8 Common Tax Mistakes — And How First-Time Filers Can Avoid Them
Are you ready for tax season? For seasoned filers, the process may not be fun, but at least it’s familiar. If you’re new to tax filing, the countless forms can make your stomach drop and head spin. Not to mention: costly tax mistakes.
First-time filers, learn how to navigate tax season with advice from financial professionals. More importantly, hear recommendations for how to dodge the errors that leave money on the table or prompt a stern letter from the IRS.
Here are eight common tax mistakes first-time filers often make and how to avoid them.
No. 1: Filling out incorrect withholdings
This common tax mistake happens long before tax season.
When you start a new job, it’s standard protocol to complete and submit a Form W-4. A W-4 is an Internal Revenue Service (IRS) form that informs your employer how much in taxes to withhold from each paycheck. The amount withheld is then sent to the IRS. When you file your tax return, you receive a credit for the amount paid during the tax year.
Beware of human error. Failure to complete a Form W-4 correctly, which includes spelling mistakes, incorrect dates, and amounts, or incomplete information, could result in a headache.
“If you don't complete the W-4 correctly, you could end up owing a lot of taxes when you go to file – a very unpleasant surprise that could have been avoided if the W-4 was properly completed,” says Brad Paladini, owner of Paladini Law.
How to avoid it
Enter every piece of information on your Form W-4 carefully. Income must be reported in full, including wages, dividends, and interest. Double- and triple-check your information at every point in the process. If you have any questions, contact the HR or benefits department at your company.
No. 2: Forgetting to file as a dependent
Are you a dependent? A change to this filing status affects the way you file taxes, and certain dependents don’t need to file.
A dependent is a qualifying child or relative who the taxpayer can claim for a dependency exemption. Each exemption decreases the income that is subject to tax.
For example, if a parent has a child living at home, the parent can claim that child as a dependent to receive a tax deduction. The child, depending on age, then has a few options for how to file their taxes — if they even need to.
“Most people filing for the first time make the major mistake of claiming themselves when their parents are still taking them as a dependent,” says Paul Miller, the founder of Miller & Company, a full-service CPA firm. “We then have to amend more returns for this error.”
How to avoid it
Know your dependency status. Many first-time filers are young people, who can be claimed by parents as dependent. However, you may still want or need to file your taxes to receive a refund.
Check the IRS to see if you qualify as a dependent and if you need to file a tax return. Typically, your earned or unearned income must exceed certain limits to do so. If you are filing taxes, make sure to clearly state that you are a dependent.
No. 3: Claiming the wrong filing status
One of the first steps to filing taxes is selecting a filing status. The filing status determines the amount of income tax you pay.
There are five tax filing statuses:
- Single
- Married and filing jointly
- Married and filing separately
- Head of the household
- Qualifying widow or widower with a dependent child
“One of the common [tax] mistakes is not knowing your filing status when preparing tax returns,” says Chayim Kessler, who runs Miami Beach CPA. “There are qualifying rules to be able to file as head of household — which is advantageous — or a single taxpayer.”
For instance, filing as the head of a household rather than single can allow you to claim a larger standard deduction.
If you’re single without kids, the correct filing status is a no-brainer. Add in other factors, and it becomes complicated.
Filing the wrong status comes with a hefty penalty. By not paying the correct amount in taxes you might owe additional taxes and interest later on if the additional payment is considered late.
How to avoid it
Filing status determines nearly everything. Select the correct status to make the rest of the process run smoothly and avoid over or underpaying. Need help determining your filing status? Use the interactive tax assistant on the IRS website.
If you accidentally chose the wrong status, you can likely file an amended return with the IRS to correct the mistake. However, this is complicated when filing jointly. For instance, if you filed using the married filing jointly status, you won’t be able to amend your status after the due date.
No. 4: Not claiming all streams of income
All income is fully taxable and must be reported unless it’s specifically excluded by law, even money earned from a side hustle.
“A common mistake among first-time filers is not including all of their income,” says Krystal Pino, founder of Nomad Tax.
Money earned through a full-time job isn’t the only income stream you need to report. Pino suggests including small earnings, too.
“Doing work for cash, debt forgiveness, and even prizes are considered taxable income, and if the payer reports it to the IRS, the receiving party (in this case, the filer) better include it as well,” Pino says.
If you under-report income — whether intentionally or out of oversight — the IRS will likely send you a mail audit. They’ll ask about the discrepancy in reported income. There is no need to panic - provide receipts and explain your circumstances. Worst case scenario, you’ll end up owing more taxes.
How to avoid it
When you file, make sure to include all streams of income. Organize all of your financial documents and report every item of significance.
No. 5: Filing too early
When it comes to taxes, patience is key. Filing too early may cause you to leave out crucial information.
Too often, first-time filers who expect a tax refund want their money as soon as possible, says Brandon Pfaff, a CPA who serves as VP of Tax at SMBC Rail Services, LLC.
“When you file your tax return before you receive all your documents, you will need to file an amended return to correct for the missing forms,” Pfaff says.
It doesn’t cost money to amend taxes as far as three years back if you file yourself. Once a tax professional is involved, they will likely charge a fee to do so.
How to avoid it
Avoid the time and energy of refiling. File correctly the first time by waiting until you receive every relevant tax document.
Each taxpayer’s situation is unique, but there are a few documents that most first-time filers will need, including:
- Federal and state tax return copies from the last three years
- Personal information, such as Social Security number or ITIN number
- Dependent information, such as childcare or alimony payments
- Income statements, including W-2, 1098, 1099, and/or schedule K-1 forms
- Deductions, including mortgage interest, charity donations, or moving expenses
- Investments, such as stocks
- Education information, such as scholarships or fellowships
- Retirement contributions, such as to a 401(k), IRA, or HSA account
No. 6: Filing too late
Submitting a tax return late is another mistake first-time filers should avoid. State deadlines may vary. Check due dates so you’re not caught off guard.
“Often new filers will leave [filing taxes] to the last minute and so they have issues paying the tax, as they are close to the deadline,” says Alistair Bambridge, the founder of Bambridge Accountants.
How to avoid it
Don’t procrastinate taxes. Give yourself more time than you think you’ll need, especially if you’re new to the process. This will allow you to address last-minute issues and proof for errors without missing the deadline.
Need more time? File a tax extension. Tax filers, regardless of income, can electronically request a free extension with IRS Free File. To do this, you must estimate your tax liability and pay the amount due. It’s important to note that an extension gives you extra time to file, but it doesn’t give you extra time to pay.
No. 7: Structural errors for status and deductions
Do you run or own a business? Your form of business will determine the income tax form you need to file, and it can get complicated.
A sole proprietorship, partnership, corporation, and S corporation (S Corp) are different business entities. For example, an S corp operates as a corporation but is taxed on each shareholders’ individual tax form.
The owners of the S corp pay income taxes based on their distributive share of ownership and report them on their individual Form 1040. The owners of a corporation are shareholders and they receive dividends as a return on their investment. The owners of an S corp pay regular income tax on their distribution, but they are not considered to be self-employed, so they pay no self-employment tax on this distribution.
“The biggest and most common mistake is not electing S corp status and then having to pay excess self-employment taxes, which are over 7%,” says George Birrell, the co-founder of Taxhub.
Beyond filing for a business status, the industry of the filer may determine how they complete their taxes.
“Another mistake is not knowing what deductions are allowable for their specific industries,” Birrell says.
For instance, filers in the media and advertising industry may be eligible for a cable bill deduction. Why? Keeping up with trends is part of the job, and an educational expense, Birrell says.
How to avoid it
First-time filers who have multiple streams of income, a business, or a side hustle should consult a tax expert. It’s difficult to understand the complexities of filing for a business, especially as a tax newbie. Catching structural mistakes early on will prevent complications in the long term. So a fee charged by a tax professional to correctly file your taxes will likely be worth it.
For subsequent years, the filer can confidently follow the template set by their tax professional.
No. 8: Forgoing professional help
Ensure that your taxes are error-free by relying on professional assistance. Use a tax preparation service or consult a tax expert to reduce common mistakes.
“The biggest mistake [first-time filers] make when doing their taxes is doing it on their own,” says David DiNardo, Chief Strategy Officer at Gauvreau.
If you’re unsure of a tax form answer, don’t guess. Connect with a professional to reduce the chance of error — not to mention, your stress level.
“The last thing anyone wants to deal with is an audit or tax implication, let alone leave money on the table,” DiNardo says.
“Trained accountants can provide you with the advice you need on tax planning strategies to minimize the amount of taxes you pay and maximize your deductions,” DiNardo says. “A professional tax consultant can also supervise all your accounts to ensure that you don’t miss important deadlines or make costly mistakes.”
Professional services are also liable for any errors made on their end. In fact, a tax preparer who makes mistakes is subject to an IRS penalty.
How to avoid it
To file on your own, you need a familiarity with taxes. Until you feel comfortable handling your taxes solo, outsource your return to a professional. Want to compromise? Use the IRS Free File online tool or one of the following free IRS-approved tax filing services to handle it yourself. Note that you may have to meet income eligibility requirements to use the free version of these services:
Bottom line
First-time filers, make sure you do it right. Avoid these common tax mistakes whether you rely on professional assistance or do it yourself.
Alistair Bambridge is a tax advisor and accountant based in New York. He founded Bambridge Accountants -- a firm of enrolled agents and accountants specializing in tax advice for those in creative industries and expat tax services for citizens living abroad -- with locations in London and New York. Its team of tax advisers provides accurate, efficient, and flat-fee tax services.
George Birrell began his career in public accounting after earning his master's degree in taxation and scoring in the top 10% on his CPA exam. As his career evolved, it was never far from Birrell’s mind that when it came to consumer tax prep, there had to be a better way. As an innovator, he found that way and the idea behind Taxhub took shape. Determined to bring customers a better tax experience, Birrell began discussing his ideas with the skilled professionals he knew he would need to move forward.
David DiNardo is the Chief Strategy Officer at Gauvreau.
Chayim Kessler is a CPA and has run the accounting firm, Miami Beach CPA, for more than 20 years. He is a graduate of Northwestern University and obtained a master of accounting degree from Florida International University. He is a member of the Florida Institute of Certified Public Accountants and received special recognition for high achievement by the Institute of Internal Auditors.
Paul Miller is the founder of Miller & Company LLP, a New York City-based CPA firm. Formed in 2002, Miller & Company LLP is a full-service accounting, tax planning, tax preparation, and business advisory firm. In 1992, Miller earned his CPA and resumed working for Mahoney Cohen (now CBIZ, Inc.), a public accounting firm on the New York Stock Exchange. Five years later, he opened his own accounting office in Little Neck, NY.
Brad Paladini is a tax attorney and the founder of Paladini Law, helping individuals and businesses fix tax problems. He has extensive experience dealing with the IRS and taxing agencies in New Jersey, New York, and California. He’s the co-author of Surviving an IRS Tax Audit and has been quoted in numerous publications.
Brandon Pfaff is a tax expert and CPA with nearly a decade of experience working with individuals and small businesses with a hands-on approach. He has worked for one of the world’s largest public accounting firms as well as several Fortune 500 companies. Pfaff specializes in accounting and tax prep for closely-held businesses, tax planning, and international tax compliance and planning. He is currently the VP of Tax at SMBC Rail Services, LLC.
Krystal Pino founded Nomad Tax in 2018 to help digital nomads navigate their complex tax issues. Pino is a certified public accountant and personal financial specialist with more than 10 years of combined industry experience. She earned a bachelor of arts in accounting and an MBA from University of Alabama at Birmingham. Originally from Buffalo, New York, and Birmingham, Alabama, Pino has been traveling internationally and working remotely for more than two years.
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