2/25/2013 8:00 PM ET|
Tax mistakes that cost thousands
A writer shares her story, along with those of others who made some major missteps and lived to tell.
When my pay was direct-deposited into my checking account every two weeks while I was working my first full-time freelance job, I'd think, "Wow, that's a decent amount of money. I can totally live off this!"
No one ever told me (and I never bothered to ask) why my paycheck seemed so large, so I lived it up for an entire year -- eating out, going to plays, buying new clothes and taking trips.
Then April rolled around: tax time. In all fairness, I knew that I hadn't been paying taxes on the money I was making as a freelancer. I just had no idea how much I actually should have been setting aside from each paycheck. I now know that I should have been saving 33% to 35% of every paycheck to put toward taxes. Hindsight . . . you know what they say.
In the end, I owed a little more $3,000. My accountant practically cried when she gave me the news.
Well, it turns out that I'm not the only one befuddled by taxes -- especially now that the new tax laws have been put in place for 2013. We found three readers who shared their own horror stories in the hopes that maybe, just maybe, it will never happen to you.
The $40K bill bombshell
In 2010, Heidi Saucedo's husband was working in Egypt for two months. While he was away, Saucedo received an envelope from the Internal Revenue Service, which contained a bill for $40,000.
"After I picked myself up off the floor, I had to contact the hubby . . . by Facebook chat," she says. "Can you imagine going through all the back-and-forth required for that via chat?"
The problem was that Heidi and her husband had not filed a tax return in five years, since money was tight while she stayed home with their two children. "I just didn't understand that we could possibly owe nothing -- I thought we would be charged for everything we owned," Saucedo says. "I knew this was foolish, but we were living paycheck to paycheck, and we were too proud to ask for assistance."
Her husband was also working under a 1099 -- which refers to the tax form reporting the earnings of someone who is not a regular, full-time employee and has no tax withheld from his or her pay. "Apparently, I had 'known' this -- my husband says that we discussed it -- but to this day, I swear I had no clue," Saucedo says.
After using TurboTax to figure out the tax deductions that hadn't been included in that $40,000 bill, such as standard deductions and the child tax credit, it turned out that they didn't owe anything. "At the time, I chose not to go to a professional since the gist of the letter from the IRS was that all we needed to do was file our taxes," Saucedo says. "I was pretty overwhelmed, and I didn't have any money to pay a CPA, so I signed up for TurboTax."
"The good thing was that when I began the search for anything and everything that I could get my hands on to rectify the situation," Saucedo adds, "I realized that I love doing taxes. Never again will there be an unfiled return!"
The $12,000 marital mix-up
In late 2008, Gayle Lynn Falkenthal received a letter from the IRS informing her that it had not received any of her quarterly estimated tax payments for her independent consultant business -- and she was behind by $12,000.
"I was shocked!" says Falkenthal. "I checked my bank account and all of the checks had been cashed by the IRS. I informed them, provided copies of the checks and the IRS opened an investigation."
Meanwhile, Falkenthal's ex-husband (with whom she, luckily, remained on good terms) mentioned to her that he'd received a direct deposit from the U.S. Treasury for a little more than $10,000, and he couldn't imagine why.
The IRS had credited Falkenthal's payments to her ex-husband's tax obligations under his Social Security number, as opposed to hers. It turns out that this kind of mix-up is pretty common the first year after a divorce.
"The wife could be making estimated tax payments in the year subsequent to the divorce using coupons based on the year prior -- her married year," says Thomas D. Fisher, a CPA. "Those coupons contain both Social Security numbers, and even if she writes her number on the check, the IRS processes the payment with the information shown on the voucher -- and always credits the payment to the first Social Security number shown, which is usually the husband's."
To avoid this problem, Fisher suggests double-checking that the 1040ES Estimated Tax Payment Vouchers are made with only your name and Social Security number after a divorce.
"My CPA instructed me on how to compose a letter for my ex-husband and me to jointly sign and send, acknowledging his receipt of the money in error," Falkenthal explains. "Finally, after another six months, the IRS acknowledged the error. My husband sent a check to the IRS for the amount sent to him, which was properly applied to my tax obligation, and then I finally received the stimulus check that the IRS had seized before sorting everything out. It was a measly $200. I spent it on a new pair of boots, just because."
The moral of this story? "It pays to remain friendly with your ex," says Falkenthal.
The miscounted dependents
Last year, Jose Vera thought that everything was totally fine when he filed his own taxes online using tax-preparation software. "I have two dependents, so I figured, 'OK, I'll just add their Social Security numbers,' " Vera recalls.
Then the waiting began.
Vera let a full two months pass before he decided to give the tax-preparation company a call. "It turns out that I had missed some information for one of the dependents, and they had been trying to email me about it, but they had the wrong address on file," Vera explains.
In the end, he'd made a mistake about the date of birth of one of his dependents, and he ended up being able to claim only one dependent instead of two -- which lost him a little over $1,100. "I almost threw my iPad into the ocean" (when he found out), Vera says. "But I figured that I'd already lost enough money for one day."
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In reading the first story of the free lancer I was completely befuddled at the story for mathematically it makes no sense. She paid no taxes for the year and her free lance taxes due were three thousand dollars. She lived it up buying clothes, vacationing and eating out and owed only three thousand dollars? Going on the premise her percentage of earnings after deductions was fifteen percent she would have a twenty thousand dollar taxable income.
My wife and I are retired and after deductions our tax rate is nineteen percent which last year we paid just under nine thousand in taxes to the treasury. Eating out about twice a month, one vacation and not much as far as new clothes.
I would love to be introduced to her accountant.
The story is pure garbage. The real story is never told.
We pay taxes on not how much we make but how much we transact.
Churning money in our paycheck and through our hands makes us look like we are making a lot of money but we don't even get to kiss the money on the way thru.
Seven years ago, I was a healthy veteran aged 50. I got a divorce from my wife of 19 years. She got everything and I had to pay 3/4 of my retirement pay as child support to care for 1 child. I took the other 2 children with me. Sad story aside, I pay child support but I don't get any tax credit. she does.... Everybody has a sad story, so don't cry when the tax man beats in your door for trying to cheat the system. Want to beat him.... Simple, do like millions are doing right now.... Quit your job, Raise your hands in surrender, and go on welfare. Have babies to support your cause and claim the government made you do it...
Or ... Own up and believe this country needs your help and not a free ride. Help stop the big babies that are bleeding the government dry for little or no sacrifice.
If you have a job in congress, you get a B coupon for the rest of your life. and the coupon stands for BIG BUCKS....
Situations of that nature are best left in the hands of a competent CPA, EA, or a lawyer that practices in taxation. It's worth the extra cost.
The current federal income tax system is clearly broken -- unfair, overly complex, and almost impossible for most Americans to understand. But there is a reasonable, bipartisan alternative that is both fair and easy to understand. A system that allows you to keep your whole paycheck and only pay taxes on what you spend.
The FairTax is a national sales tax that treats every person equally and allows American businesses to thrive, while generating the same tax revenue as the current four-million-word-plus word tax code. Under the FairTax, every person living in the United States pays a sales tax on purchases of new goods and services, excluding necessities due to the prebate. The FairTax rate after necessities is 23% and equal to the lowest current income tax bracket (15%) combined with employee payroll taxes (7.65%), both of which will be eliminated.
Important to note: the FairTax is the only tax plan currently being proposed that includes the removal of the payroll tax.
Curious? Read some of the research listed below to see exactly how your taxes would change. www.fairtax.org
Ahhh, tax time whereby a middle cl****fessional, single or married couple pays for the mistakes of others. In contrast, the EBT (food stamps) and Medicaid recipients (who, depending on their needs can receive nearly $500 a month on food stamps, $400 worth of free/premium less/co-payment less medical coverage) rejoice at tax time because most I have known also will receive around $5,000 in tax refunds... Gotta love it.
The majority of mistakes are made by the citizen not the IRS. Usually it is because we do not understand the tax code. It is so complicated that I doubt very few people understand it. We had something similar. I am employed by an organization and have a contract business as well. We did owe $18,000 one year but It was our mistake. We were not holding the appropriate amount of taxes out because it was 1099 income (slef-employment), more has to be held out. We have since corrected the error. It was very difficult to do. The moral of the story is to hire a CPA. They are well worth the money.
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