7 Common Tax Mistakes to Avoid
Avoid these 7 Common Tax Mistakes and Navigate Tax Season with Confidence
Tax season can be stressful, but avoiding common pitfalls can save you time and money. From overlooking valuable deductions like charitable contributions to withholding too much from your paycheck, such tax mistakes can significantly impact your bottom line. Let’s explore some of the most frequent tax errors and offer practical advice on how to avoid them, ensuring a smoother and more rewarding tax filing experience.
1. Maintaining poor tax records
Relying solely on memory for tax deductions is a recipe for disaster. Meticulous record-keeping is crucial. Throughout the year, diligently gather and organize all relevant tax receipts, invoices, and any documentation supporting potential deductions. Create a dedicated system, such as a file folder, spreadsheet, or dedicated tax software, to ensure easy access and prevent the loss of crucial information. This proactive approach will significantly simplify the tax filing process and minimize the risk of costly errors or missed deductions.
2. Withholding too much in taxes
Receiving a large tax refund at the end of the year might seem like a bonus, but it effectively means you’ve lent the government interest-free use of your money. Consider adjusting your withholding allowances on your W-4 form to reduce the amount withheld from each paycheck. This allows you to retain more of your income throughout the year, enabling you to invest it, save for emergencies, or use it for other financial goals. However, be cautious not to withhold too little, as this could result in a significant tax bill or even penalties come tax time.
3. Not contributing to your company’s retirement plan
Contributing to your employer-sponsored retirement plan, such as a 401(k) or 403(b), offers substantial benefits beyond long-term retirement savings. Many plans offer employer matching contributions, essentially free money that boosts your retirement nest egg. Moreover, contributions to these plans are often tax-deductible, reducing your current taxable income and potentially lowering your overall tax liability.
4. Failing to bunch deductions
It only makes sense to itemize deductions if your total deductions exceed the standard deduction amount, which for 2025 is $30,000 for married taxpayers filing jointly and $15,000 for single taxpayers (up from $29,200 and $14,600 for 2024). 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. Taxpayers who itemize deductions can deduct up to $10,000 of state and local taxes from their federal taxable income.
“Don’t let overlooked deductions slip through the cracks. From charitable contributions to medical expenses, understanding and claiming eligible deductions can significantly reduce your tax burden.”
5. Overlooking charitable contributions
Don’t limit your charitable deductions to just cash or property donations. You may also be eligible to deduct expenses directly related to your charitable activities. This can include mileage driven for volunteer work, parking fees incurred while volunteering, postage for mailing donations, and even long-distance phone calls made for charitable purposes. Keep detailed records of these expenses to ensure you can accurately claim them on your tax return. Also, if you make charitable contributions directly from your IRA, you won’t have to pay taxes on that distribution. This is especially helpful for people who don’t itemize their tax deductions.
6. Not considering filing separate returns
While filing a joint tax return is often the most advantageous option for married couples, it’s crucial to consider the potential benefits of filing separately. Tax laws and individual financial situations can significantly impact which filing status results in a lower tax liability. Before submitting your return, calculate your taxes both jointly and separately to determine the most advantageous option for your specific circumstances.
NOTE: Married Filing Separately (MFS) can affect the calculation of Medicare premiums, so just because your tax liability looks better, it’s not always the best choice. Please consult with your CPA.
7. Forgetting deductions carried over from prior years
Don’t overlook deductions that couldn’t be fully utilized in previous years due to annual limitations. These may include capital losses, passive activity losses, charitable contributions exceeding certain limits, and alternative minimum tax credits. These carryover deductions can significantly reduce your current tax liability, so be sure to review your prior year tax returns and include these deductions on your current year filing.
Plan Ahead for a Smoother Tax Season
By being mindful of these common tax mistakes and taking proactive steps to avoid them, you can significantly improve your tax outcomes. Accurate record-keeping, careful planning, and consulting with a qualified tax professional can help you maximize your deductions, minimize your tax liability, and ensure a smoother and more stress-free tax filing experience. Remember that tax laws can change, so it’s crucial to stay informed and adapt your strategies accordingly.
Disclaimer: This article provides general information and should not be considered professional tax advice. The information presented here may not apply to all situations, and tax laws are subject to change.
Questions?
Ashley is a tax and business advisory specialist with expertise in tax compliance. She advises clients across various industries, including manufacturing and distribution, on federal tax and multi-state tax matters. Her experience encompasses pass-through entities, corporations, individuals, and nonprofits.