My Favorite Mistake: Common Errors by Last-Minute Filers

Spring is here, the weather's getting nicer and tax day is looming.

So if you're one of the unlucky people who haven't filed their taxes yet, you have a sunny afternoon (or two) filled with paperwork to look forward to between now and April 16. But in rushing to get your taxes done, it's important not to make some of the common tax mistakes committed by many last-minute filers.

Seeing many of these mistakes over and over prompted Laurence Foster, a certified public accountant and personal financial specialist with Richard A. Eisner & Co., to come up with a list of the most common mistakes made by last-minute filers. Foster, who is also chairman of the Personal Financial Specialist Credential and Exam Committee of the American Institute of Certified Public Accountants, or AICPA, has been working in the business since 1963, so he's seen it all.

Foster says many of these mistakes can be avoided simply by reading the instructions that the IRS provides with all of its forms, which are available on the IRS Web site. But for those of you who don't like instructions, here's his list of the 15 most common pitfalls to avoid when filling out those tax forms:

1. Choosing the incorrect filing status.

Different filing statuses have different tax rates, and you should put down your correct status to get credit where credit's due. If you are unmarried and paid over half the cost of providing for a qualifying person, such as a child or parent, you can file as a head of household and get a lower tax rate than if you had filed as single. A person whose spouse died within the past two years with a dependent child can file as a surviving spouse and get a lower rate than a head of household. Be sure to read the instructions on Form 1040 to see where you fit in.

2. Basing your information on data from incorrect W-2 or 1099 forms and bank statements.

These forms may come from your employer, your broker or your bank, but ultimately you are responsible for the veracity of the information you put on your tax return. Make sure you keep those pay stubs and bank statements to double-check against your year-end statements.

If you discover that the information on your W-2 is wrong and you're strapped for time, Foster suggests that you still put that number on your return, but then subtract or add the difference between the wrong figure and the correct figure either on the next line or in the margin and calculate your taxes using the correct figure. You should then add a note to the IRS explaining the discrepancy with your return, but then call whoever sent you the wrong form and get them to send you the correct one, which you should send to the IRS as soon as you get it.

3. Not claiming the wages you made for a company that went out of business and didn't send you a W-2 form.

With all of the dot-com flameouts this year, this is probably a common problem for many people. Foster says even if you don't have the written record, you must record the income. Sure, you could ignore it and take your chances that the IRS may never find out about that income, but why risk it? The IRS can come back to you at any time to ask you to explain tax discrepancies in your past. And if they ever do discover that you owe back taxes, they will charge you penalties and interest on top of what you owe. Remember, it was the IRS that did Al Capone in!

4. Not knowing that your unemployment income is taxable.

Although there is no withholding from your unemployment wages, this is still taxable income. If you're on unemployment and you can afford it, the best solution is to set some funds aside to pay the inevitable tax bill.

5. Overpaying your Social Security tax if you had more than one job in a year.

Again, a common problem in this age of layoffs. If you or your spouse had more than one employer and made more than $76,200, too much Social Security tax might have been withheld. If more than $4,724.40 in total was withheld, you can claim the excess on line 61 of your 1040 form. If one employer withheld too much, however, you must ask the employer directly for the refund and cannot claim the excess on your return.

6. Not knowing that your Social Security income may be taxable.

Although there is no withholding on your Social Security income, that doesn't mean that you won't owe taxes on it. Depending on your other sources of income, you will either be taxed on 50% or 85% of your Social Security income or not taxed at all. To figure out what you'll owe, be sure to fill out the worksheet in the 1040 instruction booklet that addresses items 20a and 20b, called Social Security Benefits.

7. Not knowing if your tax-exempt interest income is taxable in your state.

The general rule of thumb is, interest on municipal bonds of your own state are not taxable, but those of another state (say, if you live in New York and own California municipal bonds) are taxed as ordinary income. If you live in a state with no income tax, such as Florida, this rule is not as important.

8. If you're divorced, both parents claiming the same child as a dependent.

If there is one child, only one parent can claim that child as a dependent. However, if there are two or more, the parents can each claim a different child for tax purposes. Which parent gets to claim the children as dependents is usually determined in a couple's separation agreement.

9. Incorrectly claiming for spousal support.

Alimony payments that you receive from a spouse are considered taxable income, but child support payments are not. Conversely, alimony payments that you pay to a former spouse are tax-deductible, while child support payments are not.

10. Claiming a newborn that does not yet have a Social Security number as a dependent.

Your child must have a Social Security number for you to claim him or her as a dependent. Foster says most hospitals will have the paperwork on hand for you to apply for the child's Social Security number right after he or she is born.

11. Not claiming a parent as a dependent if you financially support them.

If you are supporting a parent, you may claim him or her as a dependent. But just as divorced parents cannot claim the same child as an exemption, not all of the children in a family can declare their parents as dependents. If there are many siblings, Foster suggests that the deduction go to the person who needs it the most. Another idea is to alternate who gets to claim the deduction every year.

12. Deducting medical expenses when they don't exceed 7.5% of your adjusted gross income, or 10% of your adjusted gross income if you are subject to alternative minimum tax.

Items that aren't covered by health insurance can be deducted on your taxes, but only that amount that exceeds the 7.5% or 10% cutoff is deductible. In addition, the cost of equipment or other special items needed because of a medical condition (such as ramps built onto your house if you're in a wheelchair) are tax deductible, says Foster.

13. Not claiming a deduction for losses suffered in a declared national disaster area.

If the U.S. president has declared your area a disaster zone, then you can claim any losses exceeding 10% of your adjusted gross income plus $100. Also, even if the disaster occurred in early 2001, you can claim that loss on your 2000 taxes. You can also wait until 2001 to claim the losses if claiming them doesn't give you much benefit on your 2000 return, says Foster.

14. Forgetting to get a receipt for all charitable contributions that exceed $250, or an appraisal for all contributions in excess of $5,000.

Even though you don't file the receipts for your charitable contributions, Foster says you should keep them anyway in case you get audited. Appraisals for contributions of $5,000 of more, on the other hand, must be included with tax forms, he adds.

15. Forgetting to sign the form, include your Social Security number, put a stamp on the envelope or use the right tax form or notify the IRS of a name change.

These might sound silly, but Foster says last-minute filers often become so caught up in the minutiae of the numbers that they forget to do the really important things, like putting a stamp on the envelope. Remember to take a step back when it's all done and check that you've followed all of the steps.