This is also why you pay taxes, for the authorities are God’s servants, who give their full time to governing. Give everyone what you owe him: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor. (Romans 13:6–7, NIV84)
“Jesus said to them, “Render to Caesar the things that are Caesar’s, and to God the things that are God’s.” And they marveled at him.” – Mark 12:17 ESV
Every year, those of us living in America have to pay their appropriate income taxes. To say simply, the United States Tax code and laws are very, very complicated. As of 2020, the US Tax Code is 6,871 pages, but when you include the tax regulations and official tax guidance from the IRS, it is more like 75,000 pages. Needless to say, mistakes are common. Though there is great complexity in the US Tax Code, many of the common and normal mistakes are surprisingly quite simple. Because of the great complexity and yearly changes in tax law and code, we recommend that the best way to avoid tax mistakes would be to work with a professional. If you choose to self-file your taxes, using a well known tax software where you can file electronically is our second option.
This episode, we will talk through what we see at the 6 most common tax mistakes to avoid this tax season so that you can be an even better steward over what God has entrusted to you! Our goal here is to have you fulfill what the Scriptures are saying, to render unto Caesar what is Caesar’s, but not a penny more.
6 Tax Mistakes to Avoid
1. Overlooked Tax Deductions
- Common overlooked deductions include:
- Refinancing Mortgage Points
- Student Loan Interest Paid
- Social Security Taxes you pay when self-employed
- Don’t forget to listen to next week’s episode for more…
2. Math Errors (especially when self-preparing)
- Incorrect wages, bank interest, dividends, or other income.
- Incorrectly calculating deductions and credits.
- It is important to have documentation of your numbers!
- Though not a fatal error, math errors could cause a lot of confusion and frustration.
- If you are audited, and you “self-prepared” your taxes, are you prepared to explain and/or defend your numbers?
- Do you have the receipts and/or data to back up what you put on the tax forms?
- Integrity in your reporting of numbers is important!
- “The man of integrity walks securely, but he who takes crooked paths will be found out.” (Proverbs 10:9, NIV84)
3. Forgetting Important Paperwork
- Being forgetful is totally different than mis-representing the numbers on your tax return! One common way that people forget important paperwork can happen when one files prematurely. Companies often take some time to get ALL the needed documents for filing your tax return to you, so filling too soon could cause you to not include a form, two or three!
- Life gets messy, and keeping track of all financial transactions, no matter if cash, real estate or investments, one ought to remember that there may be a form for tax purposes, or a record needed so in the tax preparation days, you remember and know what you need to file.
- Though this list is not exhaustive, here are some key examples of commonly forgotten documents:
- 1099-R – Retirement accounts
- 1099-B – Sale of Mutual funds/stocks NOT that are in an IRA
- 1099-INT – Bank Interest or interest on Treasury Bonds
- 1099-DIV – Dividends on stocks/mutual funds NOT in an IRA
- K-1 – Income from business or trust (often comes out very late and can be forgotten or overlooked)
- 1098 – E Student Loan Interest
- It helps to have a running tab of every institution you may receive a tax form from.
4. Paying too much in Capital Gains tax
- When dealing with capital gains tax, you must understand something called “cost basis.” It is important to note that if there is a missing cost basis, the IRS assumes the whole thing as a gain, and assesses the tax in its entirety. It is also good to remember the times where your “cost basis” is adjusted and/or stepped up.
5. Filing as the wrong tax status
You could qualify to file under multiple statuses. Know which status you would benefit most from.
Filing status Options determine the rate at which income is taxed. Consult a tax professional to decide which status works best for you!
- Married filing jointly
- Married filing separately
- Head of household… and
- Qualifying widow(er) with dependent child.
How Tax Brackets Work
Example of $140,000 income and how it is taxed on a federal level.
Being “in” a tax bracket doesn’t mean you pay that federal income tax rate on everything you make. The progressive tax system means that people with higher taxable incomes are subject to higher federal income tax rates, and people with lower taxable incomes are subject to lower federal income tax rates. The government decides how much tax you owe by dividing your taxable income into chunks — also known as tax brackets — and each chunk gets taxed at the corresponding tax rate. The beauty of this is that no matter which bracket you’re in, you won’t pay that tax rate on your entire income.
The percentage of your taxable income that you pay in taxes is called your effective tax rate. To determine effective tax rate, divide your total tax owed (line 16) on Form 1040 by your total taxable income (line 15). Income thresholds for tax brackets are updated annually. Several provisions in the tax code, including the income thresholds that inform the federal tax brackets, are adjusted annually to reflect the rate of inflation. This indexing aims to prevent taxpayers from experiencing “bracket creep,” or the process of being pushed into a higher tax bracket because of inflation.
6. Entering the wrong personal/bank information
A reversed digit or missing number can start a very lengthy time-frame to get it corrected and get you your refund if applicable! Some of the key numbers that should be checked, re-checked and even triple-checked are:
- Social Security Numbers
- Routing/Account numbers
- Misspelled names
- Incorrect current filing address
Tax planning is one of the ways you can become an even better steward. We are passionate about making sure that we “render unto Caesar what is Caesar’s,” but not a penny more! If you successfully do the same, then you will have more resources to better take care of your family and invest more into Kingdom work through your church so others can come to know and grow in the ways of the Lord!
So as you enter this tax season, know that it is important that all the “t’s are crossed and i’s are dotted” so that you can make sure to avoid these mistakes.
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