11 Common Tax Planning Mistakes

It’s not as sexy a topic as dog treats, but it’s an important one: tax planning mistakes. More specifically, how to avoid some of the most common ones. Kiplinger lists 11 frequent mistakes you should be aware of if you don’t want an unpleasant surprise come April.

  • 1) Ignoring the Alternative Minimum Tax (AMT)
  • 2) Ignoring Entitled Tax Deductions
  • 3) Not Accounting for Mutual Fund Dividend Reinvestments
  • 4) Failure to Track Year-to-Year Carryover Items
  • 5) Failing to Name (or Naming the Wrong) Beneficiary to Your Retirement Plan
  • 6) Not Maximizing Your 401(k) Contributions
  • 7) Missing Quarterly Estimated Tax Payments
  • 8) Not Planning Correctly for Exercising and Selling Stock Options
  • 9) Not Adjusting Withholding When You Change Jobs
  • 10) Contributing to a Roth IRA When Your Income Is Too High
  • 11) Making an Estimated Tax Payment Right After a Big Income Event

“11 Common Tax Planning MIstakes” [Kiplinger]
(Photo: Getty)

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  1. chrisgoh says:

    I usually do a first draft of my taxes in early October and project out for the rest of the year. This still gives me time to react in the event that my planning based on the previous years taxes was off.

  2. RvLeshrac says:

    Hint: If you don’t have thousands of dollars in deductions to itemize, don’t bother.

    Most of these tips are things that the average middle-class Joe will find utterly worthless.

    1) I find “If a significant portion of your miscellaneous itemized deductions happens to be employee expenses you’re not reimbursed for, check with your employer to see if you can be reimbursed directly for your costs.” particularly laughable. If you weren’t reimbursed for them the first time, WTF makes you think you’re going to be reimbursed for them now? Further, the AMT doesn’t apply to most people. Some people pay the AMT when they shouldn’t, because it is an easier calculation. You’re *better off* ignoring the AMT unless you aren’t allowed to.

    2) Itemized deductions only matter in large enough numbers. Most individuals don’t have even remotely enough of them to bother.

    3) This one makes sense, but if you’re investing enough for it to matter, why aren’t you using a CPA?

    4) Over $3k in capital losses? Of course you should carry it over! Again, why aren’t you using a CPA?!

    5) OK, this one is actually important. Just not to you personally.

    6) Again, important. If your employer offers a 401(k). Most don’t. More are starting to.

    7) This one is really grasping at straw. If you’re opting to make quarterly estimated payments, you make them. Do you also wait six months to pay your mortgage?

    8) Important, but again, if you fall into the category this applies to, you should be using a CPA.

    9) There’s a formula for this. You don’t ‘adjust’ your withholding without an accountant. I know people who live by the ‘adjust your withholding’ mantra. I always hope they’ll be audited.

    10) $114k/year? $166k/year? WHY ARE YOU STILL NOT USING A CPA?!

    11) So rare that it hurts. If you just won the lottery, sure. If you just won the lottery, you need a CPA. NEED. It isn’t even an option. If you’re reading this and are holding a lottery ticket, your first stop is to go see a lawyer, to set up the blind trust, and your second stop is the CPA, to manage it.

    I’ll add the most useful tip, which was overlooked:

    12) Not using tax software or a CPA.

    You can’t do your own taxes. You just can’t. I’m not insulting your intelligence, I’m insulting your years of deep research into the tax code, including the 35,000 revisions made in the last year. You can follow the instructions and add up the numbers that tell you the most basic amount you’re going to get back, or the amount you need to pay. You are, however, also utterly incapable of running those numbers through the hundreds of alternate calculations necessary to find the optimal result.

    Using something like TurboTax is necessary to make small changes without spending another hour adding up numbers. The time it saves you alone is worth the cost of the software, not to mention the ‘no-audit’ guarantees you get with most of the packages.

    If you have a high income or many investments, you should bite the bullet and invest in a CPA. In some cases, you can even write off the CPA!

  3. Munsoned says:

    My CPA is the best! One year I was doing my taxes via TurboTax and got a really crazy estimated shortage amount. Re-ran the numbers and still got a crazy answer. Called a CPA who could actually do a little bit more analysis than a $30 piece of software. Yes, he cost me about $400, but he probably saved me $1000 that year. Net $600. He’s gotten my business ever since.

    I hate how all of the financial magazines and newspapers talk about “watching out for the AMT,” but to date, nobody has shown me an easy way for the average Joe to even figure out if they’re in the AMT zone (or even how the thing is calculated to begin with). I think most people can’t really figure this out until they’re already up sh*t’s creek.

    One item to add to the list: hold off buying mutual funds in taxable accounts (not IRA’s or 401(k)s) until after the capital gains distributions are paid out (usually in December) or you’ll end up paying the taxes on the gains of the fund over the year, even if you didn’t own it over the year or realize those gains…

  4. savvy999 says:

    @RvLeshrac: Outstanding comment.

    While I think that everyone at some point should at least try to do their taxes by themselves, the hard way, at least once (even if it’s short form for exercise), in the end one simply must use software or a CPA if you (or your spouse) have:

    – a combined income nearing $100k
    – a mortgage
    – deductions, er kids
    – stock/option gains or losses
    – a lot of gifts to charity (more than $2k)
    – your own business or consulting income

    Iffy reasons are students loans and moving expenses, those forms are relatively easy to fill out on one’s own. But anything above that and it’s TurboTax or TaxCut time.

    Others feel free to chime in on appropriate times to seek out professional help.

  5. virgilicious says:

    I couldn’t agree more about using an accountant. In the last year I’ve worked as a freelancer, an independent contractor, and started my own business. There’s no way in hell I’m going to try to wade through that tax maze myself.

  6. JeffM says:

    My wife badgers me every year about getting a CPA- we have absolutely no assets other than tax deferred retirement accounts (house, inheritance, stocks, etc..) and no stock sales (outside of disqualifying ESPP sales I can calculate) and a reasonably high combined income (too high to qualify for student loan interest deductions) – do I need a CPA? I have an online business (small forum website) that earns around $500/yr.

    If I do need a CPA what are good select criteria when choosing a CPA – that would make a good topic. :)

  7. JAYEONE says:

    ummm…since when have dog treats been sexy?