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9 Costly Tax Mistakes to Avoid – Motley Fool

Many mistakes, such as typing in the wrong words in a crossword in the pen, or calling someone with the…

Many mistakes, such as typing in the wrong words in a crossword in the pen, or calling someone with the wrong name can be annoying and even embarrassing. However, some errors can be extremely costly. Many tax errors fall into that category.

Here’s a look at a bunch of common tax errors that can cost you hundreds or even thousands of your earned dollars. If you can avoid doing them, you can minimize costs and hassle and increase your financial security.

Image Source: Getty Images.

no. 1

. Do not keep track of your expenses and receipts

You will regret if you do not have a receipt for costs that you can deduct throughout the year. Come on tax-prep time, you’ll either spend more time looking for that documentation than you want or need, or you’ll go without it, you’ll lose your deduction.

Make your financial life easier by keeping a “tax” folder throughout the year, where you release any receipts or other documents that will support your tax return. For example, keep receipts from your charitable and medical expenses to support any deductions, along with childcare receipts and travel receipts for deductible expenses. When the tax time comes, you’re ready.

no. 2. Not using pension accounts

An easy way to lose hundreds or thousands of dollars in tax savings is not to utilize tax-retired pension-saving accounts, such as IRA and 401 (k) s. There are two main types of each – Roth and the traditional – which offers two different types of tax breaks. The traditional IRA or 401 (k) reduces your current taxable income and gives you an estimated tax rate, while Roth IRA or 401 (k) offer tax-free withdrawals at retirement. By 2018, the grant limit for both types of IRAs is $ 5,500 for most and $ 6,500 for the 50 and over. Meanwhile, a 401 (k) has a much more generous grant limit. By 2018, the limit is $ 18,500, plus an additional $ 6,000 for the 50 or older.

The table below shows what you can accumulate in different periods if you are aggressively withdrawing funds and your investments average 8% annual growth: $ 19,000 $ 19,000

$ 15,000 Invested annually

19659017] $ 156,455

$ 234,682 [19659012] 15 years

$ 146,621

$ 293.243

$ 439,864

20 years

$ 247,115

$ 494,229

$ 741.334

25 years

$ 394.772

$ 394.772

] $ 789,544

$ 1.2 million

30 years

$ 611,729

$ 1.2 million

$ 1.8 million

35 years

$ 930,511

$ 1.9 million [19659014] $ 2.8 million

40 years

$ 1.4 million

$ 2.8 million

$ 4.2 million

Calculations by Author

If you contribute With $ 10,000 to a traditional 401 (k) and you are in a 24% tax concession, you avoid paying $ 2,400 in advance. If you accumulate $ 400,000 in a Roth IRA for many years, you can withdraw it without paying taxes on any of it.

no. 3. Ignore your holding periods when investing

We tend to think a lot when buying a stock and when we sell it, but we often ignore how tall we have kept the. Your holding time is valid in the tax world. At present, most of us face long-term capital gains tax rates (for qualifying assets held at least one year and one day) of 15%. Short-term capital gains are facing your usual income tax rate, which may be more than twice as high. Do not base any sales decisions solely on taxes, but include taxes in your thinking. If you plan to sell a stock you’ve been in for 11 months, consider whether it’s a good idea to hang out for another month and one day.

no. 4. Failure to Compensate Profits with Losses

Would you think there is little opposition to capital losses? Well, they can often be used to reduce your taxable profits – potentially to zero. Imagine you have $ 7,000 in profits and you sell enough holdings to generate a loss of $ 5,000. That would make you face taxes of only $ 2000 in profits. If you have bigger losses than profits, you can empty all your winnings and then reduce your taxable income by up to $ 3,000 of your losses and since transfer any losses to next year. This strategy is best applied throughout the year, not just at tax times. A particularly good time to sell a certain holding for profit or loss may be in February or August, not right at the end of the year.

Please note that if you plan to buy back some of the lost shares you sold, be sure to wait at least 31 days, so that you do not end a “laundry” that does not count.

Failure to obtain available tax credits can cost you thousands. Image Source: Getty Images.

no. 5. Do not take tax credits available to you

Tax credits are sometimes less understandable than tax credits, which is a pity because they are much more powerful. While a $ 1,000 installment can save you $ 240 if you are in a 24% tax concession, a $ 1,000 tax can reduce your tax cost by $ 1,000.

There are tax credits for all kinds of things, such as education costs, energy-efficient home improvement, adoption of children, childcare and caretaker care, and much more. A particularly valuable credit, if your income is low enough to qualify, is earned income tax, which can reduce your income by more than 6,000 dollars. If you have children or other caregivers, you have more tax credit options: Child and Dependent Care Credit offers up to $ 3,000 for care of a dependent addiction and up to $ 6,000 in total, for two or more. And child benefit credits offer $ 2000 for each qualified child you have under 17 years (at the end of the tax year) – with certain rules and restrictions again, of course.

no. 6. Do not use a Flexible Expense Account (FSA) or a Health Requirements Account (HSA)

If you have a lot of healthcare costs – and even if you only have a modest amount of them, consider using a flexible expense account. It accepts dollars before tax and allows you to use them tax-free on qualified healthcare costs. Note that you must spend most of your contribution each year or if you lose it. But if you plan well, you can save a lot on taxes. For example, if you expect to pay $ 2,000 on braces for your child this year, stock as much in your FSA and you can avoid paying taxes on it. The grant limit for healthcare authorities is $ 2,650 for 2018.

Better is still a health account, which requires that you have a qualifying high-deductible health insurance. You finance it with money before taxes, lowering your tax return. These funds can be used tax-free for qualified healthcare costs and can accumulate over the years, invested and growing. When you reach 65, you can withdraw money from an HSA for any purpose, paying regular income tax rates on withdrawals. In other words, it will ultimately become an extra pension saving account. The HSA contribution limit for 2018 is $ 3,450 for individuals and $ 6,900 for families. The 55 or older can contribute an additional $ 1000.

No. 7. Do not Take Your Mandatory Minimum Distribution (RMD)

If you are approaching 70 years and have retirement accounts, such as traditional IRA and 401 (k) s, that feature requires minimal distributions, be sure to start taking them time and take them every year. The deadline for withdrawing your distribution is 30 December, except for the year when you become 70 1/2. For that year you have until April 1st the following year to take your RMD. (It may be better to take it before the end of December, regardless of whether you end up taxing on two dividends in a year, which can drive you to a higher tax console.) Many like to set up their accounts so their RMD is automatically sent to them every year.

Fails to comply with RMD rules, and you can meet costly penalties. The penalty is a part of the amount you did not withdraw on time, so if you were to withdraw $ 8000, you’re looking to get $ 4000 off! (Note that IRS allows you to appeal a suspension.)

No. 8. Increase your chances of being reviewed

You may not realize it, but you may do different things that increase your likelihood of being reviewed. For example, if you do not send a return or report without income, you can trigger an audit. If you fail to submit a tax return for any reason, the IRS can contact and ask you. You must leave a return, even if you have no income or no tax.

To be messy with your tax return or to be wrong in it can also increase your chances of being reviewed. If IRS’s computers or workers can not determine if a particular squiggle is a 6 or an 8, your return can be flagged for a closer look. If IRS mathematics differs from yours, it may also trigger an audit. Double-check your mat and make sure you enter the correct number – and you park them in the correct boxes. One way to improve the accuracy of your return is to use tax readiness software instead of preparing your return by hand – and electronically submit your return. Remember to sign your return as well, as unsigned returns can also pay attention to the IRS.

Do not delete any information needed, such as data from 1099, form your brokers and other financial institutions send you. Not reporting income or omitting other information may raise flags at the IRS and make you review. Units that pay you usually send a report about it not only to you but also to the IRS – if they report payroll, dividend income, interest payments or anything else. The IRS then expects you to return to all these payments.

no. 9. Not Employing A Professional

A final common – and potentially costly – mistake many people do is not hiring a tax pro to prepare their returns. Sure, it will cost something – but the benefit can more than compensate for the cost. After all, most of us do not feel the tax code inside and out, and we only think of taxes for a few weeks of the year, at most. A knowledgeable taxpayer is making changes to the tax code, is good at strategizing and finding ways to shrink tax bills and deepen in the tax world throughout the year.

Do not just employ anyone, either. Ask for recommendations, and consider hiring a “Registered Agent”, a tax process licensed by the IRS, which is authorized to represent you before IRS if needed. You can find one via the National Association of Enrolled Agent’s website.

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