Mistakes are a wonderful way to learn, but you have to realize you’ve made one for the learning to happen. Here are five mistakes tax pros say people make all the time — often without knowing it — and what you can do to avoid these expensive “learning opportunities.”Mistake No. 1: Giving the government a free loan
Sure, it might feel pretty great to get a fat refund check in April, but it actually means you made an interest-free loan to the government, says Melissa Labant, director of tax policy and advocacy for the American Institute of Certified Public Accountants. Not a good idea — most people expect to earn interest when they lend money, after all.
How to avoid it: Try adjusting your W-4, the IRS form you give to your employer indicating how much tax to withhold from eachpaycheck. You can change your W-4 at any time. A federal tax calculator can help you estimate your annual tax burden more accurately.Mistake No. 2: Guessing the value of donations
Most people know to get a receipt for non-cash donations, but often those receipts can become targets during an audit if you don’t have itemized lists to go with them, says Jennifer MacMillan, an enrolled agent in Santa Barbara, California.
“If you’ve just got a bunch of blank receipts and you said, ‘Well, I just called this one $1,000 and this one $700,’ that’s just absolutely not going to fly,” she says.
How to avoid it: Figure out the thrift store value of each donated item and document it as soon as you drop it off, MacMillan says. Manytax software programsinclude modules that can estimate the value of each item you donate, and organizations such as Goodwill and the Salvation Army have their own guides as well.Mistake No. 3: Overlooking charitable donations at work
Many people give to charity via employer payroll deductions — and then overpay at tax time because they forget to deduct those donations, says Labant.
How to avoid it: Keep your year-end pay stub. It should show the donations you made through your employer for the year, she says.Mistake No. 4: Not deducting mileage
Mileage back and forth to work and the grocery store typically isn’t deductible, but mileage to and from volunteer work for IRS-recognized charities can be, Labant says. Mileage for medical appointments and business activities (if you’re self-employed) also may be deductible. If you qualify, the deduction for tax year 2016 is 14 cents per mile for charitable activities, 19 cents per mile for medical purposes and 54 cents per mile for business for the 2016 tax year. You might also be able to deduct 19 cents for each mile driven for moving purposes. Check the IRS website or with a tax professional for the details and to see if you qualify.
How to avoid it: Keep track of mileage all year by recording where you’re driving and why, Labant says. A notebook stashed in the glovebox may suffice, but there are also apps that will help you do it. And remember that the mileage allowances change. For tax year 2017, they’re 14 cents a mile for charitable activities, 17 cents a mile for medical activities and moving purposes and 53.5 cents a mile for business.Mistake No. 5: Throwing out records
People tend to keep proof of their deductions, but they often forget to keep proof of the other parts of their return. That can cause headaches, because IRS audits may involve examining bank statements from business and personal accounts, MacMillan says.
“They add up all the deposits and they say, ‘OK, so you had $100,000 that went into all your combined bank accounts and you’ve only got $50,000 on your tax return. Explain the other $50,000,” she says.
How to avoid it: Save documents that show what went into your personal accounts, MacMillan says. The IRS advises taxpayers to keep tax records for at least three years, and in some cases six years, seven years or even indefinitely depending on what you put (and don’t put) on your return. Check the IRS website for more details.