W-2s and other tax documents are starting to arrive in the mail, signaling the beginning of the U.S. tax season for individual taxpayers.
Not only are taxes a pain to confront, but they’re easy to get wrong. Here are five big mistakes to avoid:
Failing to file. Every year, I hear from people who have hidden under a rock for years–years–when tax season rolls around. They want to come clean, but are afraid the IRS will send storm troopers to carry them away. Relax: simple failure-to-file isn’t a crime, although it can be costly. Failure to file penalties are much worse than failure to pay penalties, and you lose out on any tax refunds you might have gotten after three years have passed. The fix is straightforward: find yourself a CPA or other good tax pro, bring what documentation you have and take your medicine.
Doing complicated taxes themselves. I’ve used a tax pro ever since starting my first freelance business many years ago, and that was even in the years when I was doing our taxes eight or nine times a year to test out various tax software. My pro has always found deductions I missed and been a great resource year-round. If you’ve got a business or a lot of investments, find yourself an expert. At the very least, you should be using software like Turbotax–today’s tax code is simply too complex to tackle by hand.
Paying with a credit card. Whatever rewards you’re getting from using a card are more than offset by the fees charged to use plastic. If you can’t pay right away and have a very low rate on your card, charging could make sense, but the IRS’ payment plans also come with pretty low interest rates.
Using rewards points to pay your taxes. American Express just announced that you can do this with their rewards cards, but the exchange rate is awful. You need 200 points to pay $1 in taxes, according to CreditBloggers.com. (Normally, you want an exchange rate of at least 1 cent per point or mile; CreditBloggers points out you can get a $25 Barnes and Noble card on Amex’ site for 2500 points, and even the less desirable exchange rates that typically apply for merchandise typically give you 100 or so points to the dollar.)
Taking out a refund anticipation loan. If you file electronically and opt for direct deposit, you can get your refund in about 10 days. That’s all. It’s insane to pay an interest rate that’s effectively in the triple digits to get your money faster from a tax preparer that offers refund anticipation loans. If you need the money so badly, then file earlier in the season; your wait time may be even shorter.