The period from mid of March to mid of April is one of the stressful times for most of the people since you need to file your tax return. However, a little knowledge can make your tax filing comparatively easy. You can go through this article in order to clear some jargons and avoid committing certain mistakes while filing your taxes. The knowledge will help you with your tax filing in the current year and somewhat prepare yourself for filing your taxes in the coming years, too.
Whether to go for standard or itemized deduction
In order to decide whether to opt for standard or itemized deduction, at first you need to have a clear idea regarding the two. Standard deduction is a flat amount which you can deduct from your taxable income based on your filing status and the number of dependents you have. On the other hand, itemized deduction lets you deduct the actual dollar amount of all of your individual deductions, such as, property taxes, mortgage interest payments, etc. If your itemized deduction amount is more than that of your standard deduction, then it is always better to opt for itemized deduction.
In order to decide whether or not itemized deduction is better for you, you can list your expenses on Schedule A of the Form 1040. You can then calculate the total amount to find out whether or not it is more than the deductible amount if you opt for standard deduction.
Usually, if you have a home, then the amount you spend on your property tax and mortgage interest can make it profitable for you to opt for itemized deduction. Therefore, if you have to spend a significant amount on your mortgage interest and property taxes, then check with Form 1040, whether it is better to opt for itemized deduction.
4 Ways to increase your itemized deductions
It is clear to you that you should opt for itemized deductions only if that is more than the standard deduction which you are applicable to. However, there’s a strategy you can opt for in order to make yourself eligible to making more savings while opting for itemized deduction. If you do not have enough itemized deductions every year, you can go for itemized deduction every alternate year.
Following are some of the ways to do it.
- Medical expenditure – Consider bundling your medical expenses this year. For example, if you have to go for an expensive dental treatment, consider it doing this year; it will help you qualify for itemized deduction while filing tax next year.
- Payments on property tax – If you are a homeowner, consider making the property tax payments of next year in this year.
- Money spent on hobby – If your hobby earns you dollars, then you can deduct your expenses up to the level of your income. Therefore, to match that amount, you can buy the things (you need next year) in this year itself, in order to match the income.
- Contributions to charitable organizations – If you contribute a certain amount to any charitable organization every year, then consider paying the amount worth of 2 years in 1 year and pay nothing the next year.
7 Mistakes you should not commit
Here are 7 common mistakes which people often make while calculating their outstanding tax payment or filing return. Be aware of these mistakes so that you can be extra careful this time.
- Mistakes regarding special deductions- According to the IRS (Internal Revenue Service), many people make mistakes regarding credits and special deductions while computing the tax. Mistakes are quite common regarding the Social Security benefits of people more than 65 years of age. If required, you can use online calculators to decide what your outstanding tax will be.
- Committing mistakes in the calculation- Calculating your outstanding tax is undoubtedly a complicated math calculation as you need to deal with a number of facts and figures. Therefore, every year, a lot of people make mistakes while calculating and transferring figures. However, you must be very careful since your tax refund can be reduced due to these mistakes; it might also result in owing more taxes. A word of caution even if you are using software program which does the additions and subtractions on your behalf; even then, you should check to make sure that the numbers are correct.
- Be careful while giving out bank details- As a taxpayer, you can opt for direct deposit of your refund to your preferred bank account. However, you need to be extra careful while writing your routing number and your bank account number. There is no harm in double-checking it. Do you know you might lose your tax refund if you give a wrong number? Therefore, even if you are filing e-tax with a tax adviser, make sure you check whether or not the numbers are entered correctly.
- Do not misspell the names on tax forms- The alphabets are equally important as that of the numbers. You need to know that IRS might slow down or stop the process of tax return if the name of the taxpayer along with his/her spouse and children do not match with the tax identification number of the Social Security Administration. The women need to be extra cautious. If a woman changes her surname after marriage, then it has to be registered with the Social Security Administration as soon as possible. Doing so, she will not face any problem while filing tax return jointly.
- Choose proper filing status- Not only you need to know about the proper filing statuses applicable to you, but you also need to choose which option is most beneficial to you. The standard deduction you qualify for, actually depends on how you are filing your tax return. For example, the standard deduction for a filing single has been increased from $6100 to $6200. The deduction for head of household has also increased from $8950 (in 2013) to $9100 (in 2014). So, you need to calculate and decide which option gives you the maximum deduction.
- Do not miss out charitable contributions- Every type of charitable contribution can be mentioned in your tax filing as long as you are contributing to a qualified organization. Right from cash to material goods, all can be listed under valuable tax deductions. However, while donating clothes or any other household items, make sure they are in good condition; otherwise, they will not be granted for tax deduction. Moreover, the amount which you can claim for the items is fair market value; that is, the amount which a buyer will pay for the item(s).
- Missing out the due date of filing- Perhaps one of the greatest mistakes committed by people is waiting for the last moment and missing out the deadline for tax payment. Remember to file your tax by April 15 and if you are not able to do it, then you should file Form 4868 in order to get an extension of 6 months. Failing to do so, you will have to experience late or non-filing penalties. Remember, even if you apply for an extension, you might have to send a check by April 15 if you owe taxes. You can only extend the date of filing your tax return but not your tax payment.
Whether or not to hire a tax professional
Many of you might face this dilemma during the tax filing season – whether to get help from a professional or to take help of self-guided tax preparation software. You might get professional help if you are not good at calculating numbers; hiring a professional is always easy. However, be careful to not try to schedule an appointment at the last time. The best professionals usually have waiting list which normally are filled up by the month of February.
Along with this, you also have to pay a significant amount to the tax professional. The fees may range from about $60 to $1000. Therefore, before getting help, make sure you inquire about the professional fees. However, fee associated with professional tax preparation is deductible on your tax return if you qualify the eligibility requirements.
Therefore, if you are not confident regarding filing your taxes on your own, you can hire a professional. By doing so, you can save time and money and be sure that your tax filing is accurate.
On the other hand, if you rely on a tax preparation software, know that it may not always ask you the right questions regarding your circumstances. This is because these tax preparation softwares are usually designed for people with simple tax situations and might not suit individuals with relatively complex financial circumstances. Therefore, if you decide to file on your own, make yourself knowledgeable regarding the updated news and deductions for the current year, so that you can file your tax return error free.
Usually, you electronically sign for your return. However, if you opt for mailing your return, then check whether or not you are signing your pre-addressed envelope and providing the right mailing address. Make sure you and your spouse, both are signing, if you are filing your tax jointly.