What are the five biggest errors you could avoid by simply planning and familiarizing yourself with the rules of taxation?
- Withholding too little: If this happens to you, don’t beat yourself up. It is common for the withholdings of Social Security to change every year. Additionally, not understanding the tactics your employer uses to calculate tax withholdings can also contribute to this first, common error.
Patrick’s plan: After every year’s filings, check your withholdings for the upcoming year. File a new Form W-4 if changes are needed. If you received unemployment benefits This is especially important if you have received unemployment benefits or are required to make estimated payments because of the pandemic.
- Unintentionally withdrawing money from retirement plans: Amounts you took from pre-tax retirement plans like an IRA and a 401(k) is taxable income. How is it possible to unintentionally withdraw? Most often it is when you roll funds from one retirement plan to another. If not done correctly, the entirety of the amount rolled over could be considered taxable.
Patrick’s Plan: If possible, leave your retirement accounts alone. If you must withdraw funds, make sure the amount withheld at the time of withdrawal is correct. Doing a direct rollover into your new plan is definitely a better alternative than receiving the withdrawal from the plan administrator and then conducting the transfer yourself.
- Not taking advantage of tax-deferred retirement programs. There are numerous opportunities to shelter income from tax through tax-deferred retirement programs.
Patrick’s Plan: Review your retirement savings options and plan to contribute as much as possible to your plans. Pay special attention to plans that include an employee match component. This attention can reduce your taxable income each year.
- Mix-ups on direct deposited refunds: Tax refunds can be deposited in as many as three separate bank accounts. The issue: what is one account was incorrectly entered or is closed? Unfortunately, there is no system in place for the IRS to correct this error and taxpayers have been known to lose their entire refund check when this happens.
Patrick’s Plan: It isn’t uncommon for taxpayers to feel uncomfortable providing the IRS direct access to their bank account information. If this sounds familiar to you, you can simply have a physical check cut and mailed to you. If you are comfortable with direct deposit, use only one bank account and have the number on your tax form double-checked before submitting to the IRS.