$1 Billion, You Say?
common tax mistakes leaves $1 billion on the table each year
Each year, the IRS reports it has roughly $1 billion in unclaimed refunds just from people who didn’t file a return. That is an expensive mistake. Many people don’t realize that they may be able to claim refunds of income tax that was over-withheld or qualify for a refundable credit such as the earned income tax credit. The good news is that taxpayers have until April 15 to file or amend a 2015 tax return to claim a refund.
Not filing is just one mistake, and filing a return doesn’t mean the taxpayer is in the clear. Other mistakes taxpayers should watch out for include using the wrong filing status, making clerical errors, overlooking important credits, and missing deductions.
Income changes impact tax outcome
Getting a raise or bonus, facing a pay cut, or losing a job can happen to anyone. In addition to needing a new household budget, these taxpayers also need to take the tax impact into account. Not only could taxpayers move into higher or lower tax brackets based on their income, but some credits and deductions phase out depending on income.
Ignoring tax reform and paycheck withholding changes could set taxpayers up for an unexpected change in their refund. The potential for surprises comes from updated IRS tables employers use to calculate tax withheld from an employee’s paycheck. These changes generally resulted in bigger paychecks and less tax withheld starting in February or March of 2018, even if taxpayers took no action. Anyone who updated their withholding with their employer after the IRS made its adjustments in February can expect the withholding outcome to be similar to what they planned for when completing their W-4. It is everyone who did not update their W-4 who is most at risk of significant changes to their refund or balance due.
Using the correct filing status
One of the most common mistakes taxpayers make is selecting the wrong filing status. A taxpayer’s filing status can affect which credits and deductions they’re eligible for, the value of their standard deduction, and their tax bracket.
One situation that can make choosing a filing status difficult is when more than one filing status seems to fit. For example, if a taxpayer with children is in the process of getting a divorce, they may not be sure if they should file as married filing jointly or married filing separately or, in some instances, whether they qualify to file as head of household. Or if a grandparent is taking care of their grandchildren and providing their sole support, the grandparent may qualify for head of household status.
Commonly missed credits
The thousands of changes to the tax code in the past decade make it no surprise some taxpayers miss out on available tax benefits:
• One of the most frequently overlooked tax credits is the Earned Income Tax Credit (EITC): 20 percent of eligible taxpayers do not claim this credit. Depending on their income and the number of children they have, lower-income workers may be eligible for an EITC of $519 to $6,431.
Because eligibility can fluctuate based on financial, marital, and parental changes, a taxpayer can be ineligible one year and eligible the next. Another reason so many people overlook the EITC is because they may not earn enough money to have to file a return. The EITC is a refundable credit, so even if an eligible person does not owe taxes, they can still get the EITC.
• Education credits are another often-overlooked benefit. Depending on the kind of academic program, what year the student is in, income, and other restrictions, a student may use the American Opportunity Credit of up to $2,500 or the Lifetime Learning Credit of up to $2,000. It’s not uncommon for the parent to claim these credits instead of the student if the parent claims the student as a dependent on the parent’s return. Taxpayers who paid student loan interest may be able to deduct up to $2,500 even if they don’t itemize.
Common clerical errors taxpayers make
Life and tax changes aren’t the only reasons taxpayers leave money on the table. Taxpayers should double-check their tax returns and make sure they haven’t made any clerical errors, such as mixing up names and Social Security numbers, forgetting to include information reported on the W-2, 1099 or other forms, transposing numbers, and making math errors.
Take a second look at old tax returns
Taxpayers have until April 15 to claim a refund for 2015. With H&R Block’s free Second Look, taxpayers can have their previously filed returns from 2015, 2016, 2017 and even 2018 reviewed to see if they made any mistakes that left money on the table.
Barbara E. Arnold is a Senior Tax Specialist for H&R Block, the world’s largest tax services preparer. This is her fifth tax season working at the H&R Block office on the West Side of Eau Claire at 2639 N. Clairemont Ave. where she and her colleagues provide expert tax advice and preparation support for taxpayers in the Chippewa Valley.