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Checklist of Common Tax Blunders Here is what not to do. Tax professionals report that their clients often make these mistakes in handling their finances and taxes.

If you are not using a tax professional to prepare your return, and especially if you are not using computer software to prepare your taxes, be sure to read this list carefully to make sure you're avoiding these pitfalls.

  1. Not planning for the alternative minimum tax (AMT)
    State taxes, car licenses, real estate taxes, home equity interest expenses, a portion of your medical expenses, and all miscellaneous itemized deductions (such as tax preparation fees and employee business expenses) are not deductible for AMT purposes.
    • If a significant portion of your miscellaneous itemized deductions happens to be employee expenses you are not reimbursed for, check with your employer to see if you can be reimbursed directly for your costs.
    • Do not assume that it is always best to prepay your state income taxes or your property taxes before the end of the year! If you are subject to the AMT, neither of these taxes will garner you any tax benefit.


  2. Not using a computer to plan for and prepare your income taxes
    There are so many interrelationships in the tax law that even if you have a very simple tax return, you can miss something very important by doing your return or tax planning by hand.

  3. Overusing a home equity loan
    It can be a good idea to convert otherwise non-deductible personal interest into tax-deductible home loan interest, but do not get carried away and take 15 years to pay off a three-year car loan. You will pay a fortune in interest!

  4. Overusing a home equity loan
    It can be a good idea to convert otherwise non-deductible personal interest into tax-deductible home loan interest, but do not get carried away and take 15 years to pay off a three-year car loan. You will pay a fortune in interest!

  5. Failing to pay attention to the long-term capital gains holding period
    Some taxpayers can save almost half the tax on the gain from a stock sale by holding stocks and other investments for more than one year. Thus, reducing the tax rate on the gain from 38.6% to 20%, and now, if you are in the 10% or 15% tax bracket and you sell a stock you have owned for over five years, you will pay a capital gains tax of only 8%.

  6. Taking the home office deduction without considering the tax effects when you sell your home
    The part of your home that is used for business may not qualify for the (maximum) $250,000 ($500,000 if Married Filing Joint) exclusion of gain from tax on the sale of your home. You could end up paying taxes on the home office portion of the gain!

  7. Not claiming all of the deductions you are legally entitled to
    Take charitable contributions, for example. You may not think the clothes you give to charity are worth much, but take a trip to the local thrift store and see how much items actually sell for. You may be surprised!

  8. Not accounting for mutual fund dividend reinvestments
    Reinvested dividends generate tax "basis." Be sure to add them to your cost basis when you calculate your taxable gain from the sale. It is best to update your records annually.

  9. Not tracking your year-to-year carryover items
    State and local taxes paid for the prior year in the current year, capital loss carryovers from prior years, and charitable contribution carryovers can get lost in the shuffle.

  10. Not setting up a qualified retirement plan in time
    Most qualified plans must be established but not necessarily funded by December 31 of the tax year in which you want to take the deduction. Many IRAs can be set up until April 15th of the following year, and SEP plans can be set up as late as October 15th of the following year.

  11. Failing to name (or naming the wrong) beneficiary to an IRA, 401(K), or other retirement plan
    Upon death, IRA accounts pass tax-free to your spouse. If you designate no beneficiary for your retirement accounts, many plans name your estate as the beneficiary - which can be the most costly to your estate. Naming grandkids may subject the account to the generation-skipping transfer tax.

  12. Not maximizing your contributions to 401(k) plans when you have the financial wherewithal to do so, particularly if your employer's plan provides for matching contributions up to a certain amount. The recent tax law changes provide annual increases in the maximum amount contributable. Be sure to take this into consideration when planning for your financial future.

  13. Not making your quarterly estimated tax payments when you are self-employed or have significant investment income other than wage income. There are several taxpayers who have the ability to pay their estimated taxes quarterly but somehow either do not find the time to do so or prefer to wait to pay their taxes when they file their income tax returns. This is a mistake: you will pay underpayment penalties to the tune of a 6% per annum rate for each quarter that the taxes are not paid.

  14. Not planning correctly for stock option exercise and selling activities
    Many employees who exercise options and sell stock in same-day transactions find that the gains they realize from such a sale push them into a higher tax bracket than they would otherwise be in. If this happens to you, and if your employer simply withholds taxes at a fixed rate from your sale transaction, be sure to determine just what your actual income tax liability will be so that you are not surprised at the amount of tax you owe come April 15th.

  15. Changing jobs and not adjusting your withholding allowances on Form W-4 to account for an increase in wages or for receipt of signing bonuses. Further, not considering your state income tax withholding allowances once you have adjusted your federal numbers. You may be just fine federal-withholding wise, but forgetting to adjust your state withholding as well may set you up for an unpleasant surprise.

  16. Contributing to a Roth IRA when you are not qualified to do so because your income is too high. Individuals whose adjusted gross income is over $110,000 ($160,000 for married couples filing a joint return) may not contribute to a Roth IRA. Doing so will subject you to a 6% penalty assessed on the amount you contributed.

  17. Making a federal estimated tax payment right after a big income event rather than waiting until April 15th. Why is this a mistake? If you are otherwise protected from the application of underpayment penalties (because, perhaps, you are paying through withholding and estimates an amount equal to last year's tax - or for higher income taxpayers, 112% of last year's tax), there is really no reason to pay your federal taxes early. Let that money earn interest for you until it is time to pay Uncle Sam.

OTP SIG3