We’re talking about the filing blunders that can increase your tax bill, raise the odds of unwanted IRS attention, or cost you if you get audited. Leaving aside obvious ones, such as forgetting to sign your return, here are some of the most common mistakes:
The gift that ends up taking
You probably know you need charitable organization receipts to back up any donations of $250 or more. But did you know you must actually have those receipts in hand by the time you file? Otherwise, the tax law says no write-off is allowed. Period. For cash donations of less than $250, you’re not allowed any write-off unless you have either a bank record that proves the donation (for example, a cancelled check, bank statement, or credit card statement) or a written acknowledgement from the recipient charity that meets tax-law requirements. Therefore, small undocumented cash contributions (such as money placed on church collection plates and cash dropped in Salvation Army pots) will not qualify for write-offs. You must get a receipt from the charity to lock in your rightful tax break.
You also must obtain charity-provided written acknowledgments for any cash contributions of $250 or more.
There’s more: for charitable donations of used clothes and household items, you get no deductions unless the stuff is in “good” condition or better. “Household items” include furniture and furnishings, electronics, appliances, linens, and the like. In other words, no charitable write-offs for donated junk. Under an exception, you’re allowed a write-off for any single item, regardless of its condition, that is appraised at over $500 such as a piece of antique furniture that is valuable even though it is only in “fair” conditions. (See IRS Form 8283 at www.irs.gov for more details on the rules for non-cash donations.)
The rollover fumble
Say you left your old job or retired in 2018 and rolled over your retirement account, tax-free, into a traditional IRA. What you’d receive from your former employer is a 1099-R that shows a taxable retirement-account distribution, even though it was tax-free. Or maybe you rolled over an existing IRA tax-free from one brokerage house to another. Again, you’d receive a 1099-R showing a taxable distribution, even though you didn’t actually have one.
Include the 1099-R figure on Line 4a of your 1040. Then show the taxable amount — zero if you rolled everything over — on Line 4b. Be sure to write “Rollover” next to Line 4b. Blank lines will trigger an IRS inquiry about why you failed to account for the distribution shown on your 1099-R. Then you’ll become pen pals with the government as you try to explain what happened. Not fun.
If you bought an existing home last year, you may find a tax goody buried under the blizzard of paperwork. I’m talking about your right to deduct any mortgage points paid by the seller. I know that being able to write off an expense someone else has paid for sounds too good to be true. But it is true, so don’t overlook it. The only catch: you must reduce the tax basis of your new home by the amount of seller-paid points that you deduct. That will mean a bigger profit when you sell, but since you can usually exclude home sale gains up to $250,000 ($500,000 if you are married), the bigger profit probably won’t actually result in any extra federal income tax.
Another little known deduction: If you refinanced the mortgage on your home and paid any points, you have been slowly amortizing the cost of those points over the life of the loan. But say you sold your home in 2018. Many people forget they can deduct the unamortized balance of points in the year of the home sale. Claim the write-off on Schedule A as “home mortgage interest and points.”
Here’s another deduction many people miss simply because they aren’t aware of it: If you sold a house last year, take a look at your real-estate closing statement. It probably shows that you prepaid a portion of the property taxes that came due after the date of sale. You can deduct this amount on your return, subject to the $10,000 limitation for state and local taxes ($5,000 if you use married filing separate status).
Boss of the house
One of the most common mistakes is unmarried folks filing as single taxpayers when they qualify for the much-more-favorable head-of-household (HOH) filing status. Say you’re single and your non-adult child lives with you and pays for less than half of his or her own support. If you pay more than half the household’s costs, you qualify as a head of household. You may also qualify if you are still married and lived with your child but apart from your spouse for at least the last half of 2019. Finally, if you are single and your parent is a dependent, you can probably file as HOH. This is true even if your parent has his or her own place. You are the HOH if you pay more than half the cost of your dependent parent’s home.
New kid on the block
If you have a little bundle of joy who was born last year, don’t forget to sign them up for a Social Security number before filing. It’s required to claim your rightful $2,000 child tax credit. What happens if you file without the number? The IRS will disallow the credit, recalculate your tax, and either send you a bill or mail you a lower-than-expected refund.
No cash to pay your tax bill?
So you won’t have the money to pay the feds by the April 15 deadline? Don’t make the common — and expensive — mistake of ignoring your tax-filing requirement until you’ve rounded up the bucks. Instead, you should either file your return by the deadline or apply to get an automatic extension until Oct. 15.
Either way, you can defer paying your tax bill until later. Sure, you’ll be charged penalty interest. But the current rate is 1% a month. (The rate is adjusted quarterly, so it may be higher or lower by the time you read this.) If you do nothing, you’ll be penalized to the tune of 5% of the unpaid balance per month, up to a total of 25% (after five months). After that, you’ll be charged interest at the 1% monthly rate. So, what if you extend until Oct. 15 and are still short on cash when that date rolls around? You can then try to arrange for installment payments of your tax debt. (Use IRS Form 9465 — Installment Agreement Request — to apply for an installment deal.) Alternatively, consider charging your tax bill on your credit card if that gives you a better interest rate.