Thanks to tax preparation software, more of us are making fewer mistakes on our annual tax returns. But still, just one slip in entering information on your computer could end up costing you, either in the form of a larger tax bill or a smaller refund.
Almost half of individual filers, however, still send in paper forms each year. This process multiplies the opportunities to make a tax-filing mistake.
And even if a mistake, either on your computer or paper forms, doesn't cost you cash, it could delay the receipt of any refund you're expecting.
To get exactly what you should from the IRS -- and as quickly as possible -- look out for these filing pitfalls. A few are new, thanks to recent law changes. Others are perennial problems taxpayers face each filing season. With a little care, you can avoid them all.
10 tax mistakes you can avoid:
|1.||Direct deposit dangers||6.||Math miscalculations|
|2.||Hybrid vehicle credits||7.||Social Security numbers|
|3.||Charitable contributions||8.||Ignoring IRS mailing material|
|4.||PMI deductions||9.||Signature required|
|5.||Overlooked unearned income||10.||Missing the deadline|
1. Triple direct deposit dangersTaxpayers can have a refund directly deposited into as many as three accounts. This option is a great way to save your refund money, but the more numbers you enter on a tax form, the more chances you have to enter them incorrectly. And a wrong account or routing number could cause you to lose your refund entirely.
You can divide your refund into three accounts by filing Form 8888 along with your individual return. It's not a difficult document to complete, but if you put in wrong account numbers, your refund could end up in someone else's account or be sent back to the IRS. Either way, you might not be able to retrieve your refund because there is no IRS procedure for replacing lost electronically transferred funds.
Also remember that the IRS can correct errors, such as a miscalculated amount, that you make on your return. If the change reduces your refund amount, the IRS has a specific procedure for determining how the lower amount will be deposited. "Any adjustments come from the bottom up, starting with line 3 then from line 2 and then the first account," says Jim Keller, senior tax analyst with the Tax & Accounting business of Thomson Reuters.
This could pose a problem if one of your direct deposit accounts is an individual retirement account. "There are no rules for a normal refund, but there are rules for IRAs, and they are fairly strict," says Keller. An unexpected change in an IRA deposit could create confusion at the IRS and your financial institution that is accepting the direct-refund deposit. To guard against that possibility, Keller suggests making an IRA the first account so it would be the least likely to be adjusted in case of error.
2. Fluctuating hybrid vehicle creditsThe prospect of rising gas prices makes alternative fuel vehicles more attractive. The U.S. tax code has added to the appeal of these fuel-efficient vehicles via a tax credit. The tax break, however, has a couple of drawbacks.
First, the credit is not a fixed amount. It varies for each qualifying vehicle. Even more problematic is that once a manufacturer sells 60,000 IRS-approved autos, the credit amounts start phasing out.
That's the case for Toyota and Honda hybrids. These Japanese automakers quickly reached the 60,000-sale mark and the credit for their hybrids have been phased out. No Toyota credit was available in 2008, but buyers of Honda hybrids may be eligible for a reduced credit when they file this year.
If you bought a Honda last year, make sure you claim the correct credit amount. In addition to different credit amounts for each eligible Honda hybrid, the amounts also differ depending on whether you bought your vehicle before or after July 1, 2008. And if you bought another manufacturer's eligible, alternative-fuel auto, take care to enter that correct amount, too. There are more than 40 hybrids and a handful of compressed natural gas vehicles that qualify, each with a specific allowable credit.