As we wrap up tax season, I find people have more questions than answers. Some are pleasantly surprised and others are shocked and even angry about owing taxes. As I was sitting with family over dinner, their grumblings about taxes kept cropping up in the conversation. As they continued to talk, I realized that many of their problems came from the following mistakes about taxes:
Mistake #1: Getting a big tax refund. Giving an interest-free loan when you need the money is almost never a good idea. Consider using the IRS Withholding Calculator to estimate how much withholding to use to break even on your taxes. This may free up the funds for other financial goals like savings, getting out of debt and college.
Mistake #2: Not taking advantage of itemized deductions. An article from Nolo.com cites a report by the Government Accountability Office stating that as many as 2.2 million taxpayers overpay taxes by an average of $610 per year due to a failure to itemize deductions. Consider itemizing deductions if you:
- Paid interest and taxes on your home
- Made a large charitable contribution
- Had a lot of uninsured medical and dental expenses
- Had large unreimbursed job-related expenses
Mistake #3: Not looking to your employer benefits for tax savings. I recently spoke to a friend who was concerned about owing taxes and was looking for ways to lower her taxable income. I told her to start looking at her workplace benefits. Pre-tax 401(k) plan contributions lower your taxable income as well as contributions to pre-tax medical savings plans like Flexible Spending Accounts or Health Savings Accounts. Since she has children under 13 years old, I mentioned the Dependent Care Flexible Spending Account so she can contribute money pre-tax for her children’s childcare expenses.
Don’t believe everything you hear, especially when it comes to taxes. Before jumping on everyone’s tax bandwagon, take some time and do research to validate if what they are saying is true. If you find this overwhelming, consider working with a tax professional that can help separate fact from fiction.