20 Biggest Tax Mistakes That Cost People Thousands
Avoiding these tax mistakes can help you keep more of your hard-earned money.
- Daisy Montero
- 4 min read
Tax season can be stressful, but making the wrong moves can cost you big. Overlooking deductions, misreporting income, and filing late are just a few errors that lead to hefty penalties. Learning how to sidestep these mistakes can save you thousands and keep you on the IRS’s good site.
1. Missing the Tax Filing Deadline
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Late filing leads to penalties the pile up fast. Even if you cannot pay what you owe right away, filing on time avoids extra fees. Extensions help, but they do not push back payment deadlines.
2. Ignoring Available Deductions
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Leaving money on the table is never a good idea. Many taxpayers overlook deductions like student loan interest, home office expenses, and medical costs. A little research can lead to big savings.
3. Forgetting to Report Side Income
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The IRS does not forget, even if you do. Income from freelancing, gig work, or rentals must be reported, or penalties could follow. Skipping it might seem harmless, but audits can be costly.
4. Claiming the Wrong Filing Status
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Filing as single instead of head of household can mean losing valuable tax breaks. Choosing the right status affects deductions, tax rates, and refunds. Double-checking could prevent an expensive mistake.
5. Overlooking Retirement Account Contributions
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Contributions to IRAs and 401 (k)s can lower taxable income, yet many taxpayers miss this opportunity. Even last-minute contributions can make a difference. Saving for the future and reducing taxes is a win-win.
6. Miscalculating Estimated Tax Payments
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Self-employed individuals and freelancers often misjudge quarterly tax payments. Paying too little leads to penalties, while overpaying means lending the IRS money interest-free. A tax professional can help get it right.
7. Not Keeping Proper Tax Records
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Losing receipts or important tax forms can be costly if the IRS comes knocking. Organized records make filing easier and provide backup for deductions. Digital or paper, a good system saves time and stress.
8. Misreporting Income
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Even small mistakes on reported income can trigger IRS scrutiny. W-2s, 1099s, and investment earnings must match what the IRS expects. Accuracy prevents costly audits and penalties.
9. Failing to Claim Earned Income Tax Credit (EITC)
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Millions out on this valuable credit each year. The EITC can provide significant refunds for qualifying workers, but eligibility rules are tricky. Checking the requirements could mean extra cash in your pocket.
10. Overlooking State Tax Obligations
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State taxes are just as important as federal taxes. Moving to a new state or earning income from multiple states adds complexity. Failing to file properly can lead to penalties down the road.
11. Choosing the Wrong Withholding Amount
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Under-withholding can lead to a hefty tax bill, while over-withholding means less take-home pay all year. Adjusting your W-4 properly keeps more money in your pocket without surprises.
12. Not Paying Self-Employment Taxes Correctly
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Freelancers and small business owners must cover Social Security and Medicare taxes on their own. Ignoring these payments leads to fines and headaches. Setting aside funds for taxes avoids last-minute stress.
13. Making Math Errors on Tax Returns
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Simple math mistakes can delay refunds or lead to audits. Even with software, double-checking numbers helps avoid trouble. A quick review saves time and frustration.
14. Failing to File Electronically
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Paper filing increases the risk of mistakes and slows down refunds. E-filing is faster, more accurate, and provides instant confirmation. Plus, direct deposit gets refunds to your account quickly.
15. Misunderstanding Capital Gains Taxes
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Selling stocks or real estate comes with tax consequences. Short-term gains are taxed higher than long-term ones. Knowing the rules helps maximize profits and minimize taxes.
16. Ignoring Rules for Charitable Donations
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Donating to charity can lower your tax bill, but only if done right. Receipts and proper documentation are required. Non-cash donations need extra paperwork to qualify.
17. Misclassifying Workers as Independent Contractors
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Business owners who misclassify employees as contractors can face major fines. The IRS has strict guidelines for determining worker status. Getting it wrong could mean back taxes and penalties.
18. Not Accounting for Life Changes
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Marriage, divorce, or having a child can change your tax situation. Adjusting withholdings and knowing what credits apply ensures you do not overpay. Major life events often mean tax benefits—if you claim them.
19. Failing to Track Business Expenses
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Business deductions lower taxable income, but only if recorded properly. Meals, travel, and office supplies add up fast. Good bookkeeping keeps every deductible dollar in your favor.
20. Not Seeking Professional Help When Needed
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Taxes are complicated, and DIY approaches can backfire. A tax professional helps catch errors, maximize deductions, and prevent audits. Paying for expert advice often saves more than it costs.