First and foremost I would like to let everyone know that I had the opportunity to write a guest post for Trees Full of Money about Mail in Rebates, so please go check it out.
Secondly, my new friend Bruce is a an accountant over in MO and he was kind enough to agree to write a guest article for me regarding the common mistakes people make with their taxes. I am proud to present it here today. Enjoy!
Well here we are, looking into the mist of the end of the filing season (roughly 5 weeks away). As a preparer in my one-person business, I see and hear of many people making minor mistakes. The IRS itself has their own list of common mistakes. This list consists of forgetting Social Security Number/s, checking only one filing status, using an incorrect Tax Table, simple math errors, incorrect routing and account numbers for direct deposit or EFW, forgetting to sign the return, and forgetting W-2’s and/or checks, this is some really basic stuff. Now if you don’t want to fall into the ranks of those who helped create this list, buy a Preparation Software (I personally recommend Turbo Tax) and e-file. Or you can find a qualified preparer. (I talk about this subject on my web site)
With all that in mind, I would like to talk about some mistakes that are common among those who file your own returns but don’t make it to the IRS list. These are common mistakes made not only by self-filers, but a vast majority of everyone who files. No, I am not knocking anyone here. Communication and knowledge is key when preparing a tax return.
One common mistake is going to a “Fast Food” type preparation office. The chances that your preparer will have had more than eight weeks of training is slim. They are taught how to use the software, and not much else. Often the knowledge base of tax law is not as good as you could find elsewhere. I have also heard from my new clients that their people skills aren’t as good as they should be. These places can be fine but even they sometimes make the mistakes that are on the IRS list. At best, these mistakes cause you to over pay your tax liability. At worst, you end up in an audit. (I am currently working on an article to get free audit insurance.)
Another common mistake that didn’t make it onto the IRS list was failure to itemize. In the past, the General Accounting Office has found that filers who used the standard deduction instead of itemizing paid the Internal Revenue Service almost $1 billion a year more than they should have. It is my opinion this is why “not itemizing” didn’t make it on the IRS list of common mistakes. Instead of itemizing most people chose to use the standard deduction. Using the standard deduction is faster, thus easier to get the return done. (Now I realize our government is run on a deficit, but I am pretty sure I chose not to help them pay it off. Let them learn how to manage cost better, that’s what they’d tell another business or one of us.) There is a lot to itemizing but in the long run it is worth it to you. Not everyone can, but everyone should weigh both options. With that, this Form (Schedule A-Itemized Deductions) has a great deal of common errors made that are not discussed by the IRS. But that is a series of articles and I don’t wish to over extend my invitation here.
Another common mistake that I am seeing this year more so than in the past is incorrect cost basis with inherited stocks and bonds sold. Let’s say you inherit a $10,000.00 bond and you sell it a few months after receiving it. Did you just make $10,000.00? When you get a 1099-MISC it says that you did, but did you? The answer is nope. This whole question becomes complicated somewhat. Let’s say you inherited the Bond on 06/05/2007 and decided to sell it on 10/15/2007. Sometime in February you received a 1099-MISC that says you were paid gross earnings of $10,000.00 and had no taxes withheld from the payment. At some point you received (I hope) documentation from the Broker/ bank showing your sale with a cost basis of “unknown”. Guess what? Most people just go on.
You only owe for the income made while you had the bond. Whomever you inherited the bond from bought it originally for less than it’s face value. Over time it appreciates and is worth (we hope) its face value of $10,000.00 on a set date. When you inherited the bond on 06/05/2007 its FMV (Fair Market Value) was $9,789.99. When you sold the bond (cashed it in) it was worth $10,000.00. (the chances of that are astronomical by the way) If the answer to our question, “did you make $10,000.00” is nope, then what did you make? $210.01. Now a lot of people just put the income as it reads on the 1099. Others will actually put the information (and this example has a lot on one line), but using the tables, if FMV is “unknown”, your cost basis is zero. The form says you made a lot more than you did. Your Broker/Bank (if not you yourself) can find the FMV on the date you took possession of the asset. For one I’d rather pay tax on my earned income of $210.01, than pay the tax on ten grand at roughly 15%.
If anyone has any questions please contact me. I am glad to help and information is free. I have a sign in my office that reads: “No I don’t know everything… But I know where to find it.”
Thanks for the opportunity to share this and I look forward to being invited back.