8 Things to Know About Divorce and Taxes
If you’re filing for divorce, or find yourself recently divorced, it’s imperative that you understand how your changing marital status...
Are you worried about an audit or fines from the IRS? Some audits are completely random, but many are avoidable. Stay away from these tax mistakes to stay out of trouble with the IRS.
This seems obvious, but it's actually one of the most common mistakes. If you don't sign your return, the IRS treats it as if you never filed at all because signing your return means you're declaring it to be true under penalty of perjury.
Where most people go wrong is when they use software to prepare their return and then print it out to file. After hours of typing everything in, you may forget you need to take out a pen and sign at the bottom.
If you e-filed, don't worry. The statement you agreed to before clicking submit counts as your signature.
Your taxes aren't done when you file. The IRS has up to three years to ask for proof of your income and expenses. Under some special circumstances, such as suspicion of tax evasion, they can ask for records going even farther back.
When you finish your return, don't shred everything. Place all your tax documents for the year in a folder or scan them onto your computer. Don't dispose of them until the later of three years after your filing deadline or when you actually filed (if you filed late).
If you owe more than $1,000 when it's time to file, you could end up paying extra interest and penalties. That's because you're supposed to pay as you go — the April deadline is only to file and make a final payment.
Most people don't run into this problem because most of their income is from a job with tax withholding. If you have a side job as an independent contractor with no withholding, investments, or other non-wage sources of income, be sure to make quarterly estimated tax payments.
The IRS instructions are pretty clear on how to pick your filing status, but many people don't actually read them. If you were married on the last day of the calendar year, you can file either as married filing jointly or married filing separately. Do your taxes both ways to see what gives you the smaller tax bill — you can switch every year if it helps you pay less.
If you weren't married on the last day of the calendar year, you should probably file as single. You may qualify for head of household, which gives you lower taxes, if you had a dependent living with you during the year, but read the rules carefully. Many people who decide they're the "head of their household" don't actually qualify and end up getting fined.
Make sure you get names and Social Security numbers exactly right. The IRS uses them to match up your information with its records. If you're a digit off on your spouse's or child's Social Security number or don't use someone's full legal name, you could end up getting a letter from the IRS. The best thing to do is to get out last year's tax return and make sure everything matches.
Sometimes, you might see a potential business or education deduction or credit when going through your tax software. In your mind, that item might be "business" or "education," but it might not actually meet the rules to deduct it. Before claiming any deduction or credit, read both the instructions in your tax software and the relevant IRS publication very carefully.
If you didn't qualify, you could end up owing back taxes, interest, and fines. Most tax software won't cover this as their promise is to do the math right based on the info you gave not to check the accuracy of what you told the computer.
Remember to include all of your income from all sources. This includes 1099s from side jobs, bank interest, investment gains, and other sources. Many people rush to file to get a refund before they get their 1099s or forget about an income source. Track your income in your budgeting software so you can remember to wait for each 1099.
Not being audited does not mean you did your taxes right last year. The IRS can't audit every return, and some errors or fraud slip through the cracks. But if you do get audited, the IRS will often go back to previous years if it finds a problem.
To avoid an audit and years worth of fines and interest, make sure you do your taxes right every year.
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