The 10 Most Common Tax-Filing Mistakes

Each year during tax season, clients ask us how to avoid an IRS audit. They are surprised to find out that many IRS mail examinations are caused by rather simple, avoidable mistakes made by taxpayers as they prepare and send in their income tax returns. The following list compiled by Yahoo Finance summarizes the errors that occur most frequently.

The 10 Most Common Tax-Filing Mistakes
by Katie Adams
Saturday, February 20, 2010
provided by Investopedia

One innocent slip-up on your federal income tax return could cost you time and money. Be sure to double check your return for these common mistakes:

1. Wrong Filing Status

You can only choose one filing status -- single, married filing separately or married filing jointly. What determines your filing status is your marital status as of year's end (either single or married). If you are married, it's your preference whether to file separately or jointly. (However, you and your spouse will need to agree on the filing status -- you can't file married separately if your spouse is filing jointly!) Mark the correct box accordingly, or it could cause you to be denied for tax credit claims such as the child or dependent care credit, earned income tax credit, etc.

2. Wrong Address

If you are submitting a paper return, it is best to use the peel-off label on the tax form you received in the mail. You can make corrections directly on the label. However, if you do not have a label or if there are too many corrections, make sure you clearly print your name, address and zip code on the return.

3. Incorrect or Missing Social Security Numbers

Your Social Security number is a crucial part of your federal income tax return. It corresponds with income reported as well as deductions and credits you are claiming. If you accidentally provide the wrong number, your claims could be denied, or at least delayed until you are able to make the correction with an amended tax return. In addition, the IRS can only verify someone you areclaiming as a dependent if you include his/her correct Social Security number as it appears on the Social Security card. If there have been any name changes since you last filed a tax return, you should contact the Social Security Administration by calling 1-800-772-1213 or by going to its website at ssa.gov.

4. Unsigned Return

After doing all that hard work, don't forget the easy part -- signing the form! Neglecting this important last step could unnecessarily hold up your refund or, if you owe money, you will have to pay penalties and interest on your tax bill. If you are filing jointly, make sure that your spouse also signs and dates the return.

5. Math Errors

Use a calculator and go back over your return carefully to ensure that you have added and subtracted all those numbers correctly. While the IRS Service Center can, and often does, catch math errors and will make changes accordingly on your form, it's not guaranteed.

6. Tax Computation Errors

According to the IRS, in addition to basic addition and subtraction mistakes, filers often incorrectly compute their taxable income, withholding and estimated tax payments, earned income tax credit, standard deduction (for people age 65 or older or who are blind), taxable Social Security benefits and child or dependent care tax credit. Make sure you are using the correct column for the IRS tax table based on your filing status.

7. Incorrect Identification Numbers

If you are claiming a dependent or child-care tax credit, double check to make sure you have the right identification number(s) for the care provider(s).

8. Incorrect Financial Institution Information

If you are owed a refund and elect to have the funds directly deposited into your bank account, make sure that you provide the correct financial institution account and routing transit numbers, or your refund could be delayed or worse -- sent to the wrong taxpayer!

9. Undocumented Deductions

If you are filing an itemized return and claiming charitable contribution deductions, you will need written receipts for each donation verifying the date, contribution amount and name of the nonprofit organization you supported. Other common deductions for which you will need receipts include mortgage interest, property taxes and medical expenses (if they exceeded 7.5% of your adjusted gross income.

10. Wrongly Claiming -- or Forgetting to Claim -- Credits And Rebates

In addition to standard tax credits such as the Earned Income Tax Credit (EITC), each year there are new credits, rebates and deductions for which you may qualify. Last year's top tax-filing mistake was wrongly accounting for the 2008 recovery rebate. Over 2 million tax filers either didn't include the rebate on their return or entered the wrong amount. This year, millions of tax filers will be able to claim the Obama Administration's "Making Work Pay" tax credit that was extended under the 2009 American Recovery and Reinvestment Act (ARRA), as well as the First-Time Homebuyer Tax Credit. If you think you may qualify for a credit or rebate, check the IRS website to find the appropriate form, or consider using tax preparation software that can walk you through a checklist of potential benefits.

Conclusion

You can reduce the likelihood of making tax mistakes by filing electronically through the IRS website or by using tax preparation computer software that can help you avoid, or correct, common errors.

When it comes to filing your taxes, it can often pay to wait until the deadline.

10 Ways the New Healthcare Bill May Affect You

Our office has been receiving many calls regarding the new healthcare legislation. The following article from Yahoo Finance summarizes ten areas of the bill that may affect the average taxpayer.


10 Ways the New Healthcare Bill May Affect You
by Katie Adams
Friday, March 26, 2010
provided by Investopedia


The Patient Protection and Affordable Healthcare Act, more commonly referred to as the "healthcare bill", has taken over a year to craft and has been a lightning rod for political debate because it effectively reshapes major facets of the country's healthcare industry.

Here are 10 things you need to know about how the new law may affect you:

1. Your Kids are Covered

Starting this year, if you have an adult child who cannot get health insurance from his or her employer and is to some degree dependent on you financially, your child can stay on your insurance policy until he or she is 26 years old. Currently, many insurance companies do not allow adult children to remain on their parents' plan once they reach 19 or leave school.

2. You Can't be Dropped

Starting this fall, your health insurance company will no longer be allowed to "drop" you (cancel your policy) if you get sick. In 2009, "rescission" was revealed to be a relatively common cost-cutting practice by several insurance companies. The practice proved to be common enough to spur several lawsuits; for example, in 2008 and 2009, California's largest insurers were made to pay out more than $19 million in fines for dropping policyholders who fell ill.

3. You Can't be Denied Insurance

Starting this year your child (or children) cannot be denied coverage simply because they have a pre-existing health condition. Health insurance companies will also be barred from denying adults applying for coverage if they have a pre-existing condition, but not until 2014.

4. You Can Spend What You Need to

Prior to the new law, health insurance companies set a maximum limit on the monetary amount of benefits that a policyholder could receive. This meant that those who developed expensive or long-lasting medical conditions could run out of coverage. Starting this year, companies will be barred from instituting caps on coverage.

5. You Don't Have to Wait

If you currently have pre-existing conditions that have prevented you from being able to qualify for health insurance for at least six months you will have coverage options before 2014. Starting this fall, you will be able to purchase insurance through a state-run "high-risk pool", which will cap your personal out-of-pocket expenses for healthcare. You will not be required to pay more than $5,950 of your own money for medical expenses; families will not have to pay any more than $11,900.

6. You Must be Insured

Under the new law starting in 2014, you will have to purchase health insurance or risk being fined. If your employer does not offer health insurance as a benefit or if you do not earn enough money to purchase a plan, you may get assistance from the government. The fines for not purchasing insurance will be levied according to a sliding scale based on income. Starting in 2014, the lowest fine would be $95 or 1% of a person's income (whichever is greater) and then increase to a high of $695 or 2.5% of an individual's taxable income by 2016. There will be a maximum cap on fines.

7. You'll Have More Options

Starting in 2014 (when you will be required by law to have health insurance), states will operate new insurance marketplaces - called "exchanges" - that will provide you with more options for buying an individual policy if you can't get, or afford, insurance from your workplace and you earn too much income to qualify for Medicaid. In addition, millions of low- and middle-income families (earning up to $88,200 annually) will be able to qualify for financial assistance from the federal government to purchase insurance through their state exchange.

8. Flexible Spending Accounts Will Become Less Flexible

Three years from now, flexible spending accounts (FSAs) will have lower contribution limits - meaning you won't be able to have as much money deducted from your paycheck pre-tax and deposited into an FSA for medical expenses as is currently allowed. The new maximum amount allowed will be $2,500. In addition, fewer expenses will qualify for FSA spending. For example, you will no longer be able to use your FSA to help defray the cost of over-the-counter drugs.

9. If You Earn More, You'll Pay More

Starting in 2018, if your combined family income exceeds $250,000 you are going to be taking less money home each pay period. That's because you will have more money deducted from your paycheck to go toward increased Medicare payroll taxes. In addition to higher payroll taxes you will also have to pay 3.8% tax on any unearned income, which is currently tax-exempt.

10. Medicare May Cover More or Less of Your Expenses

Starting this year, if Medicare is your primary form of health insurance you will no longer have to pay for preventive care such as an annual physical, screenings for treatable conditions or routine laboratory work. In addition, you will get a $250 check from the federal government to help pay for prescription drugs currently not covered as a result of the Medicare Part D "doughnut hole".

However, if you are a high-income individual or couple (making more than $85,000 individually or $170,000 jointly), your prescription drug subsidy will be reduced. In addition, if you are one of the more than 10 million people currently enrolled in a Medicare Advantage plan you may be facing higher premiums because your insurance company's subsidy from the federal government is going to be dramatically reduced.

Conclusion

Over the next few months you will most likely receive information in the mail from your health insurance company about how the newly signed law will affect your coverage. Read the correspondence carefully and don't hesitate to ask questions about your policy; there may be new, more affordable options for you down the road.

How long should I keep my financial records?

Our office receives many inquiries about how long a taxpayer is required to keep his records to support his tax returns or protect him in case of an audit. The following article from Bankrate.com explains the basics. Please contact our office with any additional questions or comments.


How long to keep financial records
By Bankrate.com

You can't take everything with you, but the following are suggestions about how long you should keep personal finance and investment records on file:

Financial Records Timeline - Type of record Length of time to keep, and why:

Tax records should be kept for: Seven years

Returns

Canceled checks/receipts (alimony, charitable contributions, mortgage interest and retirement plan contributions)

Records for tax deductions taken

The IRS has three years from your filing date to audit your return if it suspects good-faith errors.
The three-year deadline also applies if you discover a mistake in your return and decide to file an amended return to claim a refund.
The IRS has six years to challenge your return if it thinks you underreported your gross income by 25 percent or more.
There is no time limit if you failed to file your return or filed a fraudulent return.

IRA contribution records: Permanently

If you made a nondeductible contribution to an IRA, keep the records indefinitely to prove that you already paid tax on this money when the time comes to withdraw.
Retirement/savings plan statements From one year to permanently
Keep the quarterly statements from your 401(k) or other plans until you receive the annual summary; if everything matches up, then shred the quarterlies.
Keep the annual summaries until you retire or close the account.

Bank records: From one year to permanently
Go through your checks each year and keep those related to your taxes, business expenses, home improvements and mortgage payments.
Shred those that have no long-term importance.

Brokerage statements: Until you sell the securities
You need the purchase or sales slips from your brokerage or mutual fund to prove whether you have capital gains or losses at tax time.
Bills From one year to permanently
Go through your bills once a year.
In most cases, when the canceled check from a paid bill has been returned, you can shred the bill.
However, bills for big purchases -- such as jewelry, rugs, appliances, antiques, cars, collectibles, furniture, computers, etc. -- should be kept in an insurance file for proof of their value in the event of loss or damage.

Credit card receipts and statements: From 45 days to seven years
Keep your original receipts until you get your monthly statement; shred the receipts if the two match up.
Keep the statements for seven years if tax-related expenses are documented.

Paycheck stubs: One year
When you receive your annual W-2 form from your employer, make sure the information on your stubs matches.
If it does, shred the stubs.
If it doesn't, demand a corrected form, known as a W-2c.

House/condominium records: From six years to permanently
Keep all records documenting the purchase price and the cost of all permanent improvements -- such as remodeling, additions and installations.
Keep records of expenses incurred in selling and buying the property, such as legal fees and your real estate agent's commission, for six years after you sell your home.
Holding on to these records is important because any improvements you make on your house, as well as expenses in selling it, are added to the original purchase price or cost basis. This adds up to a greater profit (also known as capital gains) when you sell your house. Therefore, you lower your capital gains tax.


Source: Marquette National Bank and Catherine Williams, President of Consumer Credit Counseling Services of Greater Chicago

Start saving in your 20s if you want to get rich. Even if money is tight, this is the time to start stashing away money. Start small, start now.

It's easy to understand why retirement doesn't loom large on the horizon for 20-somethings. Young workers are more concerned with kick-starting careers, not ending them in the long-distant future.

But it's worth noting that the very fact that you're young gives you a huge edge if you want to be rich in retirement. That's because when you're in your 20s, you can invest relatively little for a short period and wind up with far more money than someone older who saves much more over a longer period.

Consider this scenario: If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you'll have around $560,000, assuming earnings grow at 8% annually. Now, let's say you wait until you're 35 to start saving. You put away the same $2,000 a year, but for three decades instead, and earnings grow at 8% a year. When you're 65 you'll wind up with around $245,000 -- less than half the money.

Seems like a no-brainer, right? Save a little now and reap big rewards later.

Unfortunately, many of today's youngest workers pass on the opportunity to save for retirement early, when the beauty of compounding interest can work its magic and maximize savings. A study by human resources consultant Hewitt Associates found that just 31% of Generation Y workers (those born in 1978 or later, now in the thick of their 20s) who are eligible to put money into a 401(k) retirement savings plan do so. That's less than half of the 63% of workers between ages 26 and 41 who do invest in employer-sponsored savings accounts.

Start saving ASAP! There are plenty of reasons you may have yet to save, such as cash flow. If you're struggling to pay off student loans or cover rent, funding a 401(k) may seem difficult, if not downright impossible.

Sign up for that 401(k)! Make the most out of those few dollars you can get hold of by allocating them wisely. Don't squirrel them away under the mattress. You will want them to be invested in a way that will encourage your assets to grow as quickly as possible.

Where to start? If you're eligible to participate in a 401(k) at work, do so. There are plenty of reasons to love these plans but No. 1 by far is that most employers match your contributions in order to encourage your participation. The hitch: Oftentimes, you'll need to save enough to trigger the match.

In a typical plan, employers match up to 3% of your salary, according to the Profit Sharing/401(k) Council of America. When you sign up, the money you save is automatically deposited into the plan before it's taxed, so less of your income will be taxed now. That saves you money, too.

No company retirement fund? Use a Roth instead. If you aren't eligible for a retirement fund at work that gets you matching funds, sign up for the next best thing: a Roth IRA. You'll fund this with money that's already been taxed as part of your normal paycheck. But money in a Roth IRA withdrawn later is tax-free. Save what you can. It will add up. If you are able to sock away $4,000 a year into a Roth for 40 years, and if it earns 8% annually, you'll be a tax-free millionaire at retirement. To make sure you stick to saving, have a portion of your paycheck or payments from your bank account automatically deposited into the Roth each month or every few weeks.

Get educated! Meanwhile, don't be embarrassed to admit that financial talk can seem confusing. After all, financial know-how is not genetically encoded and, unless someone has taken the time to teach you about finance, you'll need to do a little learning. And now that you're starting to make and save money, this is the perfect time to educate yourself. Read books, articles or financial Web sites. The more you know, the easier it will be throughout your career to make solid, informed decisions.

Build a strong defense with an emergency stash. Start amassing an emergency fund so you don't have to rely on credit cards -- and possibly bury yourself in debt -- in the event that your car dies, your roommate comes up short on rent or you suffer some other financial mishap. Ideally, you'll stash up to three months living expenses, but the important goal is to save something. You can help stay on track by having automatic deposits made to your emergency account.

In the meantime, keep an eye on spending. Those splurges can add up fast and will prove to be a huge drain on future savings. What's more, if you pile on debt, you'll wind up wasting a lot of money on interest and fees that could be better spent elsewhere.

Avoid debt! If you're really struggling to stretch the paycheck to set something aside for retirement, this is the time to make some changes. Give your budget a major overhaul. Consider getting a roommate or picking up an extra job for the time being. Big changes now, coupled with consistent saving over time, will reap huge rewards down the road.


Excerpted from Bankrate.com

13 tax changes you need to know before filing your 2009 returns

We found a concise summary of 2009 tax changes in the following AOL Walletpop personal finance article. Please contact our office to discuss any questions or comments you may have.

13 tax changes you need to know before filing your 2009 returns

2009 Educational Credits and Deductions

If you are a taxpayer with higher education costs, you should be aware of the many tax benefits that are available to you. Generally, educational assistance such as scholarship, fellowship, or employer-provided educational benefits are excludable from income. For education costs not covered by educational assistance, tax benefits include the Hope scholarship credit (also known as the American Opportunity credit for 2009 and 2010) and the lifetime learning credit. Alternatively, you may have the option of deducting qualified tuition and fees expenses "above the line." These credits and deductions are coordinated with the exclusion for distributions from education savings plans, such as, Coverdell Savings Accounts and qualified tuition programs. For taxpayers who take out a loan to pay for their education, a deduction is available for the student loan interest.

The amount of the American Opportunity tax credit is computed as 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of such expenses, for a total maximum credit of $2,500. The lifetime learning credit is generally available for 20 percent of education expenses up to $10,000. For taxpayers who do not itemize, an above-the-line higher education tuition deduction can be claimed in 2009 for up to $4,000.

Each education credit and the deduction have adjusted-gross-income phase out limitations. In addition the education credits are coordinated with the deduction and Coverdell Savings Accounts and qualified tuition programs so that taxpayers cannot realize duplicate tax benefits for the same dollars of education costs. Because of the variety of tax benefits and the variations as to eligibility and the definition of qualifying education expense, some or all of the benefits may apply to you. Every taxpayer should review their tax plan in order to take maximum advantage of the tax savings for education.

Determining the best alternative for you and your dependents requires an analysis of your expected costs, resources, and income. We can advise you on the best course of action. Please contact our office at your earliest convenience to discuss your situation.

How Do I ... Convert a Traditional IRA to a Roth IRA?

People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, "qualified" distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.

Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.

Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.

Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.

For more details, including four ways to convert a Traditional IRA to a Roth IRA, please visit the newsletter section of our website at http://www.brummetandolsen.com/newsletter.