Posted by : Daniel Stoica in (Blog, Federal Income Tax, Federal Tax Return, Income Tax Return, Tax Filing, Tax Help, Tax Preparation, Tax Preparers) On: June 9th, 2011
Tagged Under : accounting professional, Daniel Stoica, Estimated Tax, refund, retirement plan, tax mistakes, tax professional, tax returns, taxpayer, withdrawals
1. Not Paying Estimated Taxes: Most self-employed people don’t understand the filing requirements regarding self-employment taxes, which means they end up not paying them and are hit with a huge tax bill at the end of the year, or are charged with penalties for not paying them in the first place. Income tax is basically pay as you go and anyone who is self-employed who doesn’t pay federal taxes by payroll wage deductions has to pay taxes by quarterly estimated taxes throughout the year. Self-employment taxes that are paid by estimated tax payments is the way self-employed people also pay into social security. So it’s important for self-employed people to understand their tax filing requirements and make sure they pay them in order to avoid expensive tax bills later.
2. Being Happy About Big Refunds: A big check from the government is often a good thing, but in a number of taxpayers’ circumstances, the check they get is really just the money they worked for during the year and allowed the government to hold on to, interest free. The only true refunds you will get from the government are refundable credits like the earned income credit or additional child tax credit. For refundable credits, the government lets you use them to lower your liability to zero and keep what is left over after the credit. With planning and management of their payroll withholdings, taxpayers can keep any extra withholdings and make adjustments so they can keep as much of their money as possible.
3. Making Early Withdrawals from Retirement Plans: With the economy the way it is, taxpayers are taking money from their retirement plans just to make ends meet. They don’t realize they have caused a taxable event that will cost them at tax time. If a taxpayer is under the age of 59 ½, any withdrawal they make from a retirement plan will result in an early withdrawal penalty that is figured on the tax return. However, there are exceptions to this and taxpayers need to understand them to see if they qualify. Taxpayers think that by paying the withholding in terms of the tax they need to pay, but they don’t know there are penalties that come with making that withdrawal.
4. Thinking That a Tax Return is a Product, not a Service: Tax preparation is the service; the tax return is the result of that service. Taxpayers go into tax preparation offices asking for the least expensive tax preparation fees. This is the exact opposite of what they should be asking for when it comes to their finances. The tax professional should be proactive and help their client hold on to the best tax position they can throughout the year. Should they end up with a large tax liability, the client needs to talk to their tax professional to figure out the problem and work on keeping the problem form happening again. There is no substitute for a knowledgeable, professional tax preparer.
5. Not Asking Questions: It is important for taxpayers to understand that the amount on their tax return is what the IRS will hold the taxpayer responsible for once it is filed. If you don’t understand the numbers on your return, ask what they mean. A professional tax preparer will explain them to you. If it still doesn’t make sense, or you aren’t comfortable with the return, you can always talk to another tax preparer. Two prepares who are given the same information should have the same numbers on the return. However, certain tax laws allow for differences in interpretations. If they aren’t the same, there could be a problem.
Usually your best route as a taxpayer is to make sure you understand everything and actively listen to a reputable tax preparer. It could mean the difference between a large refund or owing penalties.