and earned
$62,000, then moved to Company B and earned $70,000. Each company would
withhold taxes on your total earnings, but you should have paid taxes on
only $117,000, not $132,000, and you would have overpaid by $930.
Tax prep software should catch this one, but paper filers may get
snagged. Luckily, it’s an easy fix: “You can claim the money as a credit
on line 71 of your 1040,” says Shier.
4. Blanking on what you saved
It’s not uncommon to forget money socked away in an IRA the previous
year, especially since your broker doesn’t send you paperwork confirming
contributions (IRS Form 5498) until after you file your taxes.
But if you forget to report a contribution to a traditional IRA
and you qualify for a deduction—see IRS Publication 590-A—you will miss
a break on your current taxes. If the contribution is nondeductible,
you still need to file Form 8606 so that you don’t pay income taxes on a
portion
of your withdrawals during retirement, notes Gretzschel. So call your brokerage to refresh your memory about 2014 contributions.
5. Missing out on money back for your home office
Moonlighters often opt to forgo the home-office deduction, both
because it’s a hassle to keep track of the paperwork and because they’re
worried about putting up red flags to IRS auditors.
As of last year, however, an alternative, simplified version of the
write-off allows you to deduct $5 per square foot of office space up to
$1,500 with no documentation whatsoever. Unlike the old method of
calculation, no depreciation is taken on your home, which means the
break will not affect capital gains when you sell, says Eric Bell, a CPA
with Jones & Roth in Eugene, Ore.
6. Overpaying taxes on retirement distributions
People 70 or older and retired are required to withdraw certain
amounts of money from 401(k)s and IRAs each year. When you begin
receiving distributions, you have the option to have income taxes
withheld. Call it a senior moment, but retirees sometimes forget that
they chose to have taxes taken out, says Gretzschel.
They don’t look closely enough at the 1099-R forms and therefore
don’t input the taxes paid into their 1040. As a result, they could end
up paying the taxes twice—and the IRS may or may not catch the mistake,
Gretzschel says.
7. Overlooking online largess
There’s been a big increase in online charitable giving, but many
people forget to save emailed receipts as they do ones that come in the
mail. “If you don’t have an organized electronic life, it’s hard to get
receipts together,” says Shier.
She recommends searching your email in-box for “gift” and “donation.”
If you are in the 28% bracket and discover $250 more in donations to
report, you’ll reap $70 in tax savings.
8. Ignoring the write-off that is right in your hands
Those who itemize can write off certain investing and tax
expenses—including tax-prep software, financial adviser fees, and rent
on a safe-deposit box where you store securities—that exceed 2% of your
adjusted gross income.
Bell says that those most likely to overcome the 2% hurdle on these
“miscellaneous expenses” have modest income but a fairly large taxable
portfolio that they pay an adviser to manage; many retirees who
super-saved fit that bill. If you have an AGI of $100,000 and you have
$5,000 in investment-adviser fees (equating to 1% on a $500,000
portfolio), you’ll have to exclude the first $2,000, but can deduct the
remaining $3,000.
While calculating your costs, don’t forget that you can add
subscriptions to professional publications, business magazines, and
investing magazines—including the one you’re reading now.