If your objective is to pay the least amount of income taxes, then you need to be aware of common tax mistakes. Here are seven to watch out for:
1. Maintaining poor tax records. Don't rely on your memory to keep track of deductions. During the year, accumulate tax receipts and notes concerning deductions in one place.
2. Withholding too much in taxes. When you receive a refund, you've given the government an interest-free loan for the year. Consider reducing your withholding and investing the extra money.
3. Not contributing to your company's retirement plan. Not only will the plan help you save for retirement, but it may also help reduce your current-year tax bill. For instance, for 2022, you may contribute a maximum of $20,500 to a 401(k) plan, or $27,000 if you are at least 50 years old (for 2021 the figures were $19,500 and $26,000 respectively). If you're in the 37% tax bracket, contributing $20,500 reduces your current-year tax bill by $7,585.
4. Failing to bunch deductions. It only makes sense to itemize deductions if your total deductions exceed the standard deduction amount, which for 2022 is $25,900 for married taxpayers filing jointly and $12,950 for single taxpayers. In addition, some deductions must exceed certain thresholds - for example, medical expenses are only deductible to the extent that they exceed 7.5% of adjusted gross income and the deduction of some miscellaneous expenses are limited while others have been eliminated.
Many expenditures can be bunched into one year or another to take advantage of these limits. For instance, if your total itemized deductions are slightly below the limit, you might consider prepaying property taxes or state estimated tax payments.
5. Overlooking charitable contributions. In addition to cash and property donations, you may deduct mileage, parking fees, postage, and long-distance phone calls made while performing charitable work.
6. Not considering filing separate returns. In some situations, it may be more beneficial for a married couple to file separately. Once you file jointly, your return can't be amended to file separately, so calculate your tax both ways before filing.
7. Forgetting deductions carried over from prior years. Don't forget about items you carried forward because you exceeded annual limits, such as capital and/or passive losses, charitable contributions, and alternative minimum tax credit.
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