As Tax Filing Deadline Looms, Individuals Need to Avoid Common Tax Preparation Errors
As the April 18, 2011 deadline for filing 2010 federal income tax returns gets closer, individuals who are in the process of completing their tax returns need to be careful to avoid some of the most common tax preparation errors. This column discusses 10 of the most common errors made by individuals in preparing their federal income tax returns.
Incorrect Social Security numbers.
Any individual being claimed as a tax dependent on a tax return -- this includes the individual filing the return and, if applicable, the individual's spouse and tax dependents -- must have valid Social Security numbers that appear on the tax return. The name of these individuals must appear on the tax return in the exact way the name appears on the individual's Social Security card.
Legitimately claiming a family member as a tax dependent.
Individuals who are claiming a family member as a tax dependent need to be
absolutely certain that they can legitimately claim them as such. Some common
errors: Divorced spouses in which each spouse claim a child as a dependent but
only one spouse may do so. Another example: A child claiming a parent as a tax
dependent when the child does not provide more than half of the parent's support
during the year or the parent has gross income during the year exceeding the
personal exemption amount ($3,650 for 2010; $3,700 for
Incorrect filing status.
Individuals must be sure they choose the correct "filing status". -- single,
married filing jointly, married filing separately, head of household, or
qualifying widow(er). Another MyFederalRetirement.com column discussed
what individuals must consider when choosing a filing status. Some of the most
common errors: Separated (but not divorced) spouses each filing as single; a
separated spouse filing as head of household but not claiming any tax
Omitting small interest payments.
The law says that banks, credit unions, and brokerages do not have to provide a 1099-INT for interest payments totaling less than $10 during the year. Why do these small amounts matter? The reason is that the IRS considers these amounts as taxable income as such and therefore must be reported on one's income tax return.
Deducting mortgage "points" incorrectly.
Mortgage "points" -- these are fees paid to obtain a mortgage -- are deductible in full in the year an individual obtains a first mortgage. Points paid at a mortgage refinancing must be deducted over the life of the new mortgage (the points are "amortized") . The only exception is that as a result of a refinancing, points are paid to obtain a new mortgage and the mortgage proceeds are used to substantially improve a principal residence (for example, add a room to the principal residence).
Forgetting to use the sales tax deduction in lieu of the state income tax deduction.
Individuals who itemize on their federal income taxes have the choice of deducting the higher of their state and local income taxes or sales taxes paid during 2010. Congress extended this provision through 2011. For individuals who live in states without state and local income taxes but have state and local sales taxes -- this includes Florida, Nevada, South Dakota, Tennessee, Texas, South Dakota, and Wyoming -- the sales tax deduction is obvious. Taking the sales tax deduction may also be better if an individual lives in a state with a relatively low income tax and if the individual during 2010 bought a "big ticket" item such as a car, boat, or an engagement ring and paid a significant amount of sales tax.
Overstating charitable deductions.
When an individual attends a charitable fund raising event -- for example, a
banquet or a concert -- then the individual may not deduct the entire cost of
the event as a charitable contribution. The charity should send a letter to the
individual explaining how much of the contribution is deductible. In short,
whatever "benefit" the individual received must be deducted from their
contribution. For example, if the individual pays $100 to attend a charitable
organization's banquet and the fair market value of the meal is $30, then the
individual's charitable contribution is limited to
Missing the Making Work Pay tax credit.
2010 was the last year for this refundable, dollar-for-dollar tax credit of
up to $400 for individuals or $800 for married couples earning less than
$190,000 ($95,000 for single individuals). Although IRS withholding tables were
adjusted during 2010 to reflect this credit, individuals need to file Schedule M
in order to claim the credit.
Overlooking the "kiddie" tax.
Children under the age of 24 and who had investment income (interest, dividends and/or capital gains) exceeding $1,900 during 2010 owe tax on their investment income based on their parent's tax rate. Information from the parent's tax return is required to complete the child's tax return. That means the parent's tax return has to be completed first. More information about the "kiddie" tax can be obtained in IRS Publication 929, downloadable from http://www.irs.gov.
Contributing to the wrong type of IRA and/or not completing IRS Form 8606.
Any individual with earned income (wages, salary or self-employment income) is eligible to contribute as much as $5,000 ($6,000 if age 50 or older as of Dec. 31, 2010). The deadline for contributing is Apr. 18, 2011. There are three types of IRAs:
(1) traditional deductible IRAs; (2) traditional nondeductible IRAs; and (3) Roth IRAs. If an individual is covered by a retirement plan (this includes federal employees) and if their modified adjusted gross income (MAGI) is too large, then a contribution to a deductible traditional IRA may not be made. If their MAGI is too large, they may not contribute to a Roth IRA. IRS Publication 590 (Individual Retirement Arrangements and downloadable from http://www.irs.gov lists the MAGI limits by filing status. Individuals have until April 18, 2011 to notify their IRA custodian to withdraw any invalid IRA contributions. Or they can notify their IRA custodian that their 2010 contribution is to be made to a nondeductible traditional IRA. This is because any individual younger than age 70.5 with earned income can contribute to a nondeductible traditional IRA. If such a contribution is made, then IRS Form 8606 must be filed with one's income taxes. Otherwise, the IRS assumes the contribution was made to a deductible traditional IRA.
Finally, individuals who file paper returns rather than filing electronically must make sure that they sign and date their returns. Paper filers are also encouraged to make sure they double check their postage. Postage rates are due to increase April 17 -- the day before the tax filing deadline. While the cost of a first-class stamp remains at 44 cents, the cost of each additional ounce increases from 17 cents to 20 cents. Tax returns mailed with insufficient postage will be returned to the sender postage due.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD. He is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.