After Dec. 31, there’s nothing you can do to affect your taxes for the year that just passed, right? Not so. There are many things you can do before you file to screw up your return. We’re talking about the filing blunders that can increase your tax bill, raise the odds of unwanted IRS attention, or cost you if you get audited. Leaving aside obvious ones, such as forgetting to sign your return, here are seven gaffes, or missed opportunities, I see most often:
1. The Gift That Ends Up Taking
You probably know you need charitable organization receipts to back up any donations of $250 or more. But did you know you must actually have those receipts in hand by the time you file? Otherwise, the tax law says no write-off is allowed. Period. For cash donations of less than $250 made in 2014, you’re not allowed any write-off unless you retain either a bank record that proves the donation (for example, a canceled check or credit card statement) or a written communication from the recipient charity that meets tax-law requirements. Therefore, small undocumented cash contributions (such as money placed on church collections plates and cash dropped in Salvation Army pots) will not qualify write-offs. You must get a receipt from the charity to lock in your rightful tax break. (You also must obtain charity-provided substantiation for any cash contributions of $250 or more.)
There’s more: for charitable donations of used clothes and household items, you get no deductions unless the stuff is in “good” condition or better. “Household items” include furniture and furnishings, electronics, appliances, linens, and the like. In other words, no charitable write-offs for donated junk. Under an exception, you’re allowed a write-off for any single item, regardless of its condition, that is appraised at over $500 such as a piece of antique furniture that is valuable even though it is only in “fair” conditions. (See IRS Form 8283 at www.irs.gov for more details on the rules for non-cash donations.)
2. The Rollover Fumble
This is something I messed up on my own return not too long ago. Say you left your old job or retired in 2014 and rolled over your retirement account, tax-free, into a traditional IRA. What you’d receive from your former employer is a 1099-R that shows a taxable retirement-account distribution, even though it was tax-free. Or maybe you rolled over an existing IRA tax-free from one brokerage house to another. Again, you’d receive a 1099-R showing a taxable distribution, even though you didn’t actually have one.
The solution: Include the 1099-R figure on Line 15a of your 1040 (or Line 16a if it was a retirement-plan distribution). Then show the taxable amount — zero if you rolled everything over — on Line 15b or 16b, respectively. Be sure to write “Rollover” next to Line 15b or 16b. Blank lines will trigger an IRS inquiry about why you failed to account for the distribution shown on your 1099-R. Then — like me — you’ll become pen pals with the government as you try to explain what happened. Not fun.
3. Home Cooking
If you bought an existing home last year, you may find a tax goody buried under the blizzard of paperwork. I’m talking about your right to deduct any mortgage points paid by the seller. I know that being able to write off an expense someone else has paid for sounds too good to be true. But it is true, so don’t overlook it. The only catch: you must reduce the tax basis of your new home by the amount of seller-paid points that you deduct. That will mean a bigger profit when you sell, but since you can usually exclude home sale gains up to $250,000 ($500,000 if you are married), the bigger profit probably won’t actually result in any extra federal income tax.
Another little known deduction: If you refinanced the mortgage on your home and paid any points, you have been slowly amortizing the cost of those points over the life of the loan. But say you sold your home in 2014. Many people forget they can deduct the unamortized balance of points in the year of the home sale. Claim the write-off on Schedule A as “qualified residence interest.”
Here’s another deduction many people miss simply because they aren’t aware of it: If you sold a house last year, take a look at your real estate closing statement. It probably shows that you prepaid a portion of the property taxes that came due after the date of sale. You can deduct this amount on your return.
4. Who’s in Charge Here?
One of the most common mistakes I see is people filing as single taxpayers when they qualify for the much-more-favorable head-of-household (HOH) filing status. After I wrote about this issue a while back, a reader took my story to his accountant. A few weeks later, amended returns claiming refunds for the last several years appeared in his mailbox.
Say you’re single and your non-adult child lives with you and pays for less than half of his or her own support. If you pay more than half the household’s costs, you qualify as a head of household. You may also qualify if you are still married and lived with your child but apart from your spouse for at least the last half of 2014. Finally, if you are single and can claim your parent as a dependent, you can probably file as HOH. This is true even if your parent has his or her own place. You are the HOH if you pay more than half the cost of your dependent parent’s home.
5. New Kid on the Block
If you have a little bundle of joy who was born last year, don’t forget to sign them up for a Social Security number before filing. It’s required to claim your rightful personal exemption write-off ($3,950 for 2014). What happens if you file without the number? The IRS will disallow the exemption, recalculate your tax, and either send you a bill or mail you a lower-than-expected refund.
One Maryland taxpayer thought (logically enough) that having lots of dirty diapers ought to be more than enough proof for his deduction, even without a Social Security number for the kid. So he litigated the issue. Guess what? He lost. The moral: this requirement is nonnegotiable. To get a number for your new child, fill out Form SS-5 (Application for a Social Security Card). To get Form SS-5, visit the Social Security Administration’s website at www.ssa.gov.
6. Exemption for College-age Child
Those college-education tax credits are tasty. Unfortunately, the Lifetime Learning credit is phased out for 2014 starting at an adjusted gross income (AGI) of $108,000 for joint filers and $54,000 for singles (complete phaseout occurs at an AGI of $128,000 and $64,000, respectively). The American Opportunity credit is phased out starting at AGI of $160,000 for joint filers and $80,000 for singles (complete phaseout occurs at AGI of $180,000 and $90,000, respectively).
When your income is way too high to take advantage, claiming your college-age child as an exemption could turn out to be a mistake. Why? Because if you forego the exemption ($3,950 for 2014), your child can use the education credit against his or her tax bill. Remember: this strategy works only if your child has enough income to owe taxes so that the credit is worth more than the exemption (otherwise, the credit has no value to your child).
7. Where’s the Cash Flow?
So you won’t have the money to pay the feds by April 15? Don’t make the common — and expensive — mistake of ignoring your tax-filing requirement until you’ve rounded up the bucks. Instead, you should either file your return by the deadline or apply to get an automatic extension until Oct. 15.
Either way, you can defer paying your tax bill until later. Sure, you’ll be charged penalty interest. But the current rate is only 0.75% a month. (The rate is adjusted quarterly, so it may be higher or lower by the time you read this.) If you do nothing, you’ll be penalized to the tune of 5% of the unpaid balance a month, up to a total of 25% (after five months). After that, you’ll be charged interest at the 0.75% monthly rate. So, what if you extend until Oct. 15 and are still short on cash when that date rolls around? You can then try to arrange for installment payments of your tax debt. (Use IRS Form 9465 — Installment Agreement Request — to apply for an installment deal.) Alternatively, consider charging your tax bill on your credit card if that gives you a better interest rate.
This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, ©2014 Dow Jones & Co. Inc. All rights reserved.