Common mistakes to avoid when filing your taxes
Choosing the wrong filing status: People think software will solve everything, but this is a common mistake, says Mark Steber, chief tax officer at Jackson Hewitt Tax Service, Inc. Are you single, married, head of household? You want to get this right because it can impact your standard deduction and change the level at which you go into a higher tax bracket, says James Robertson, enrolled agent and master tax adviser for H&R Block in east Cobb County.
Claiming the wrong number of dependents: "The word dependent seems straightforward, but you can have a dependent that is not related to you at all," says Robertson. If someone has lived in your house all year, you have paid 50 percent of their expenses and they have an income level of $38,000 or less, they are a dependent. This may include an elderly parent or non-relative, in addition to your children.
Mismatched or missing forms: The biggest red flag for the IRS is a mismatch of forms, Robertson says. "Almost everything on your tax return is third-party reported by someone else to the IRS. That is the initial check to see if there is an error on the tax return," he says. The mismatch can be in your favor or in favor of the IRS but why risk setting off an alarm bell? Make sure you have tracked down and reported all forms.
Thinking the system or your preparer will save you from the IRS: "If you sign it, it is yours. What is on it or not is your responsibility," Steber says. Make sure you have a preparer with proper credentials. In addition, while you can amend a return forever, know that you can only be refunded money for three previous years, Robertson adds.
How to use your tax refund wisely
Contribute to or start an emergency fund: In these challenging economic times, it is more important than ever to have money set aside in the event of a job loss or other life-changing event. ClearPoint Financial Solutions recommends that you have $1,000 in an emergency savings fund, as well as savings to cover three to six months of living expenses in case of a job loss.
Invest in retirement: Retirement is expensive and most consumers believe they are behind in saving adequately to ensure a comfortable retirement. Whether it's in your 401(k), IRA or Roth IRA, investing your tax refund now will help provide financial security after you retire, says Thomas Nitzsche, certified financial educator for ClearPoint Financial Solutions.
Open a 529 College Savings Plan: A college education isn't getting any cheaper. With 529 College Savings Plans, deposits made now can be withdrawn tax-free when used for higher education. Plus, some plans come with tax benefits.