Not Planning for the Alternative Minimum Tax (AMT)
State taxes, car licenses, real estate taxes, certain home equity
interest paid, a portion of your medical expenses, and most
miscellaneous itemized deductions (such as tax preparation fees and
employee businessexpenses) are not deductible for AMT purposes.
If a significant portion of your miscellaneous itemized deductions
happens to be employee expenses you're not reimbursed for, check with
your employer to see if you can be reimbursed directly for your costs.
Don't assume that it's always best to prepay your state income taxes or
your property taxes before the end of the year. If you are subject to
the AMT, neither of these taxes will garner you any tax benefit.
Not Using a Computer to Plan for and Prepare Your Income Taxes
There are so many interrelationships in the tax law that even if you
have a very simple tax return, you can miss something very important by
doing your return or tax planning by hand.
Overusing a Home Equity Loan
It can be a good idea to convert otherwise non-deductible personal
interest into tax-deductible home loan interest. But don't get carried
away and take 15 years to pay off a three year car loan or you'll pay a
fortune in interest.
Taking the Home Office Deduction Without Considering the Tax Effects
When You Sell Your Home
The part of your home that is used for businessmay not qualify for the
(maximum) $250,000 ($500,000 if Married Filing Joint) exclusion of gain
from tax on the sale of your home; you could end up paying taxes on the
home office portion of the gain.
Not Claiming all of the Deductions You are Legally Entitled to
Take charitable contributions into consideration. You may not think the
clothes you give to charity are worth much, but consider using valuation
software, such as It's Deductible, and see how much items actually sell
for when determining how much to claim. You may be surprised.
Not Accounting for Mutual Fund Dividend Reinvestments
Reinvested dividends generate tax basis. Be sure to add them to your
cost basis when you calculate your taxable gain from the sale. It is
best to update your records annually.
Not Tracking Your Year-to-Year Carryover Items
State and local taxes paid for the prior year in the current year,
capital loss carryovers from prior years, and charitable contribution
carryovers can get lost in the shuffle.
Not Setting up a Qualified Retirement Plan in Time
Most qualified plans must be established (but not necessarily funded) by
December 31 of the tax year in which you want to take the deduction.
Many IRAs can be set up through April 15th of the following year, and
SEP plans can be set up as late as October 15th of the following year.
Failing to Name (or Naming the Wrong) Beneficiary to an IRA, 401(k) ,
or Other Retirement Plan
Upon death, IRA accounts pass tax-free to your spouse. If you designate
no beneficiary for your retirement accounts, many plans name your estate
as the beneficiary, which can be the most costly to your estate. Naming
grandkids may subject the account to the generation-skipping transfer
tax.
Not Maximizing Your 401(k) Contributions, Particularly if Your
Employer’s Plan Provides for Matching Contributions
Current tax law provides annual increases in the maximum amount
contributable; be sure to take this into consideration when planning for
your financial future.
Not Making Your Quarterly Estimated Tax Payments When You’re
Self-employed or Have Significant Investment Income
Some taxpayers who have the ability to pay their estimated taxes
quarterly either don't find the time to do so or prefer to wait to pay
their taxes when they file their income tax returns. This is a mistake:
you'll pay underpayment penalties to the tune of about 6% per annum for
each quarter that the taxes aren't paid.
Not Planning Correctly for Stock Option Exercise and Selling
Activities
Many employees who exercise options and sell stock in same-day
transactions find that the gains they realize from such a sale push them
into a higher tax bracket than they'd otherwise be in. If this happens
to you, and if your employer simply withholds taxes at a fixed rate from
your sale transaction, be sure to determine just what your actual income
tax liability will be so that you're not surprised at the amount of tax
you owe come April 15th.
Changing Jobs & not Adjusting Your Withholding Allowances
Further, not considering your state income tax withholding allowances
once you've adjusted your federal numbers. Your federal withholding may
be just fine, but forgetting to adjust your state withholding as well
may set you up for an unpleasant surprise. So, update your Form W-4.
Contributing to a Roth IRA When You’re not Qualified to do so Because
Your Income is too High
Individuals whose modified adjusted gross income is over $110,000
($160,000 for married couples filing a joint return) may not contribute
to a Roth IRA; doing so will subject you to a 6% penalty assessed on the
amount you contributed.
Making a Federal Estimated Tax Payment Right After a Big Income Event
Rather than Waiting Until April 15th
Why is this a mistake? If you're otherwise protected from the
application of underpayment penalties (because, perhaps, you are paying
through withholding and estimates an amount equal to last year's tax or,
for higher income taxpayers, 110% of last year's tax), there's really no
reason to pay your federal taxes early. Let that money earn interest for
you until it's time to pay Uncle Sam.
Related Articles:
College Expense Deduction
Tuition & Fees Deduction
Education Tax Credits - The Basics
Explained
Common Tax Blunders
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