Top 5 Tax Filing Mistakes You Must Avoid: Expert Tips for 2023

individuals irs tax tips taxes

Today, I have a good story for you. It’s about a young professional named, Karen, who thought she had taxes all figured out  until tax season rolled around. Her mistakes were a bit costly, but they're also incredibly common.

Karen was doing well, living her best life. She had just landed her first job after college and even started a side hustle as a freelance graphic designer. With her new income streams, she felt pretty good. But then tax season arrived, and Karen realized, well, that she wasn’t as prepared as she thought she was.

Mistake 1: Not Keeping Receipts

Karen frequently had business meals with her clients and prospective clients. She would also purchase supplies and materials for her freelance business. Although she made these purchases often, she didn't make it a habit to keep all of her receipts, thinking they weren't that important.

When tax season arrived, she consulted her accountant and found out that these were indeed tax deductible business expenses.

While she was able to claim some of these expenses, her lack of good record-keeping made the process far more challenging than it needed to be.

She had to spend extra time sorting through bank statements, client invoices, and emails to substantiate her claims, which could have been avoided with better record-keeping. It was a valuable lesson for her in the importance of keeping detailed financial records for her freelance business.

How to Avoid It:

• Keep track of all your business-related receipts.
• Take a picture of the receipt or scan it.
• You can use an app or a dedicated folder for this purpose.
• Summarize your receipts on a spreadsheet or notebook. 

Mistake 2: Incorrectly Claiming Deductions

Karen thought she could claim her new Macbook computer, her LA Fitness gym membership, and personal beauty expenses, like hair and nails, as business expenses.

While her Macbook was a legitimate business expense, because she uses it primarily for work, her gym membership and personal grooming expenses didn't qualify.

The IRS only allows deductions that are "ordinary and necessary" for your business. Personal grooming and gym memberships usually don't fit that criteria.

How to Avoid It:

Be discerning when claiming deductions. While some expenses like a work computer are generally acceptable, others like gym memberships and personal grooming are usually not considered "ordinary and necessary".

Keep detailed records, including receipts and invoices, to substantiate your business expense claims.

If you're unsure about what qualifies as a legitimate business expense, consult a tax professional for advice tailored to your specific situation.

Mistake 3: Filing Status Confusion

Karen recently got married, but when tax season rolled around, she decided to file as "Single" because she thought it would be simpler. This was a mistake. Once you're married, "Single" is no longer a valid filing status option. Your options are generally either "Married Filing Jointly" or "Married Filing Separately."

By incorrectly filing as "Single," Karen caused her husband to have problems with his own tax return, since when he filed his return, he properly filed as married filing separately. He later received a letter from the IRS for clarification.

They also missed out on the potential advantages that come with the correct marital filing status, such as a higher standard deduction and eligibility for certain tax credits.

How to Avoid It:

Familiarize yourself with the different filing statuses and their implications. If you're married, your options are generally "Married Filing Jointly" or "Married Filing Separately." 

Weigh the pros and cons of filing jointly versus separately. While filing jointly often results in a lower overall tax liability, it may not be the best choice for everyone.

Many tax software programs allow you to easily compare the outcomes of different filing statuses. Use this feature to make an informed decision.

If you have a complex tax situation, such as significant medical expenses, large charitable contributions, or multiple income streams, consult a tax professional to determine the most advantageous filing status for you.

Mistake 4: Not Reporting All Income

Karen did work as a freelance graphic designer in addition to her full-time job. While she did report much of her freelance income, she made a critical mistake. Her self-reported income was less - than the income reported to her via 1099s from payment settlement entities like PayPal. This discrepancy caught the attention of the IRS, with what is called an underreporting notice. As a result, Karen faced penalties and had to amend her tax return to, accurately reflect all of her income sources.

How to Avoid It:

Always report all your income, whether it's from your full-time job, freelance work, or any other source. This includes income reported on forms like W-2s and 1099s, as well as cash payments.

Reconcile your self-reported income with any 1099 forms you receive. Payment settlement entities are required to report to the IRS, so not reporting all of your 1099 income will raise red flags.

Keep good records of all transactions, including invoices and payment confirmations, to ensure you're reporting accurate income figures.

Mistake 5: Procrastinating and Misunderstanding Extensions

Karen waited until the last minute to file her taxes. Realizing she needed more time, she filed for an extension, thinking this would also extend her payment deadline. However, she didn't understand that an extension to file is not an extension to pay. So, she did owe taxes, and they were due by the April 15th deadline. Because she missed the payment deadline, she was hit with a late payment penalty.

How to Avoid It:

Start preparing your tax documents well in advance of the deadline. This gives you enough time especially if you have complex situations like multiple income streams or a side business.

If you do file for an extension, remember that it's only an extension to file your tax return, not an extension to pay any taxes owed. Make sure to estimate and pay any owed taxes by the initial April 15th deadline to avoid late payment penalties.

Use tax software or consult a tax professional to ensure you're accurately estimating any taxes owed, especially if you have multiple sources of income or deductions that might complicate your tax situation.

Thanks for reading and see you in the next blog post!

About The Author

Noel Lorenzana is an Illinois-licensed, Registered Certified Public Accountant with over 20 plus years of experience.

Through his online educational content, YouTube videos, easy-to-understand courses and 1-on-1 consulting, he gives you the tools to become tax savvy for yourself. 

Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.