Common Tax Mistakes
🆘 Waiting until after the year is over to ask questions
Once January 1 hits, you cannot undo anything from the previous year. To name a few…
Maximizing retirement accounts
Tax loss harvesting of stock accounts
Making estimated payments
Charitable Contributions
Roth conversions
If you are unsure of whether you are tax efficient, pay a professional for a consultation in September or October so you don’t miss out.
💲 No savings buffer
This one is the hardest for most clients to digest, but can have a huge sting. There are many articles out there on cutting costs, putting every cent into retirement, investing it all, & living with very little in savings. But what happens when an unexpected event occurs? An injury or downturn in economy leads to a loss of income. Then the options become…
Credit Cards with 24% Interest.
Taking retirement out early at 10% penalty
Refinancing your house at a higher interest rate.
6 months of savings is a good idea. 12 months is better. Then initiate your money making/saving plans from there.
Personal Note – Every year, I deal with multiple clients who end up with large balances due, payment plans with interest, and large credit card bills due to not following the above. I run my own business and I still keep a balance that can cover 12 months of expenses sitting in high interest savings in case something goes wrong.
⏰ Paying late fees / penalties
One of the most common and most expensive. The IRS has been hammering people the last 2 years. Over 15% of my clients got letters this year after they filed! This only comes into play if you owe taxes. If you are getting a refund, this does not apply to you.
There are 3 penalties…
Failure to File – 25% of balance due – Filing an extension gives you an extension to file and will eliminate this penalty as long as you file by the extension deadline.
Failure to Pay – 0.5% of the balance due every month until you pay. You DO NOT GET AN EXTENSION for this penalty. If you file an extension, the government still wants you to estimate and pay what you owe. Any shortfall is subject to this penalty
Failure to pay estimated taxes – If you owed taxes the year before, you are on the IRS radar. Your previous return should have included estimated payment vouchers. Send those in. If you need help with estimated payments, reach out to your professional. Paying a consultation fee saves more than it costs in 99% of cases.
In the last several years, the failure to pay penalty has been implemented more strictly.
‼️ Incorrect withholdings
On an annual basis, this is the one I find that costs clients the most.
- Many married couples need to file as ‘Single’ when both are working.
- Parents that swap kids each year need to update to Single or Head of Household.
- Stock Option Sales can lead to shortfalls.
Under withholding can lead to unexpected balances due of multiple thousands of dollars. And then penalties can be assessed for underpayment.
For a deep dive, read here – WITHHOLDINGS.
⛱️ Not utilizing retirement accounts.
When it comes to low hanging fruit with biggest upside, contributing to retirement accounts is #1.
You reduce income in your top tax bracket. This often reduces taxes by thousands of dollars.
If your company matches your contributions, that is literally 100% return on investment. You contribute $3,000. You company matches $3,000. That is FREE MONEY!
These accounts grow tax free until retirement. Often you can contribute to retirement while in a higher tax bracket, and later take it out in a lower one.
Just remember rule #1! Don’t contribute to retirement until you can leave it there until you retire. Taking it out early leads to a 10% penalty on top of additional income tax.
You can read more details about retirement accounts here – RETIREMENT.
🤯 Misuse of affordable health care subsidies.
Less common, but very expensive. For simplicity, understand the following…
When you use ‘The Healthcare Marketplace’ created by the Affordable Care Act, the government is paying for part of your health insurance.
They will ask you for your income. Many clients try to report lower income than they actually make to get a bigger subsidy.
At the end of the year, the government sends you a 1095-A. If your income is higher than you initially reported, you may have to pay some or all of that subsidy back.
If you plan on using subsidized healthcare, it is better to over estimate your income, and get the money back at the end of the year.
Side Note – Every year, I have at least one client owe over $10,000 back at the end of the year just for the subsidy. It can be a very costly error.
🏦 Missing out on Tax Credits
Credits are more important than deductions. Here is why…
- When you get a deduction, it saves you a % of that deduction based on your tax bracket. If you are in a 22% tax bracket, and you get a $1,000 deduction, you would have had to pay 22% in taxes, or $220. That is your savings.
- Credits are flat additions back to your tax return. The child tax credit alone is $2,200 per kid for 2026. In a 22% tax bracket, you would need $10,000 in deductions to get the same things. Credits are big.
Child Tax Credit. Dependent Care Credit. Education credits. Adoption Credit. There are a lot (though the EV, solar, and home energy credits ended after 2025). Make sure you know what credits are available to you here – CREDITS.
📈 Stocks and Stock Options Sale
Although less common, this can be one of the largest mistakes made.
Utilize Long Term Capital Gains – When you own a stock for 1 year or longer, you are generally taxed less when you sell it. If you get stock options from your company, you do not ‘own’ them until you ‘exercise’ your options. If you have large stock options, it is good to have a strong financial planner in your rolodex.
Cost Basis – If you get options from your company, check for incorrectly reported ‘Cost Basis’. Sometimes this is even $0. Then when you sell your options, you will pay capital gains tax on the entire amount. Make sure that you go through the process of finding your cost basis to reduce the amount that is taxed.
Capital Losses and Wash Sales – When you sell a stock, you cannot buy it back for 30 days. Otherwise it is known as a ‘Wash Sale’ and will not be recognized by your brokerage. At the end of the year, if you are sitting on a stock that has gone down, you can sell it to recognize the loss to offset some taxes. This is known as tax loss harvesting. 30 days later you can buy it back if you so choose.
🤔 Parting Thoughts
As always, thanks so much for reading! If you enjoy reading, please share these articles with anyone (subscribe here) that you feel might benefit.
If you have any additional questions, please reach out. We help individuals and businesses year-round with personal and business tax services.
Thanks,
– Taxman