150218_PLA_TaxFilingFlubs
Zachary Zavislak

Don't Make These 8 Classic Tax-Filing Fails

Feb 18, 2015

Slipping up on your taxes can exact a high price. Some of the most frequently made blunders—silly things like entering the wrong Social Security number, spelling your name incorrectly, or putting in the wrong account numbers for direct deposit—hold up processing your return and any refund you might be due. That's bad enough.

Other common mistakes cost you more than time. They cost you real money. Just by overlooking deductions, taxpayers give up an average of about $600 at tax time, according to research by Youssef Benzarti, an economics Ph.D. candidate at the University of California at Berkeley. He found that many people don't itemize when they should—therefore passing over breaks such as the write-off for investment-related expenses. "Or," says Benzarti, "they take only the easy deductions like mortgage interest and state taxes" and not harder-to-prove ones, such as charitable donations and use of a home office.

With April 15 fast approaching, MONEY consulted with a slew of tax pros to find out what other savings taxpayers like you typically miss. Review your return to make sure you don't commit any of these costly errors.

1. Taking the wrong tax write-off for college

There are two mutually exclusive breaks you can use to ease the pain of paying for higher ed. People sometimes automatically take the $4,000 tuition and fees deduction because it sounds like the most money. But the $2,500 American Opportunity Tax Credit is typically a better deal,
says Melissa Labant, director of tax advocacy for the American Institute of CPAs. Here's why: The tuition and fees deduction lowers the portion of your income subject to tax. "But a tax credit yields a dollar-for-dollar reduction in the taxes you owe," says Labant.

You're eligible for the full AOTC if you spend $4,000 on tuition and fees, as you can slash your taxes by 100% of the first $2,000 and 25% of the next $2,000. Also, your adjusted gross income must be $80,000 or less if single, $160,000 or less if married and filing jointly. (Partial credit is available for incomes up to $90,000 for singles and $180,000 for couples filing jointly.)

One caveat: You can't take the AOTC for more than four years for any one dependent. So if your kid takes longer to graduate, you'll be glad to have the tuition and fees deduction for year five.

2. Paying too much tax on investments you sold

At its simplest, your cost basis for figuring out the tax liability on an investment you've sold is the original price you paid for that investment. It's subtracted from the price at which you sell in order to calculate capital gains or losses. Where it gets thorny is when you have to adjust your shares for such things as stock splits, reinvested dividends, capital gains distributions, and sales commissions.

Brokerages and mutual fund companies have been required to track cost basis for their customers since 2011 and 2012, respectively. But you have to calculate cost basis yourself on shares bought before those dates. Unfortunately, many investors forget to do that and end up paying more capital gains than they owe when they sell, says Kris Gretzschel, CPA and manager of the tax and financial planning team for Wells Fargo Advisors.

Say you purchased 100 shares of a stock for $100 per share and paid a $20 commission; your original cost basis is $10,020. Let's assume you then received a $3-per-share dividend each year for five years that you automatically reinvested. Your new cost basis is $10,020 plus $1,500
($300 times five years) for the dividend, or $11,520. Now say you sell the stock for $18,000. Using the original cost basis instead of the adjusted one, you'd be paying taxes on $7,980 in gains vs. $6,480.

Online calculators like the one at CalcXML.com can help you tally up your cost basis. Or you can use a service like Netbasis.com, which charges $25 per transaction.

3. Leaving money on the table when changing jobs

High earners who had more than one employer during the year, this one's for you. In 2014 each employer had to withhold 6.2% in Social Security taxes on the first $117,000 in income (the limit is $118,500 in 2015). "But that could lead the employers to withhold more taxes than you're required to pay," says Suzanne Shier, chief wealth planning and tax strategist for Northern Trust in Chicago.

Let's say you worked for Company A for half the year and earned $62,000, then moved to Company B and earned $70,000. Each company would withhold taxes on your total earnings, but you should have paid taxes on only $117,000, not $132,000, and you would have overpaid by $930.

Tax prep software should catch this one, but paper filers may get snagged. Luckily, it's an easy fix: "You can claim the money as a credit on line 71 of your 1040," says Shier.

4. Blanking on what you saved

It's not uncommon to forget money socked away in an IRA the previous year, especially since your broker doesn't send you paperwork confirming contributions (IRS Form 5498) until after you file your taxes.

But if you forget to report a contribution to a traditional IRA and you qualify for a deduction—see IRS Publication 590-A—you will miss a break on your current taxes. If the contribution is nondeductible, you still need to file Form 8606 so that you don't pay income taxes on a portion
of your withdrawals during retirement, notes Gretzschel. So call your brokerage to refresh your memory about 2014 contributions.

5. Missing out on money back for your home office

Moonlighters often opt to forgo the home-office deduction, both because it's a hassle to keep track of the paperwork and because they're worried about putting up red flags to IRS auditors.

As of last year, however, an alternative, simplified version of the write-off allows you to deduct $5 per square foot of office space up to $1,500 with no documentation whatsoever. Unlike the old method of calculation, no depreciation is taken on your home, which means the break will not affect capital gains when you sell, says Eric Bell, a CPA with Jones & Roth in Eugene, Ore.

6. Overpaying taxes on retirement distributions

People 70 or older and retired are required to withdraw certain amounts of money from 401(k)s and IRAs each year. When you begin receiving distributions, you have the option to have income taxes withheld. Call it a senior moment, but retirees sometimes forget that they chose to have taxes taken out, says Gretzschel.

They don't look closely enough at the 1099-R forms and therefore don't input the taxes paid into their 1040. As a result, they could end up paying the taxes twice—and the IRS may or may not catch the mistake, Gretzschel says.

7. Overlooking online largess

There's been a big increase in online charitable giving, but many people forget to save emailed receipts as they do ones that come in the mail. "If you don't have an organized electronic life, it's hard to get receipts together," says Shier.

She recommends searching your email in-box for "gift" and "donation." If you are in the 28% bracket and discover $250 more in donations to report, you'll reap $70 in tax savings.

8. Ignoring the write-off that is right in your hands

Those who itemize can write off certain investing and tax expenses—including tax-prep software, financial adviser fees, and rent on a safe-deposit box where you store securities—that exceed 2% of your adjusted gross income.

Bell says that those most likely to overcome the 2% hurdle on these "miscellaneous expenses" have modest income but a fairly large taxable portfolio that they pay an adviser to manage; many retirees who super-saved fit that bill. If you have an AGI of $100,000 and you have
$5,000 in investment-adviser fees (equating to 1% on a $500,000 portfolio), you'll have to exclude the first $2,000, but can deduct the remaining $3,000.

While calculating your costs, don't forget that you can add subscriptions to professional publications, business magazines, and investing magazines—including the one you're reading now.

More from the 2015 Tax Guide:
The IRS Could Audit You For Doing This
7 Ways to Keep Your Tax Refund Safe From Thieves
Where to Get Free Tax-Prep Help

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