When completing tax returns as a married couple, compare the total amount of tax due between the two filing-status options: married filing jointly and filing separately. Find out which status nets you the lowest tax bill.
Smart tax planning and avoiding dangerous tax mistakes can play a big part in increasing your disposable income.
Here are the four most dangerous tax mistakes you will face throughout your life.
• Forgetting to file
If you are single and made more than $6,300 in wages last year or received at least $1,050 in unearned investment, interest or profits from selling — including those eBay sales — you must file a tax return, said tax expert Crystal Stranger, an enrolled agent and president of tax firm First Tax.
• Ignoring 401(k)
By investing in your employer’s retirement plan as early as possible, you can easily secure a large retirement nest egg. Wait a few years before participating, and you will end up paying more taxes today and having a smaller retirement account later.
Those who qualify can enjoy additional tax benefits, Stranger said. The saver’s credit and various education credits can put more money in your pocket by cutting your taxes. Many people can benefit from the latter, including parents paying for their children’s education and adults adding to their own skills.
• Choosing wrong status
When completing tax returns as a married couple, compare the total amount of tax due between the two filing status options: married filing jointly and filing separately. Find out which status nets you the lowest tax bill.
This is easy to do with tax software. Or, ask your tax professional to do the calculations for you. Choose the wrong filing status, and you will end up costing your new family money unnecessarily.
• Keeping track
Buying a home is one of the most stressful ventures of adulthood. Forgetting the tax implications of a home purchase makes the situation even more trying. Remember, “not all closing costs are deductible,” said Bill Farmer, an enrolled agent with Lexington, Ky.-based HTI Tax Service.
Unlike business expenses, home improvements are generally not tax-deductible, Stranger said. However, if you use part of your home for a business, you might be able to deduct applicable repairs. Do not skimp on this one — maintain your records and check with the IRS to ensure you are in compliance with the law.
Finally, there is another reason to keep track of your home improvements. Ultimately, when you sell, you can add the cost of improvements to your original price, or basis, and save on capital gains taxes if you owe them. Keep the records where you can access them, because at sale time they are worth money to you in the form of tax savings.