Common Mistakes We See When People DIY Their Taxes
Filing your taxes with DIY software can be a great way to save money, but it’s not without its potential pitfalls if a person isn’t confident in what they’re doing. Even though DIY tax software are designed to guide you through the process, we still frequently find mistakes when reviewing returns that have been completed by the taxpayer. The mistakes can lead to missed deductions, potential penalties, and erroneously filed returns. Here are some of the most frequent errors we see people make when using DIY software, and how you can avoid them.
1. Missing Crucial Forms: The Case of the HSA 1099-SA
One of the most common mistakes is forgetting to include all the necessary forms, particularly the 1099-SA form for Health Savings Accounts (HSAs). This form reports distributions made from your HSA, which can be used to pay for qualified medical expenses.
Why This Matters:
If you miss the 1099-SA, you might not report the distributions correctly, which can lead to taxes on those distributions or even penalties if the funds weren’t used for qualified expenses.
How to Avoid It:
Double-check your mail and emails for any tax forms from your HSA provider. If you’re not sure whether you should have received one, contact your HSA provider directly. DIY software will ask about your HSA, but it’s up to you to ensure you’ve input all the correct information.
2. Not Appropriately Filing Local Returns
Local taxes can be a bit of a hidden landmine for DIY tax filers. Many people understand the need to file federal and state taxes, but depending on where you live and work, you might owe taxes to multiple localities—or be entitled to refunds! This is especially common if you worked in a different city or municipality from where you live.
Why This Matters:
Failing to accurately file and pay local tax can mean you either overpay or underpay your local taxes. If you’re entitled to a refund from one locality, you may not receive it unless you file the appropriate tax form. So you may be leaving money on the table!
How to Avoid It:
Review your W-2 carefully to see if local taxes were withheld for multiple localities. DIY Tax software may ask about this, but it’s easy to overlook if you’re not sure why the question matters. Make sure you answer all questions about where you worked and lived during the tax year, and don’t skip the section on local taxes.
3. Mishandling Form 8606
Form 8606 is filed with your tax return and is used to report non-deductible contributions to IRAs and Roth IRA conversions. This form can be tricky, especially if you’re implementing the Backdoor Roth IRAs tax strategy.
Why This Matters:
Incorrectly filing Form 8606 can lead to double taxation on your retirement savings or missed opportunities for tax savings. It’s not just a current year form, but also a form that has long-term effects on the taxability of your retirement in the future. It’s an extremely critical form if you’re doing any advanced tax planning with your retirement accounts.
How to Avoid It:
If you’ve made non-deductible IRA contributions or performed a Roth conversion, be meticulous when filling out Form 8606. DIY software will guide you through this, but it requires careful input. If you’re not completely confident, it might be worth consulting with a tax professional to ensure you’re not making costly mistakes.
Final Thoughts
DIY tax preparation software are powerful tools that makes tax filing accessible, but are not flawless. Errors such as missing crucial forms, mishandling local tax returns, or screwing up Form 8606 can lead to unnecessary headaches. By being aware of these common pitfalls, you can take steps to avoid them and ensure your taxes are filed correctly.
If you find yourself getting stuck or unsure about anything, don’t hesitate to reach out to a tax professional. Sometimes, the cost of professional advice is well worth avoiding the potential pitfalls that come with DIY tax filing.
Taking a little extra time to review your tax return and understand the forms involved can save you a lot of trouble down the road. Happy filing!
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