Don’t pay more tax than you are required to. We think your legal income tax liability is big enough already, and the IRS will not be in any rush to tell you about money you could have saved!
Here are some common areas where taxpayers let money slip through the cracks to the IRS:
- Failure to claim credit for overpaid Social Security Tax: Have you worked for more than one employer this year? You may have paid more in total Social Security taxes than you were required to. Once properly calculated, a credit can be claimed on your federal income tax return to reflect the amount overpaid. This overpayment may be used toward your income tax you owe, and the balance would be refunded to you.
- Failure to claim all dependents: If you are supporting your elderly parents or other qualified relatives, even if they don’t live in your home, you may be able to claim a $3,700 exemption (deduction) from your taxable income. The relative must not have a certain level of income and you must provide over half of their support.
- Failure to file as Head of Household: If you are single or separated but have a dependent living with you, you may be able to use tax rates under Head of Household filing status. These rates are considerably lower than the Single and Married Filing Separately tax rates.
- Failure to track cost basis in sold securities: Don’t report more gains than you have to! The IRS has initiated improved cost reporting requirements for brokers, but it doesn’t address all situations. Selling mutual funds is a particularly vulnerable to tax error. Most mutual funds automatically reinvest any capital gains generated during the year; you pay tax on dividend income in the year received and increase your cost basis – even though you don’t receive the dividend in cash. Don’t pay income tax a second time when you sell the reinvested mutual fund shares!
- Failure to underpay income tax: For 2011, individuals will generally be subject to underpayment penalties if their balance due is over $1,000 and during the year they have not paid at least: a) 90% of their total 2011 taxes, or b) 100% of their total 2010 taxes. That’s a complicated concept to understand, but the main thing is this: make sufficient tax payments during the year to avoid paying penalties on top of tax.
- Failure to overpay income tax: This is the opposite situation. While most people are thrilled to get a big refund from the IRS, they miss the big picture: you gave the IRS too much money. You could have invested that money or used it for a better purpose than lending it interest-free to the IRS. Would you rather have a big refund later or use of your own money during the year?
Your tax professional can help assess your situation and discuss how to minimize your taxes.
