Avoiding Common Tax Mistakes: Advice from CPA Tax Professionals
by Ankita Tripathy Finance 18 July 2024
Understanding taxes can be overwhelming, but with the right knowledge, you can avoid common mistakes that might cost you. Certified Public Accountants (CPAs) specialize in tax preparation and planning, offering valuable advice to help individuals and businesses stay on track and save money.
Whether you’re filing as an individual or managing taxes for a business, knowing the pitfalls to avoid can make a significant difference in your financial health. In this blog, we’ll delve into expert advice from CPAs on how to sidestep common tax errors and ensure a smoother tax season.
Common Tax Mistakes That People Often Make
Tax filing and payments are crucial for your business. And when you take this difficult ask upon yourself there is always room for error, including deductions that can reduce the amount.
Whether you are new to this or a seasoned business owner, the ever-changing tax rules can get you overwhelmed.
Here are some of the common mistakes people make while filing taxes:
1. Filing Incorrectly
Filing taxes incorrectly is a major issue that can lead to unnecessary stress and financial penalties.
CPAs stress the importance of accuracy in reporting income, deductions, and credits. Simple mistakes like typos or mathematical errors can trigger audits or delays in refunds. Using tax software or consulting with a CPA can mitigate these risks.
2. Missing Deductions and Credits
One of the most significant mistakes taxpayers make is failing to claim eligible deductions and credits. Advise RE CPA to emphasize the importance of thorough documentation and knowledge of available deductions, such as charitable contributions, medical expenses, and educational expenses.
Taxpayers often overlook credits like the Earned Income Tax Credit (EITC) or Child Tax Credit, which can result in overpayment.
With the help of a CPA, you can identify and tick off every item that can be deducted. Small items such as business magazines, postage stamps, and printing marketing material are all deductible. However, you have to save all the receipts for these. Here are some of the deductions that are mostly missed.
- Home office – Make sure that you read the IRD guidelines to check if yours is eligible for a home office deduction.
- Tax preparation expenses
- Travel expenses
- Software cost or accounting and bookkeeping fees
- Meals (If you have taken your client out for lunch or dinner) – However, you can only claim 50% of the amount here.
- Insurance, both for your employees and yourself
- Vehicle use for business purposes
3. Ignoring Tax Deadlines
Missing tax deadlines can result in penalties and interest charges. CPAs advise clients to mark tax deadlines on their calendars and submit required documents well in advance. Extensions are available but should be filed promptly to avoid penalties.
4. Forgetting Quarterly Payments
Self-employed individuals and businesses with substantial income may be required to make quarterly estimated tax payments. CPAs stress the importance of calculating and paying these taxes on time to avoid penalties for underpayment.
There are two kinds of penalties. One is for “Failure to Pay,” and the other is for “Failure to File.” The penalty for failing to pay is less than the penalty for failing to file. Even when you know that you cannot afford to pay immediately, you should still file to avoid this common tax mistake.
5. Neglecting Documentation
Maintaining accurate records is crucial for substantiating deductions and credits claimed on tax returns. CPAs recommend keeping receipts, invoices, bank statements, and other relevant documents organized throughout the year. This practice not only ensures compliance but also simplifies tax preparation.
Having accurate records is necessary for avoiding some of the common tax mistakes. You need the correct record for the IRA, or you can miss out on the deductions, meaning you lose money. If your business has gone through an audit, you need to keep each and every document, file, folder, and pay stub.
6. Overlooking State and Local Taxes
Taxpayers often focus solely on federal taxes and overlook state and local tax obligations. CPAs emphasize researching and understanding specific tax requirements based on residency and business location. Failure to comply with local and state tax laws can result in penalties and legal consequences.
7. Incorrectly Classifying Workers
Misclassifying workers as independent contractors instead of employees or vice versa can lead to tax liabilities and legal issues. CPAs advise businesses to understand the criteria for worker classification and to seek professional guidance if uncertain.
However, if your independent contractors are supposed to work certain hours or are forced to come on-site to work, then they qualify as regular workers. Ensure that you understand the IRS stipulations for independent workers. There are various tax penalties if you classify them inappropriately.
8. Neglecting Retirement Contributions
Contributing to retirement accounts such as 401(k)s, or IRAs not only helps secure financial futures but also provides tax benefits. CPAs recommend maximizing contributions within allowable limits to reduce taxable income and potentially qualify for tax credits.
9. Not selecting the entity correctly
It is not easy to select the tax entity for your company. Various small businesses form LLCs or sole proprietorships. However, these tax entities might not be the best for your companies. You have to consider the desired business structure, financial goals, and the number of entities to make the right decision.
Some of the potential entities for small business are:
- Nonprofit
- LLC
- Partnership
- C-corp
- S-Corp
If you are unable to figure out which entity to choose from then it is better you consult an accountant and figure out a structure that fits your aim.
Wrapping up!
Avoiding common tax mistakes requires diligence, attention to detail, and professional guidance. CPAs play a crucial role in helping individuals and businesses navigate tax laws, maximize deductions and credits, and ensure compliance.
By understanding these common pitfalls and implementing proactive strategies, taxpayers can minimize stress and optimize their financial outcomes.
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