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9 Precious Tax Errors to Avoid – The Motley Fool

Many mistakes, such as writing the wrong words in a crossword in pen, or calling someone with the wrong name can be annoying and even embarrassing. However, some errors can be extremely costly. Many tax mistakes fall into that category.

Here's a look at a number of common tax errors that can cost you hundreds or thousands of your hard earned dollars. If you can avoid doing them, you can minimize costs and problems, and increase your financial security.

  the words common errors printed on lined paper and surrounded by blue blisters

Image Source: Getty Images.

No. 1
. Do not keep track of expenses and receipts

You will regret it if you do not hold on receipts for expenses that you can deduct. Come with tax trial time, you'll either spend a lot of time looking for that documentation than you want or need or you'll continue without it and lose out on deductions.

Make your financial life easier by maintaining a "tax" folder throughout the year, where you receive receipts or other documents that will support your return. For example, keep receipts from your charity giving and medical expenses to support possible deductions, along with child welfare receipts and travel receipts for deductible expenses. When tax time comes, you will be ready.

No. 2. Do not take advantage of a pension account

An easy way to lose hundreds or thousands of dollars in tax savings is not to use tax-deducted retirement accounts, such as IRA and 401 (k) s. There are two main types of each – Roth and the traditional – which offers two different types of tax breaks. The traditional IRA or 401 (k) shrinks your current taxable income and gives you a tax advance in advance, while Roth IRA or 401 (k) offer tax-free retirement benefits. For 2018, the grant limit for both types is $ 5,500 for most and $ 6,500 for the 50 and older. Meanwhile, a 401 (k) has a much more generous limit. By 2018, the limit is $ 18,500, plus an additional $ 6,000 for the 50 or older.

The table below shows what you can collect over different periods if you wrap off funds aggressively and your investments average 8% annual growth:

$ 5,000

$ 63,359

$ 95,039

10 years

] $ 78,227

$ 78,227

$ 5,000

$ 5,000

19659017] $ 156,455

$ 234,682

15 years

$ 146,621

$ 293.243

$ 439,864

20 years

$ 247,115

$ 494,229

$ 741.334

25 years

$ 394,772

$ 789,544

$ 1.2 million

30 years

] $ 611,729

$ 1.2 million

$ 1.8 million

35 years

$ 930,511

$ 1.9 million

$ 2.8 million

40 years

$ 1.4 million

$ 2.8 million

$ 4.2 million

Calculations by Author

If you contribute $ 10,000 to a traditional 401 (k) and you are in one 24% tax rebate oll, you will avoid paying $ 2,400 in advance tax. If you collect $ 400,000 in a Roth IRA for many years, you can deduct it without paying taxes on any of it.

No. 3. Ignore holding periods when investing

We usually think about buying a stock and when to sell it, but we often ignore how long we've held it. The operating period applies in the tax world. At the moment, most of us face long-term capital gains tax rates (for qualifying assets held for at least one year and a day) of 15%. Short-term capital gains meet your regular tax rate, which may be more than twice as high. Do not base any sales decision exclusively on taxes, but bring taxes into your thinking. If you are planning to sell a stock you have held for 11 months, consider whether it makes sense to hang on another month and one day.

No. 4. Failure to Compensate Winnings With Loss

Do you think it's a bit of capital loss? Well, they can often be used to shrink your taxable profits – potentially to zero. For example, think you have $ 7000 in winnings and you sell enough inventory to generate a loss of $ 5000. That would allow you to face taxes of only $ 2000 in winnings. If you have a lot more loss than winnings, you can wipe out all of your winnings and then shrink your taxable income by up to $ 3000 of your losses and then transfer any remaining losses in the next year. This strategy is best used throughout the year, not just on tax time. A particularly good time to sell a particular stock for profit or loss may be in February or August, not at the end of the year.

Note that if you are planning to buy back some of the losing shares you sold, be sure to wait at least 31 days, so that you do not end up with a "laundry sale" that does not count.

  Cross crossed yellow tape, with the word warning printed several times on it

Failure to apply tax credits can cost you thousands. Image Source: Getty Images.

No. 5. Do not take tax cards available to you

Tax credit is sometimes less understood than tax deduction, which is a shame because they are far stronger. While a $ 1000 deduction can save you $ 240 if you are in a 24% tax rate, a $ 1000 tax can reduce your tax bill by $ 1000.

There are tax credits for all kinds of things, such as educational expenses , energy efficient home improvements, adoption of children, care for children and addicted, and much more. A particularly valuable credit, if your earnings are low enough to qualify, is the earned income tax credit, which can shrink your income by more than $ 6000. If you have children or dependents, you have more options for tax credit: Child and Dependent Care Credit offers a credit of up to $ 3000 for the care of a qualified addiction and up to $ 6000 total for two or more. And Child Tax Credit offers $ 2000 for every qualifying child you have under 17 years (at the end of the tax year) – subject to some rules and restrictions again, of course.

No. 6. Do not use A Flexible Expense Account (FSA) or HSA Account (HSA)

If you have many healthcare costs – and even if you have only a small amount of them, consider using a flexible spending account. It accepts dollars before tax and lets you use them tax-free on qualifying healthcare. Note that you must spend most of your contribution each year or you lose it. Still, if you plan well, this can save you a lot in taxes. For example, if you expect to pay $ 2000 on braces for your child this year, socks so much into the FSA and you can avoid paying taxes on it. The grant limit for Health FSAs is $ 2,650 for 2018.

Even better is a health savings account, which requires you to have a qualifying, high-quality health insurance plan. You finance it with money before tax, lowering your tax bill. The money can be used tax-free for qualifying healthcare expenses, and it can accumulate over years, also invested and growing. When you're 65, you can withdraw money from an HSA for some purposes, and pay regular income tax rates on withdrawals. In other words, there will eventually be an extra pension account. HSA contribution limits for 2018 are $ 3,450 for individuals and $ 6,900 for families. The 55 or older can contribute an additional $ 1000.

No. 7. Do not Take Your Minimum Distribution (RMD)

If you approach age 70 and you have some pension accounts, such as traditional IRAs and 401 (k) s, this feature requires minimum distributions, be sure to begin take them on time and take them every year. The deadline for taking the distribution each year is 30 December, except for the year when you become 70 1/2. For that year you have until April 1st the following year to take your RMD. (It may be better to take it by the end of December, but you will not end up being charged with two distributions in one year, which may push you into a higher tax console.) Many people like to set up their accounts so that their RMD is sent to them automatically each year.

Fails to comply with the RMD rules and you may receive bad penalties. The penalty is a big 50% of the amount you did not take out time, so if you were to withdraw $ 8000, you're looking at forfeiting $ 4,000! (Note that IRS allows you to appeal for a waiver.)

No. 8. Increasing Chances of Being Revised

You can not realize it, but you can do different things that increase the likelihood of being revised. For example, if you do not submit a return or report without revenue, it may trigger an audit. If you do not submit a tax return for any reason, the IRS can contact and ask you. You must return even if you do not have income or no tax.

Being messy with your tax return or having a mistake in it can also increase your chances of being reviewed. If IRS computers or workers can not determine if a particular sniggle is a 6 or an 8, the return message may be marked for a closer look. If IRS mat is different from yours, it may also trigger an audit. Double-click your math and make sure you enter the correct numbers – and you park them in the appropriate boxes. One way to improve the accuracy of your return is to use tax-based software instead of preparing your return by hand – and to submit your return online. Remember to sign your return too – as unsigned returns can also draw attention to the IRS.

Do not omit any necessary information, either, for example, data from 1099 form the brokerage house and other financial institutions send you. Failure to report income or omit other information may increase flags on IRS and get you revised. Units that pay you usually send a report of it not only to you but also to the IRS – whether they report payroll, dividend income, interest paid or anything else. The IRS then expects you to return to include all these payments.

No. 9. Do not hire a professional

A final joint – and potentially costly – wrong many people do is not hiring a tax manufacturer to prepare their returns. Sure, it will cost something – but the benefit can more than make up for the cost. After all, most of us do not know the tax code inside and out, and we only think of fees for a few weeks a year. A knowledgeable tax manufacturer keeps up with changes in the tax code, is good at strategizing and finding ways to shrink tax bills, and is immersed in the tax world throughout the year.

Not considered just anyone either. Ask for recommendations and consider hiring a "Registered Agent", a tax manufacturer licensed by IRS, which is authorized to represent you before the IRS, if necessary. You can find one through the National Association of Enrolled Agents website.

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