7 Mistakes to Avoid on Your 2012 Tax Return
By Rick Rodgers, CFP
Every year, our politicians talk about the need to simplify the tax code and every year they make it more complex.
The average taxpayer will spend an estimated 23 hours completing their return. Eighty percent of taxpayers will hire someone to do the work, or buy tax software, even though 64 percent of taxpayers don’t owe anything.
There are six definitions of a child, more than a dozen educational credits, and 16 different types of tax-favored savings plans. That may seem daunting, but with some basic knowledge and planning, you can avoid costly mistakes.
Here is a list of the seven common mistakes and missed deductions to help you prepare your 2012 tax return.
1. Charitable deductions – cash. Did you make a contribution to charity last year? The IRS is cracking down on bogus deductions, so be sure to follow the donation tax rules. One of the most important rules is that you give to a charity with an IRS tax-exempt status. Don’t forget to take the mileage deduction when it applies. The IRS allows 14 cents per mile driven in service of charitable organizations.
2. Charitable deductions – in kind. Your used clothing donated to charity may not be seem worth much, but consider using valuation software to determine how much to claim. The same applies for furniture and other household items donated. Clothing must be in good condition or better to take the deduction.
3. Tax ID number. Tax ID number errors raise red flags with the IRS, which attempts to match reported income to tax returns. Take time to verify that your tax ID number is correct on 1099s, W-2 forms and all tax documents to avoid delays processing your return.
4. Dividend reinvestments. Each time a stock or mutual fund reinvests dividends, it’s the same as making a new purchase of shares. The amount of the reinvested dividend adds to your tax basis when you calculate your taxable gain from a sale. Make sure you don’t overpay the IRS. Mutual funds generally track the average basis of shares and automatically include reinvested dividends in the calculation.
5. Unused deductions from 2011. The tax code allows capital losses to offset capital gains. When losses exceed gains, the taxpayer can use only $3,000 of losses against other income. Any excess loss can be carried forward into future tax years. Don’t forget to carry the unused losses over to your 2012 tax return. Charitable deductions are capped based on the type of property donated and your adjusted gross income. Excess deductions can also be carried into future years. Don’t let carryovers get lost in the shuffle.
7. Overlooked medical deductions. Health insurance premiums are an often overlooked deduction. The portion paid by the employee is a deductible expense when you itemize. This includes the portion you pay to Medicare which is usually deducted from Social Security. Transportation expenses for trips to medical facilities or doctors’ offices are also deductible. The IRS allows 23 cents per mile driven for medical purposes in 2012.