It’s once again that time of year when we brave overcrowded gyms, dry January, and of course, the start of tax season.
As you begin organizing receipts and checking the mail for your W-2, it’s also a good idea to brush up on how you maximize your tax savings. Below are some of the common mistakes taxpayers make when filing taxes and how to avoid them.
1. Getting a big refund in April.
Filing taxes can be a stressful process, but getting a big refund at the end of it all can feel like a nice reward. Well, if you do get a refund each year, it’s not exactly cause for celebration. The truth is that getting a refund is bad, actually.
Why? That money isn’t a generous gift from Uncle Sam. It’s your money that you earned throughout the year, but didn’t receive until you filed your taxes. This happens if you don’t claim the correct number of exemptions on your W-4 and end up having too much tax withheld from each paycheck. And that’s money you could have used to pay off debt or socked away to collect interest.
2. Claiming the wrong filing status.
Whenever you file taxes, you have to choose a status:
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
“This choice determines almost everything on your tax return and is made at the beginning of the process, yet most people don’t understand the basic options available to them,” said Ryan McInnis, founder of Picnic Tax.
If you’re single with no kids, choosing the right filing status might seem obvious. But married couples, single parents and caretakers might have a tougher time choosing the right one.
For example, McInnis said most married couples choose “married filing jointly,” even though there are many situations when this isn’t the optimal choice. “Say you or your spouse have a large amount of out-of-pocket medical expenses and one spouse has a much higher gross income than the other spouse. Because you aren’t able to deduct medical expenses until they exceed 10% of gross income, it may be better to file separately so that the spouse with the lower income can deduct the medical expenses on their own return,” he said.
There are countless other examples, too. For instance, single parents who have a qualifying dependent and pay for more than half the total cost of running the household may qualify to file as “head of household,” which increases the standard deduction. You can also be considered unmarried if your spouse didn’t live with you for the last six months of the year.