Avoiding Common Tax Mistakes as the Year Ends

As the year wraps up, many people focus on maximizing deductions and optimizing their financial situation for tax season. However, common tax mistakes can lead to missed deductions, penalties, or a larger tax bill. Avoiding these errors now can help you save money and reduce stress come tax season. Here are some tips to avoid common tax mistakes as the year ends.

1. Waiting Until the Last Minute

Procrastinating on tax preparation can lead to rushed decisions and missed opportunities to save on your taxes. By planning ahead, you’ll give yourself enough time to maximize deductions, organize documents, and make any necessary financial moves before December 31.

How to Avoid Procrastination:

• Set a tax prep schedule: Block out time in your calendar to organize tax documents, track expenses, and review financial statements.
• Prepare key documents early: Start collecting income statements, investment records, charitable receipts, and other tax-related documents.
• Review contributions and deductions: Analyze your finances to identify any areas where you can optimize deductions or credits before the end of the year.

Planning ahead ensures you have ample time to make any adjustments, avoid rushed errors, and take advantage of tax-saving strategies.

2. Forgetting to Maximize Retirement Contributions

Contributing to tax-advantaged retirement accounts, like a 401(k) or IRA, can reduce your taxable income and help you save for the future. Many people overlook their retirement contributions as the year closes, missing out on valuable tax benefits.

Maximizing Retirement Contributions:

• 401(k) contributions: If your employer offers a 401(k), aim to contribute the maximum amount ($23,000 for 2024 or $30,500 if you’re over 50). Many employers allow catch-up contributions for those aged 50 and older.
• IRA contributions: For Traditional and Roth IRAs, the annual contribution limit is $6,500 ($7,500 if you’re over 50). You can contribute until April 15, 2025, for the 2024 tax year.
• HSAs for tax-free medical expenses: If you have a high-deductible health plan, consider contributing to a Health Savings Account (HSA), as contributions are tax-deductible and grow tax-free.

Making last-minute contributions to your retirement accounts can lower your taxable income and help you stay on track for retirement goals.

3. Ignoring Required Minimum Distributions (RMDs)

If you’re over age 73, the IRS requires you to take minimum distributions from certain retirement accounts, such as traditional IRAs and 401(k)s. Failing to take your RMD can result in a 50% penalty on the amount you should have withdrawn.

How to Handle RMDs:

• Calculate your RMD: Contact your retirement plan administrator to calculate the amount you’re required to withdraw. Many banks and financial institutions provide this information as part of your account management.
• Take RMDs by December 31: Ensure your distributions are processed before the year ends to avoid penalties.
• Consider Qualified Charitable Distributions (QCDs): If you’re charitably inclined, you can satisfy your RMD by making a donation directly from your IRA to a qualified charity. This QCD can also reduce your taxable income.

Handling RMDs on time helps you avoid penalties and stay compliant with IRS requirements.

4. Overlooking Charitable Contributions and Deductions

Charitable donations are tax-deductible, but they’re often overlooked or incorrectly reported. Make sure you understand the IRS rules for charitable deductions and keep proper documentation for your records.

Tips for Deducting Charitable Contributions:

• Donate before December 31: Only contributions made by the end of the year count toward this year’s taxes, so plan your donations before the year ends.
• Document all donations: Keep receipts, bank statements, or acknowledgment letters from the charity for donations over $250.
• Consider donating appreciated assets: Donating stocks or other appreciated assets can yield additional tax benefits, such as avoiding capital gains tax while deducting the asset’s fair market value.

Properly documenting and timing your charitable contributions ensures you receive the full tax benefit.

5. Mismanaging Estimated Tax Payments if You’re Self-Employed

Self-employed individuals or those with side income often need to make quarterly estimated tax payments. Missing these payments or underpaying can result in penalties, so it’s essential to calculate them accurately.

How to Manage Estimated Taxes:

• Calculate accurate payments: Review your income and expenses to calculate your tax liability. Use the IRS’s estimated tax worksheet or consult a tax professional.
• Avoid underpayment penalties: Pay enough throughout the year to meet the IRS safe harbor rule, which requires at least 90% of your current tax liability or 100% of last year’s liability, whichever is smaller.
• Make final payment by January 15: The last estimated tax payment for 2024 is due on January 15, 2025.

Accurate estimated tax payments help you avoid unexpected bills or penalties and keeps you compliant with IRS requirements.

6. Missing Out on Medical and Flexible Spending Account (FSA) Deadlines

FSAs allow you to set aside pre-tax dollars for medical and dependent care expenses. However, FSAs have a “use it or lose it” rule, meaning any unused funds may be forfeited at the end of the year.

How to Avoid Losing FSA Funds:

• Check your FSA balance: Review your FSA balance in December to see if you have any funds left.
• Use remaining funds on qualified expenses: Spend FSA funds on eligible medical expenses, such as prescriptions, vision care, or medical equipment.
• Verify carryover rules: Some employers allow you to carry over up to $610 of unused FSA funds or offer a grace period to use them.

Using up your FSA funds before the deadline prevents you from losing money and ensures you maximize this tax-saving account.

7. Miscalculating Capital Gains and Losses

If you’ve sold investments, you may owe capital gains taxes, or you could have a deductible capital loss. Understanding and calculating these correctly can save you money, especially if you can offset capital gains with losses.

How to Handle Capital Gains and Losses:

• Calculate gains and losses accurately: Review your brokerage statements to calculate capital gains (profits) and capital losses (losses) from investments sold this year.
• Use tax-loss harvesting: If you have capital gains, consider selling underperforming investments to realize losses and offset gains.
• Follow the $3,000 limit: You can deduct up to $3,000 in net capital losses against ordinary income if your losses exceed your gains.

Managing capital gains and losses helps you minimize taxes on investment income and maximize potential deductions.

8. Overlooking Energy-Efficient Home Improvement Credits

The federal government offers tax credits for certain energy-efficient home improvements, such as installing solar panels or energy-efficient windows and doors. These credits can reduce your tax liability and may be worth considering if you’re planning home improvements.

How to Claim Energy Credits:

• Research eligible improvements: Check the IRS guidelines to see if your home upgrades, like solar water heaters or insulation, qualify for credits.
• Keep receipts and manufacturer’s certification: Save documentation to verify that your improvements meet IRS requirements.
• Include the credit on your tax return: Consult a tax professional if you’re unsure how to claim these credits on your tax return.

Taking advantage of energy credits helps reduce your tax bill while supporting sustainable practices.

9. Failing to Update Your Personal Information

Changes in marital status, dependents, or address can impact your taxes. Updating this information with the IRS and on your tax forms ensures you receive the correct tax benefits and avoid any delays or discrepancies.

Key Changes to Report:

• Change in marital status: If you married, divorced, or experienced the death of a spouse this year, update your filing status and any relevant forms, such as W-4s.
• Changes in dependents: Adding or losing dependents affects your credits and deductions, so make sure to reflect this on your tax return.
• Address updates: If you moved, update your address with the IRS (Form 8822) and notify your employers and financial institutions.

Updating personal information helps prevent errors on your tax return and ensures you receive the correct benefits.

10. Not Consulting a Tax Professional if Your Situation is Complex

Tax law changes, life events, and complex financial situations can make taxes more challenging to handle alone. If you’re dealing with a major life event or have substantial investments, self-employment income, or other complexities, consulting a tax professional can be invaluable.

When to Seek Professional Help:

• Life changes: Major changes like marriage, buying a home, or starting a business can impact your tax situation.
• Complex finances: If you have investment income, rental properties, or significant self-employment income, a tax professional can help you navigate deductions and credits.
• Tax law changes: A tax professional can help you understand new tax laws and how they apply to your specific circumstances.

Working with a tax professional can save you time, help you maximize your tax savings, and give you confidence that your return is accurate.

Final Thoughts

Avoiding common tax mistakes as the year ends can help you maximize deductions, avoid penalties, and start the new year with peace of mind. By planning ahead, keeping good records, and taking advantage of available credits and deductions, you can make tax season more manageable and set yourself up for financial success in 2025.