Tax planning is increasingly complicated, and one of the top challenges businesses struggle with. You see, taxpayers often seek to lower their taxes by qualifying for deductions or credits that are allowed under the Internal Revenue Code (IRC). Oftentimes, taxpayers plan ways to take advantage of these deductions and other potential savings without understanding what constitutes a valid deduction.
When taxpayers find that they can’t take full advantage of the deductions allowed by law, it’s often because they have made one or more mistakes. Common tax planning mistakes include the following.
1. Missing Tax Deadlines
In most cases, when a taxpayer cannot take advantage of a certain tax deduction, it’s because they have missed the appropriate filing deadline. In many cases, taxpayers miss their tax filing deadline simply because they’re unaware they exist.
The IRS allows eligible taxpayers additional time to file returns and pay taxes to protect them from an accidental oversight. However, the IRS does not extend this privilege without good reason.
To avoid missing important tax filing and payment deadlines keep track of all of your receipts and records. You could also file your return on time (even if you don’t get all of your deductions).
2. Missing Tax Savings Opportunities
Taxpayers often unintentionally fail to claim certain deductions or credits which would otherwise reduce their tax liability. While this is not necessarily a tax planning mistake – depending on the deductions and credits missed – it’s nonetheless something that taxpayers should be aware of.
To ensure that you’re taking full advantage of allowable deductions, you need to claim all income. It’s also vital that you don’t overlook home office deductions, and don’t forget to claim education credits or deductions.
3. Taking Improper Deductions (Illegal Tax Shelters)
Many taxpayers make assumptions about what can and cannot be deducted when filing their taxes. The fact is, only certain items allowable by law may actually be claimed during the filing process.
If a taxpayer attempts to deduct an item without first checking with a professional, they risk exposing themselves to an investigation from the IRS. To avoid this, taxpayers should always check with a tax professional before taking deductions.
4. Claiming the Wrong Deduction
Claiming deductions often seem like a simple task. However, even something as simple as taking an itemized deduction over a standard deduction can have tax consequences—especially if the taxpayer selects the incorrect deduction to take.
When claiming deductions, taxpayers should always double-check that they’re choosing the deduction, which will lower their taxes for that year.
5. Making Claims Without Proper Documentation
Taxpayers often make mistakes while filing tax returns because they fail to collect all necessary documentation in support of their claims. While many people assume that simply filing certain forms is enough to substantiate any claim, this is simply not the case.
For example, people often assume that filing form 1099 entitles them to certain deductions. However, there are strict requirements for what forms and when they must be filed to be valid.
To avoid making mistakes keep track of all of your receipts and records. Also, ensure you file the required forms (1099) with the IRS on time.
6. Failing to Seek Professional Guidance When Needed
While it’s certainly possible to take full advantage of allowable tax deductions by relying on one’s own knowledge alone, doing so may result in an incomplete picture of a taxpayer’s actual financial status.
This can hinder future tax planning while exposing the taxpayer to other tax mistakes. To avoid this, it’s important for people to gather all receipts and records ahead of time and seek guidance from professional tax experts.
7. Not Keeping Up With Changing Regulations
It can be easy for taxpayers to get out of touch with changing regulations within their own industry. This usually occurs because people are unaware that their industry is being regulated in the first place.
While some industries are not subject to taxation, others may face strict guidelines that determine how certain deductions are taken or applied. To avoid making costly tax planning mistakes, be aware of changing regulations within your field.
8. Failing to Meet Deadlines for Important Documents
The IRS imposes strict deadlines on certain items, including W2s and 1099s. If these documents are not filed on time, penalties may be incurred, which can quickly add up over the course of a year.
Taxpayers should always remember to file important documentation on time – or seek guidance. To avoid missing important deadlines, ask your employer for all W2 forms earlier in the year and plan ahead by filing 1099s early.
9. Failing to File a Return or Report All Income
Many people assume that if no taxes are owed, it’s unnecessary to file a return—this is not the case. Even when you’re under no legal obligation to send records of your income, failing to do so can result in interest charges and penalties from the government that will only add insult to injury.
In many cases, filing a report on even small amounts of income can be beneficial. It opens up options such as direct deposit, which allows certain deductions.
10. Not Filing a Tax Extension (Form IL-505)
Failing to file a tax extension is one of the taxpayers’ most common mistakes when preparing for tax season. People often assume that they have until April 15th to file their taxes.
However, this is simply not the case as it only applies to those submitting their federal tax returns. For those who are filing a state return, you must file your tax extension by April 15th. To avoid making these mistakes submit form IL-505 as soon as possible and remember an extension only gives you more time to file.
Tax Planning Strategy: Common Tax Planning Mistakes to Avoid
Tax planning is something that everyone should take seriously because one mistake can cost thousands of dollars. By avoiding these common tax planning mistakes and consulting with a professional tax expert, taxpayers can ensure that they’re taking full advantage while saving money on future income taxes.
For more information on avoiding these mistakes next year, consult with our professional tax experts to get started today.
