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Tax season may seem like a once-a-year task, but this mindset can lead to costly mistakes. Without active planning, it is easy for taxpayers to overpay the IRS.
From overlooked deductions to misreported investment income, tax professionals describe five tax mistakes that can cost Americans thousands of dollars each year.
1. Treating taxes as a once a year event
According to Christina Taylor, vice president of tax development and delivery, one of the most costly mistakes taxpayers make is before even opening their tax software. aprilAn embedded tax technology platform.
“When people only think about their returns in February or April, they miss out on credits and optimizations that they’re actually eligible for, so you end up giving some of your refund back to the IRS,” she said.
Taylor said the impact could be substantial. “Last year, Americans overpaid their federal taxes by an average of nearly $3,200, and spent billions of dollars and 6.5 billion hours on tax preparation.”
Los Angeles-based Bob Wheeler cpaThe CFO and the author echoed that sentiment. “From my three decades of experience helping Los Angeles clients navigate the IRS, I can tell you that most tax pain is self-inflicted – not because people want to pay more, but because they lack a proactive strategy.”
Wheeler said that by waiting until April to think about taxes, most of the opportunities to lower the bill have already passed.
2. Failing to track deductions throughout the year
Another common tax mistake is failing to track deductible expenses throughout the year, especially when taxpayers think they’ll take the standard deduction.
Taxpayers should always keep track of charitable contributions (cash and non-cash donations), medical expenses, and deductible interest expenses for state deduction purposes.
“If you can’t prove it, you can’t deduct it,” said Jennifer Kohlbacher, CPA and director of wealth strategy. Mariner Wealth Advisors. “Digital receipts are your best friend.”
3. Misreporting investment income or stock compensation
Investment income and stock compensation can create complications that may lead to overpayment of taxes.
Kohlbacher said errors often occur when employees receive equity compensation such as restricted stock units or non-qualified stock options and sell those shares. In these cases, often “the basis is not calculated or reported correctly,” she said.
That mistake could directly increase the capital gains tax owed.
4. Missing Estimated Tax and Withholding Strategies
Some taxpayers who earn extra income or run a small business may not fully understand the rules for estimated tax payments, which must be paid quarterly throughout the year, Kohlbacher said.
“The ability to use the right estimated tax payment strategy will save you from underpayment penalties and interest,” he said. This allows taxpayers to put their money to work for a longer period of time rather than paying more to the government.
Wheeler said another mistake is not to wait and change after a life change, such as a wedding or a new baby. This could lead to “either a bigger bill or a bigger, interest-free loan in the form of an overpayment to the government,” he said.
5. Simple Filing Errors and Poor Recordkeeping
Even basic mistakes like typos or incorrect math can cause unexpected tax headaches such as delaying refunds or triggering IRS notices, Wheeler said.
Although these mistakes may seem small, they contribute to a broader pattern that Wheeler sees each year. “The average taxpayer often leaves $500 to $2,000 annually on the table.”
How to avoid these costly tax mistakes
The good news is that most tax mistakes can be prevented with good planning and organization. Wheeler said even simple steps like organizing receipts, using digital technology to keep yourself organized and scheduling a mid-year review with a CPA can prevent many of the most common mistakes.