1/19/2011 4:24 PM ET|
8 tax mistakes that can cost you
Such accounts have tripped up several of our readers. One said she improperly housed a Roth account inside an insurance vehicle. When she transferred the money out of the account, she had to pay a 10% penalty and count earnings as ordinary (taxable) income.
Another reader bemoans that he did not convert his traditional IRA into a Roth in a year when his income was particularly low.
5. Don't let 'I do' undo you.
One woman told us that in the first year she was married, both she and her husband sent in tax returns, and both checked the "married filing jointly" status. They realized their mistake when the IRS sent them two refund checks. "It took nine months of writing and calling the IRS" to straighten things out, she recalled. "I still chuckle."
Another reader wrote that his wife claimed her son as a dependent the year after he got married. The rules for when you can claim adult children as dependents are complex, but marriage typically rules out the dependent tax break. "We ended up repaying the refund we got, as well as penalties," the reader writes.
Coenen says that a married, adult child can sometimes be claimed as a dependent on a parent's tax return if certain provisions are met. But the child can't also file a joint tax return with his or her spouse. "It is likely that the son in this case filed a tax return with his spouse, so the dependent exemption his parents attempted to take was later denied," Coenen says.
For deductions you more likely can take, read "10 big deductions too many of us miss."
6. Was your student loan debt paid by your employer? Make sure the IRS knows.
If you're lucky enough to have your employer cover some of your student loan debt, don't forget the tax man. In the eyes of the IRS, it is pay and must be reported as income on your W-2. One reader, who assumed her employer had taken care of the arrangements, wrote on our Facebook page, "The Army gave me money towards a student loan and didn't hold back any taxes, I assumed they had, so now I'm paying the IRS back! Oops."
7. Don't be afraid to second-guess your tax preparer.
If your tax preparer's advice contradicts your past experience, get a second opinion from another preparer -- or, better yet, from the IRS. One reader spared us the details, but summarized her biggest tax mistake: "I listened to my tax preparer." About $25,000 in fines later, the reader said, "I should have checked with the IRS."
Another reader, who owns rental properties, missed out on deducting mileage for visiting the properties, as well as the cost of tools he used for repairs. He said he had his doubts, but he was in a rush, so he stuck with the advice of his tax preparer. He later confirmed that the deductions likely would have been allowed by the IRS.
8. If your taxes get complicated, consult a tax preparer.
This may sound like it contradicts tip No. 7. But many readers who told us about their dumb mistake said they regretted that they hadn't hired a tax professional. One reader messed up the paperwork for requesting a refund after moving to a new state. The mistake triggered an audit. (See "6 ways to avoid an audit" for more.)
Another reader wrote: "Tax laws are constantly changing and there are deductions out there that you have no way of knowing about."
Ultimately, you are the one responsible for the accuracy of your income tax return. But a good tax preparer can save you time, money and headaches by fixing often silly and sometimes costly mistakes. Read "Should you do your own taxes?" if you could use help deciding whether to hire a professional -- and "Do it right: Your 15-point tax checklist" if you plan to go it alone.
Correction: This article originally incorrectly referred to a change in laws surrounding IRA conversions. During 2010 only, any taxes due on a Roth IRA conversion could be spread over two years.
VIDEO ON MSN MONEY
I've always done my own taxes but admit I've had situations where I'm bounced from publication to publication only to be more confused after reading how something should be reported. Our legislators will never give in to a simpler tax code. They'd be giving up too much of their power in controlling our financial behavior. (This is meant to be a bi-partisan slam of our elected officials).
The fact that ObamaCare and FinReg requires the additional hiring of 16,000 IRS enforcement agents should give anyone that has more than a simple tax return and refuses to "trust" a so called "tax expert" an anxiety attack. But hey, we should be happy. Although it's going to hurt when we're asked to bend over, Obama is holding true to his promise in "creating jobs"!
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