It’s tax season and people engage in the same old ritual. Get the paperwork together, input info into the software, and hope for the best. However, there’s an unseen world of opportunity and pitfalls that never make it to the view of anyone handling their own taxes. You can’t see the gaps and that’s why they continue to repeat every single year.
The Write-Offs You’re Probably Forgetting
People underestimate their medical write offs. The threshold is high for it to exceed 7.5% of AGI but once that happens it’s incredible how much people forget about. Medical mileage, equipment, permissible home modifications, certain premiums? Sure. Most people only remember regular doctor’s visits and medication.
People overthink the home office deduction because they’ve read too much about it being a red flag, so they don’t write it off at all. Remote workers and independent contractors leave tons of dollars on the table because they’re either afraid or they’re sick of calculating the square footage of their office.
Filing Status Errors That Cost You
This one can be huge. Head of Household vs. Single can be several thousand dollars in liabilities and most people get stuck on the qualifying guidelines. Custodial agreements, percentages, and residency all have to be confirmed, and people screw that up all the time. Software does not always ask the right questions.
Married Filing Separately is also a situation people find themselves in that compromises them for credits and deductions galore that are only available to joint filers. The math isn’t always what people think so working with a savvy tax accountant is a necessity to determine what approach would yield the most savings for the couple as a whole instead of parsing pennies.
Timing Issues You Don’t Think About
People fall victim to capital gains losses every year because they don’t know which date matters for their transactions. Selling in December vs. January can switch which tax year gets the gain or loss and people aren’t thinking about tax years while they’re trading.
401Ks, IRAs, HSAs all have different cut-off dates for contributions that can trip people up if they’re filing without a knowledgeable tax accountant. Missing these dates gets people penalties instead of fabulous write offs.
Credits You Leave on The Table
Credits are a world above deductions as they lower your taxes rather than providing a deduction, but they also require more hoops to jump through to get permission.
The Earned Income Tax Credit is just one of many credits people file every year yet leave untapped by those who otherwise qualify, even a mundane yearly credit everyone is entitled to still goes unclaimed by some taxpayers.
People qualify for all kinds of other education credits every year that no one remembers ever claiming. The American Opportunity and Lifetime Learning credit rules are separate, as are income phaseout rules, qualifying expenses and what can be written off for each credit. Tuition is an obvious expense to cover but some charge considered required by the school may be covered too. People forget about this due to common errors.
Investment Income Reporting Errors
Dividend reinvestments probably trip people up every tax season as they fail to report these correctly and end up getting double taxes paid on their money as dividends and gains.
Cryptocurrency investors are creating a whole new realm of errors as every transaction is taxable event even if people just switch tokens in a digital wallet instead of converting it back to fiat currency.
State-Specific Problems Most People Don’t Think About
Multi-state issues create complexities that most software solutions can’t handle adequately. Remote workers that file with one state while their employer operates in another, properties across state lines and even just someone who moved halfway through the year make state taxes an insane headache.
States have reciprocity agreements (or they don’t), cities impose their own taxes, and some states tax retirement income while others do not.
Here’s Why This Happens Again and Again
The common thread through all of this is tax preparation isn’t simply about crunching numbers or filing receipts. It’s about what the numbers mean or make possible. Software can input numbers, but it can’t assess a situation or ask probing questions.
Most people don’t know what they don’t know so they can’t even ask questions. The tax code changes every year, sometimes only slightly which has a massive impact over this years return versus last years. What worked last year may not be optimal this year without understanding these subtle shifts with the tax code.
Getting a return filed on time without making new claims at the local post office is one thing but getting it filed properly reflecting the true state of affairs for the taxpayer is another.
