Self-filing Your Taxes? These 5 Tax Mistakes May Be Costing You Money

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Table of Contents: 

1. Top Tax-Filing Mistakes That Cost You Money
2. Other Common Tax Return Mistakes
3. How to fix a mistake on a tax return I already filed?

Top 5 Tax Mistakes That Cost You Money

The five tax filing mistakes below can be the most costly when it comes to the amount you owe to the IRS. 

1. Automatically Taking the Standard Deduction

The standard deduction is a fixed amount that reduces your taxable income. It’s simple and doesn’t require taking the time to itemize tax deductions. However, automatically opting for the standard deduction can cost you money.

By automatically taking the standard deduction, taxpayers with unique situations may miss out on a larger deduction through itemizing, especially if they have significant deductible expenses.  Itemizing involves deducting expenses like mortgage interest, state and local taxes, medical expenses, business expenses, and charitable contributions individually. This oversight can result in a higher taxable income and, therefore, a higher tax bill.

A tax advisor can ensure you don’t miss these tax deductions:

• Charitable Contributions: You can deduct donations made to qualified charitable organizations, reducing your taxable income. For more advanced charitable giving strategies, a tax advisor can assist you in setting up a Donor-Advised Fund or Qualified Charitable Distributions from an IRA to leverage larger tax deductions.
• Home Office Deduction: This deduction allows individuals who use a portion of their home exclusively for business purposes to deduct expenses such as utilities, rent, and repairs. The IRS provides two methods to calculate this deduction.
• Business Expense Deductions: If you’re a business owner, you can deduct expenses that are ordinary and necessary for the operation of your business, including supplies, travel, and salaries.
• Rental Property Depreciation: If you’re a landlord, you can reduce your taxable income by deducting the cost of buying and improving a rental property over its useful life.
• Tax Deduction When Selling Rental Property: This deduction allows property owners to reduce capital gains taxes by factoring in the depreciated value of the property and improvements.
• Qualified Medical Expenses and Healthcare Costs: You can deduct out-of-pocket medical and dental expenses that exceed 7.5% of your adjusted gross income.
• Mortgage Interest Tax Deduction: Homeowners can deduct interest paid on a portion of mortgage debt, which lowers taxable income.
• Tax-Loss Harvesting: This strategy involves selling investments at a loss to offset capital gains on other investments, reducing your taxable income. You can write off up to $3,000 in net losses annually, and if you don’t have gains in the same tax year, you can carry forward losses to reduce taxes in future years. Another benefit is that you can reinvest your tax savings to compound your investment portfolio’s growth even more. 
• State and Local Tax (SALT) Deductions: These deductions allow you to deduct certain taxes paid to state and local governments from your federal taxable income, including state and local property taxes, income taxes, and sales taxes. The Tax Cuts and Jobs Act of 2017 introduced a cap on SALT deductions, limiting the total deductible amount to $5,000 for married taxpayers filing separately and $10,000 for all other taxpayers.
• SEP IRA and Solo 401(k) Deductions: If you’re self-employed, you can contribute to a Simplified Employee Pension (SEP) IRA or Solo 401(k) plan. This can provide significant tax benefits as contributions to these plans are tax-deductible, reducing your taxable income. These accounts also have higher contribution limits than traditional retirement accounts, allowing you to save more for retirement while lowering your current tax bill.

2. Not Taking All Eligible Tax Credits

A tax credit is a dollar-for-dollar amount you may claim, if eligible, on your tax return to reduce the income tax you owe. A tax credit directly reduces the amount you owe the IRS and can increase your tax return. Missing out on a credit can cost thousands. 

Work with a tax professional to see which credits you are eligible for:

• Small Business Tax Credits: There are numerous tax credits for small business owners. There are credits for your business if you provide benefits like health insurance, child care services, paid family and medical leave, or a 401(k) program. There is even a tax credit for research and development (R&D) costs, commonly available to startups operating in science, medical, and technology businesses. A tax advisor can work with you to ensure you claim all eligible credits and advise you on the tax impact of implementing new benefits or R&D initiatives. 
• Child Tax Credit: As of the tax year 2024, this credit provides up to $2,000 per qualifying child under age 17, which directly reduces the amount of tax owed.
• Foreign Tax Credit: If you are subject to U.S. taxes on the same income that you have paid or accrued foreign taxes to a foreign country or U.S. possession, you may be able to take either a credit for those taxes.
• Credit for Prior Year Minimum Tax: If an individual, estate, or trust paid Alternative Minimum Tax in prior years, you can use Form 8801 to determine whether you are eligible for a tax credit.
• Healthcare Premium Tax Credit: This is a valuable credit for freelancers and small business owners who purchase their insurance through the Health Insurance Marketplace. Referred to as the PTC, the Healthcare Premium Tax Credit helps eligible individuals and families cover the cost of premiums for their Marketplace-purchased insurance. 
• Electric Vehicle Credit: Multiple credits, up to $7,500 for individuals and up to $40,000 for businesses, are available for purchasing an electric vehicle (EV) or fuel cell vehicle (FCV). The IRS provides resources to help determine if your vehicle qualifies for a tax credit.

3. Using the Wrong Tax-filing Status

Using the correct filing status is important to optimize your taxes. Your tax filing status determines details, including your filing requirements, standard deduction amount, eligibility for tax credits, and tax bracket. 

How using the wrong tax-filing status can cost you money:

• The Five Statuses: There are five filing statuses, each with its own tax bracket: single, married filing jointly, married filing separately, head of household, and qualifying surviving spouse.
• Lower Deductions and Credits: Using the wrong filing status can lead to a higher tax liability or the loss of beneficial tax credits and deductions. For instance, the “head of household” and “married filing jointly” statuses offer a higher standard deduction and more favorable tax brackets compared to the “single” status. Choosing incorrectly could mean paying more in taxes than required. 
• Lookup Your Status: The IRS offers a free tool to help you choose the correct status at tax time.

4. Not Filing Your Taxes On Time

You are required to file your taxes by the deadline (typically April 15 in most years) unless an extension is filed. Failing to meet the filing deadline without an extension leads to a failure-to-file penalty.

Key details to file a tax return extension and avoid penalties:

• Filing an Extension: If you need to file an extension, it must be done by the date taxes are due, typically April 15 most years. An extension gives you until October 15 to file your tax return. Keep in mind that an extension to complete your return does not grant you any extension of time to pay your taxes. If you believe you owe taxes, you should estimate and make a payment by your regular deadline to avoid penalties.
• Failure-to-File Penalty: According to the IRS, the failure-to-file penalty is five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%. 
• Penalty Start Date: This penalty starts accruing the day after the tax filing due date, leading to a significantly higher penalty the longer you wait to file, and that’s on top of any taxes you may owe. 

5. Not Paying Estimated Quarterly Taxes

According to the IRS, Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

• Impact on Your Tax Bill: If you don’t pay estimated taxes each quarter, you will owe an entire year’s worth of taxes when you file your annual return.
• Penalties for Underpaying Taxes: If you don’t pay at least 90 percent of your taxes owed during the year, you’ll likely be hit with a penalty for underpayment from the IRS when you file your annual return.
• Estimated Tax Due Dates: There are four due dates, each occurring 15 days after the end of a quarter: April 15 for Q1, June 15 for Q2, September 15 for Q3, and January 15 for Q4.

Bonus: See our guide on 20 Ways to Reduce Your Taxes for a complete list of tax optimization strategies for executives, company founders, early startup employees, and small business owners.

Other Common Tax Return Mistakes

Here are a few of the most common filing mistakes that can cause a delay in your return being processed.

• Wrong Address: Entering a wrong address can result in missed communications from the IRS or not receiving your refund if it is a paper check. The IRS has Form 8822 for address changes in the case that you move after filing your return.
• Wrong Name: This sounds silly, but it’s more common than you’d think. For you and your dependants, remember to enter names as they appear on Social Security cards to avoid your return being rejected or issues with your refund being processed.
• Wrong Social Security Number or Tax Identification Number: One incorrect social security number (SSN) or other type of taxpayer identification number (TIN) on a form can get your return rejected by the IRS.
• Entering Incorrect Account and Routing Numbers: When setting up direct deposit for a tax refund, you must provide accurate bank account and routing numbers. If incorrect bank details are provided to the IRS, the deposit will either fail or, worse, be deposited to the wrong account.
• Unsigned Tax Return: Finally, don’t forget to sign your tax return if you file on paper. According to recent data from the IRS, 21.4% of all tax returns were not filed electronically which increases the likelihood of missing a signature.

How to Avoid Costly Tax Mistakes

To help avoid errors and ensure you take advantage of your eligible tax deductions and credits, consider the following:

1. Use advanced tax prep software if you are self-filing that automatically looks for all possible tax deductions and credits. Even then, the software can miss deductions and credits if you do not provide all the relevant details. 
2. Use a tax advisor to minimize your tax bill, especially if your situation is more complex, including investments, retirement planning, business income, or rental properties. Tax professionals are trained to understand the nuances of each tax situation and collect the necessary information to minimize your tax bill. Additionally, a tax advisor can work with you year-round to target a reduction in your tax burden and help avoid a higher tax bill on your annual return.

Harness can connect you with a tax advisor that aims to meet your needs. From owning a business to exercising employee stock options to starting a family and everything in between, Harness’s goal is to have your tax needs covered.

How to Fix a Mistake on a Tax Return You Already Filed?

According to the IRS, if you make a mistake on your tax return and need to make a change or adjustment, you can file an amended return. You’ll use Form 1040-X, Amended U.S. Individual Income Tax Return to file an amended return, which can be completed electronically with tax filing software.

Harness Can Help Save You Money on Taxes

From starting a business to starting a family, we connect you with tax experts and wealth management professionals who have experience and strive to understand your situation and endeavor to meet your goals. We’ve hand-picked top tax, financial, and estate firms from around the United States to help you find the best advice and advisor for you. Get started with Harness today.

Tax related services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances.

This article does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only. To the extent you have questions regarding the applicability of any specific topic discussed above based on your specific portfolio or situation, please consult a professional adviser of your choosing.