Top Three Tax Mistakes That Can Cost You Thousands
Taxes are complicated. There is a lot of room for interpretation and for error. In my experience as a tax professional, I’ve seen the various types of errors first-hand. Every year, there seems to be more mistakes that can cause tax implications. Strangely, though, there are three that come up year after year.
Here are the most common and costly tax mistakes that typical filers fall victim to:
Residency Issues
State taxes are a quagmire of problems. Many times, a return will be completed on the federal side, and you will think that you are done. That’s the bulk of the taxes, right? Did you know that there are many states that don’t even have income tax? Where did you live? Did you move mid-year? What about the pandemic? Did you move temporarily? Where do you work versus where do you live? Do you cross state lines to work? State Departments of Revenue can be just as concerning as the IRS and are sometimes even more motivated to come after you.
IRA/Qualified Plan Distributions
Do you have a 401(k), IRA, 403(b) or other type of qualified plan? If you are like most Americans, the answer is probably “yes”. Do you know what the rules are in order to take money out of that plan? You may confidently say “YES!”, obviously you know that you need to wait until age 59 ½ . Did you know that there are instances when you can take it out earlier? Do you understand rollovers and conversions? Is there a right time to convert or to withdraw that is more complicated than just your age? Taxes coupled with penalties can be high if you aren’t paying attention.
Miscalculation of Basis
I probably had you up to this point and just lost you! Don’t worry, you’re not alone. Basis is the amount that has been paid for an item that you want to sell. This may be an easy concept when you bought a share of stock 2 years ago for $2 and you sell it this year for $4. The $2 is your basis. But what about your business? What did you pay for your business? You actually earn basis in your business over the course of years based on the earnings less distributions. What about money that you contributed to the business? How does that affect the basis? It’s complicated and has to be calculated carefully and correctly. You can imagine what the impact would be on that sale of stock if I said that you had paid $1 or $3 for the share when you sold it for $4. Is your gain $3 or $1? Put a few zeros after those numbers and you may be looking at a large tax bill.
Filing in multiple states, the intricacies of qualified plans, and the cost basis of large assets can be tricky to navigate. Avoid these common errors and ensure your funds are protected by investing in an experienced tax preparer like Wildalea.
Wildalea is a full-service provider of tax strategy and strategic tax preparation to make sure that you are only paying your fair share of taxes. It’s our goal to remove surprises, communicate effectively and minimize your tax bill within the clear lines of the tax code. Keeping you educated, informed and compliant. Get in touch about your tax strategy at www.wildalea.com.
