The IRS recently announced it has $1.1 billion in unclaimed tax refunds. And that is just from 2014 for taxpayers who did not file a tax return. That is an expensive mistake. Taxpayers may be able to claim refunds of income tax that was over-withheld or qualify for a refundable credit like the earned income credit. The good news is that taxpayers have until April 17 to file or amend a 2014 tax return to claim a refund.
Other mistakes taxpayers should watch out for include using the wrong filing status, making clerical errors, overlooking important credits and missing deductions.
Income changes impact tax outcome
Getting a raise or bonus, facing a pay cut or losing a job can happen to anyone. In addition to needing a new household budget, these taxpayers also need to take the tax impact into account. Not only could taxpayers move into higher or lower tax brackets based on their income, but some credits and deductions phase out depending on income.
Using the correct filing status
One of the most common mistakes taxpayers make is selecting the wrong filing status. A taxpayer’s filing status can affect which credits and deductions they’re eligible for, the value of their standard deduction and their tax bracket.
One situation that can make choosing a filing status difficult is when more than one filing status seems to fit. For example, if a taxpayer with children is in the process of getting a divorce, they may not be sure if they should file as married filing jointly or married filing separately or, in some instances, whether they qualify to file as head of household.
Commonly missed credits and deductions
The thousands of changes to the tax code in the past decade make it no surprise some taxpayers miss out on available tax benefits.
Earned Income Tax Credit for lower-income workers
One of the most frequently overlooked tax credits is the Earned Income Tax Credit (EITC): 20 percent of eligible taxpayers do not claim this credit. Depending on their income and the number of children they have, lower-income workers may be eligible for an EITC of $510 to $6,318.
Because eligibility can fluctuate based on financial, marital and parental changes, a taxpayer can be ineligible one year and eligible the next. Another reason so many people overlook the EITC is because they may not earn enough money to have to file a return. The EITC is a refundable credit, so even if an eligible person does not owe taxes, they can still get the EITC.
Education credits are another often-overlooked benefit. Depending on the kind of academic program, what year the student is in, income and other restrictions, a student may use the American Opportunity Credit of up to $2,500 or the Lifetime Learning Credit of up to $2,000. Taxpayers who paid tuition and fees in 2017 may be able to deduct up to $4,000 and those who paid student loan interest may be able to deduct up to $2,500.
Only about 30 percent of filers itemize, even though more should, especially homeowners. Owning a home is often the key that unlocks itemization, but some taxpayers with high state taxes and charitable contributions may also be able to itemize. Itemizing allows taxpayers to deduct qualifying:
- charitable donations,
- medical expenses,
- personal property taxes,
- real property taxes,
- state income or sales taxes,
- casualty losses,
- mortgage interest payments and
- certain 2017 mortgage insurance payments.
Itemizing can save taxpayers hundreds of dollars. For example, if a single taxpayer pays $9,600 in mortgage interest, property taxes and charitable donations, that is $3,250 more than the standard deduction of $6,350. With a marginal tax rate of 25 percent, itemizing saves this taxpayer more than $800.
Common clerical errors taxpayers make
Life and tax changes aren’t the only reasons taxpayers leave money on the table. Taxpayers should double check their tax returns and make sure they haven’t made any clerical errors, like mixing up names and Social Security numbers, forgetting to include information reported on the W-2, 1099 or other forms, transposing numbers and making math errors.
Take a second look at old tax returns
Taxpayers have until April 17 to claim a refund for 2014. With H&R Block’s free Second Look, taxpayers can have their previously filed returns from 2014, 2015, 2016 and 2017 reviewed to see if they made any mistakes that left money on the table. Those who haven’t yet filed and are using H&R Block’s online products can have a tax pro review their return before submitting it to the IRS. Taxpayers can see if a Second Look is right for them with a free online assessment and schedule an appointment online or by calling 1-800-HRBLOCK.