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Q. I prepare my own tax returns and would like to know how to avoid
errors that lead to incorrect or delayed refunds.
A. Using tax preparation software goes a long way in cutting down
errors on your tax forms. However, 30 million Americans still prepare
their taxes by hand and often stumble into a number of common
mistakes. You can avoid some of these errors by taking a few minutes
to browse this list of common mistakes.
- Errors reporting the 2001 tax rebate. The number one error for
the 2001 tax year centers on the rebate check that was issued to most
Americans as the result of tax reform legislation. This rebate, most
commonly in the amount of $600.00 or $300.00, was actually an advance
rebate for the 2001 tax year, in addition to any refund you receive
after filing your standard paperwork. Form 1040 addresses this
rebate, but the terms have caused a lot of confusion. Line 47 of Form
1040 asks you to calculate a "rate reduction credit," which is based
on whether or not you received the rebate check. But the term "rate
reduction credit" has led people to believe this is some other tax
credit, rather than the rebate check they have (in most cases)
already received. The only reason to use the rate reduction credit
line is if you didn't receive the maximum rebate amount you were owed
or if you never received the check because of address errors or other
mail processing problems. Page 36 of the Form 1040 instructions
provides a worksheet that walks you through the necessary steps.
- Forgotten attachments or documentation. If you don't file
electronically, you must attach all W-2s and 1099s that have
withholdings. Also, nearly every number in the income section of Form
1040 requires a supporting schedule. For example, net business income
requires Schedule C, capital gains and losses require Schedule D, and
interest and dividends (mandatory if over $400) require Schedule B.
Keep in mind that some of those schedules also require additional
supporting schedules or other forms.
- Making an incomplete report on your general income. Almost any
form of income is taxable. This means that you must report not only
your wages, but also income from all other sources such as
investments, lotto winnings and, in most cases, legal settlements. If
you didn't receive a 1099 for one of your accounts, contact your bank
or brokerage firm. An error in their mailings does not mean that your
investment income isn't taxable.
- Making an incomplete report on social security income. Your
social security payments may indeed be taxable. Form 1040
instructions include a sizable worksheet to help you make this
determination. It may look daunting, but don't skip it.
- Tracking other retirement income incorrectly. If you received
retirement distributions from a source other than social security, it
will be reported on Form 1099R. The distributions may fall into one
of three categories: 1) taxable (usually from traditional IRAs), 2)
nontaxable (usually from Roth IRAs), or 3) "taxable amount not
determined." This third category would apply if you make a post-tax
contribution to a nondeductible IRA; in this case, the IRS knows that
you owe money, but does not know the exact amount because it does not
know the amount of your earnings. In this case, you are responsible
for making an accurate calculation of the taxable amount.
- Choosing the wrong filing status. Filing as "head of household"
is usually more beneficial than filing as "single" or "married filing
separately." Many people who qualify for this filing status don't
realize it. If your children live with you and you pay more that half
the costs of your home, check out this option. Form 1040 instructions
provide more details. If you live with a partner, this does not
qualify you for "married filing jointly." Also, be sure to check
carefully whether the standard deduction or itemized deductions are
more beneficial. One clear benchmark is home ownership. If you own a
home, you should probably itemize your deductions. Itemizing can put
a lot more money into your pocket than simply taking the standard
- Errors in social security numbers. Providing the wrong social
security number is one of the most common mistakes people make.
Double-check and triple-check that the numbers are correct for you,
your spouse, and your dependents.
- Omitting your signature. Don't forget to sign your return. This
includes your spouse, if you are "married filing jointly." As simple
as it seems, many people miss this part. Your filing will be rejected.
- Overlooking eligibility for tax credits. Tax credits include
education credits, income credits, and childcare and dependent
credits. Slow down and look at these items carefully. Many people
don't realize that they qualify, or they miscalculate the amount of
the credit they can claim.
- Failing to file while living overseas. Unless you give up your
American citizenship, you must file a tax return every year and pay
any applicable taxes. For more information, see IRS Publication 519 -
U.S. Tax Guide for Aliens.