14 Common Tax Mistakes That Can Cost You Real Money

tax mistakes tax forms
Pandemic-driven changes in tax law have made the 2020 filing season especially challenging. Larry Reynolds/Getty

The only thing worse than doing your taxes is finding out after you file that you made a costly error that shrunk or delayed your refund, resulted in you owing money or—the most dreaded outcome of all—triggered an audit.

Even with the help of software or a preparer, millions of Americans struggle to get their taxes right the first time around, so much so that the IRS devotes a whole section of its website to the common errors it sees all the time. But this year, avoiding the pitfalls that trip up so many people when completing their returns is especially challenging thanks to a slew of legislative changes to the tax code driven by the pandemic.

While these changes are good news for the millions of Americans who suffered layoffs and lost wages because of COVID, it doesn't make what is already a complicated and confusing process any easier to navigate, especially when those rules morph mid-tax season—like the recent shift in the treatment of unemployment benefits, courtesy of the $1.9 trillion American Rescue Plan recently enacted by Congress.

To help you avoid making mistakes on your return that could tie you up in letters from the IRS, potentially lose you hundreds, even thousands, of dollars in misspent filing fees and missed tax breaks, or see you paying a penalty to the government, Newsweek spoke with CPAs and other tax experts about all the new and unfamiliar information you'll need to deal with on your 2020 return as well as the perennial blunders they see Americans commit year after year.

Here's what you need to know.

Mistake No. 1: Not Claiming Additional Stimulus Money You're Owed

The first two stimulus payments sent out last year were technically an advance on a special tax credit for 2020, called the Recovery Rebate Credit. Because the IRS calculated your credit based on information about your income and dependents from your 2018 or 2019 tax return, you could be owed a larger check based on your actual 2020 numbers. That's especially likely if your income was drastically lower in 2020 than in the previous two years or if you welcomed a child into your family last year.

Fit either of those situations or you are still waiting on a missing stimulus payment? You'll need to complete a new step on your tax return this year to get the money you're due—even if you're not normally required to file. Skipping that step is costly since the amount involved typically runs to hundreds or even thousands of dollars.

To claim the missing funds, first calculate the total amount of stimulus money you're owed, using the Recovery Rebate Credit worksheet on page 58 of the 1040 instruction booklet. Then enter that sum on line 30 of Tax Form 1040 or 1040-SR.

If the IRS agrees that you're owed that stimulus money, the sum will be added to your total refund or used to shrink your tax bill, not sent as a separate deposit to your bank account or mailed as your previous stimulus payments were.

Mistake No. 2: Paying Tax on All of Your Unemployment Benefits

As part of pandemic relief bill passed in March, anyone who received unemployment benefits last year can, for the very first time, exclude $10,200 of that compensation from their federal income tax.

That's welcome news for the more than 61 percent of people who received jobless benefits but did not opt to have any money withheld to pay income taxes, according to a Jackson Hewitt survey. Those workers would otherwise likely be facing a tax bill for 2020.

Households earning less than $150,000 qualify for the exemption, and it is applied per individual, meaning a married couple can exclude up to $20,400, assuming both spouses received more than $10,200 each in unemployment insurance. But if one spouse received $15,000 in benefits and another $2,000, only $12,200 would be excluded on their joint return. The change could save people who received unemployment benefits between $1,000 and $2,200 on their taxes for 2020, depending on various estimates.

One thorny aspect of this otherwise welcome news: Since the change took effect after the tax season started, some 55.7 million Americans had already filed (as of March 5), including many presumably who received unemployment last year. Tax programs also need to be updated to reflect the new law.

CPA Cari Weston recommends sitting tight for a little bit if you haven't filed yet and work with tax preparation software. "It should automatically exclude this amount from your taxable income, but not all software is computing it correctly just yet," Weston says.

If you have already filed, wait until after May 17 to act (the IRS has extended the traditional April 15 filing deadline by a month, to give people more time to file and pay any outstanding taxes). You can't file an amended return, Form 1040-X, until after this date and the IRS is asking people not to file a second return, what's known as a superseded return, before then, says Weston, director of tax practice and ethics for the American Institute of CPAs.

Mistake No. 3: Paying Money Unnecessarily to File Your Taxes

Despite the misleading marketing by some tax preparation software and companies, you don't actually have to pay for help filing your tax return, as long as your annual income is $72,000 or less.

The IRS's Free File Program allows 70 percent of Americans to use brand-name tax products for free, such the software offered by TurboTax, TaxAct and FreeTaxUSA. (A full list of tax help partners can be viewed on IRS website.) Typically, tax help software for federal returns costs $50 to $60, but can go up to $110 if you're self-employed, with state programs tacking on another $45 or so.

Millions of eligible Americans fail to take advantage of the free filing option. In 2020, only 4.2 million people used the service to file their 2019 taxes, according to the IRS. While that's a nearly 50 percent increase from the prior year, many, many more could be filing for nothing.

Part of the problem may stem from accessing the offer. Avoid going directly to a tax preparer's website, as some companies only provide the free option only if you access it via the direct link on the IRS website. Always start the process on the agency's site.

Another catch: Your taxes can't be very complicated or unusual. The IRS Free File Program only mandates that tax prep companies offer the 30 most commonly-used tax forms and schedules. For most taxpayers, though, that won't be an issue since those forms cover everything from self-employment income to education credits to the first time home buyer's credit.

tax mistakes frustrated man
Frustrated and confused by all the tax changes this year? Lots of people can relate. fizkes/Getty

Depending on the tax company you chose to complete your federal return, you may also be able to file a free state tax return. The IRS does not require this so it comes down to the discretion of the tax preparer you select or your state's own rules.

Earn more than $72,000? You still may not need to spend any money to file. Especially if your tax situation is straightforward—say, you had income from a single employer in the state where you live and few or no other financial transactions—you can complete paper or electronic federal forms yourself and submit them to the IRS at no cost. The online fillable forms will even do some basic calculations for you, although they lack the step-by-step guidance typically offered by tax software or a CPA.

Mistake No. 4: Failing to Take Advantage of Free Help

Confused about the new tax rules, struggling to use online tax software or simply have a question about your personal tax situation? If you wish to speak with a tax professional directly, free assistance may be available through the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs. These programs cater to tax filers who earn $57,000 or less, those with disabilities, non-fluent English speakers and people over the age of 60.

One caveat: Because of the pandemic, not all VITA or TCE centers are open or operating at full capacity this year, so getting this personal help may be trickier than usual. You can use the IRS's locator tool to find a VITA or TCE center near you.

Mistake No. 5: Auto-Filling Your Personal Information

Many filers use the same tax-prep software or preparer each year. That can make finding past tax info easy and filling out the form faster, but it can also inadvertently trip you up, especially if some of the particulars of your personal situation have changed.

Say you've switched banks or moved to a new home. If you roll over your information from the last tax year and don't think to update it because it automatically populates, your return could be rejected or held up because the IRS can't match your address or other details from the tax docs your employer submits. Or the agency might be unable to direct deposit a refund to your account, says Weston.

Many people also fail to fill in their info correctly in the first place, so auto-filling from previous returns just perpetuates the error. Weston says she's seen people misspell their own name, put in the wrong date of birth for one of their children, transpose digits when typing their Social Security numbers and a host of other errors that can lead to delays in processing of your return and needless back-and-forth communication with the IRS.

Avoiding this mess is simple, says Weston: Just take a couple extra minutes when you finish preparing your return to double check all your personal information and be certain you've not made a careless error.

Mistake No. 6: Not Counting Your Charitable Giving

Another new provision in the tax code for 2020 allows you to deduct up to $300 in cash donations to a qualifying nonprofit on your return, even if you don't itemize. That's a big change you'll want to take advantage of because, since changes to the tax code that were enacted in 2017, the only way to get a break for donating has been to itemize deduction on your return instead of taking the standard deduction—something only 13 percent of Americans do.

"This is a new and easy tax break to get," says Woburn, Massachusetts financial planner and CPA James Guarino. "It's really low hanging fruit to claim if you go through your records or credit card statements and can support it."

Donations must have been made by cash, check or credit card to count. Unfortunately, drop-offs of physical goods—such as canned or boxed items to a food pantry, something many Americans did last year—aren't allowed for claiming this deduction nor are contributions to investments called donor-advised funds, Guarino says.

Mistake No. 7: Skipping This Credit for Low-Income Earners

If you experienced a layoff, furlough or drop in earnings thanks to the pandemic, you may be newly eligible to claim a very generous and refundable credit that can knock up to $6,600 off your taxes, either increasing your refund or reducing the amount you owe, says CPA and TurboTax expert Lisa Greene-Lewis.

The Earned Income Tax Credit can only be claimed by low-income taxpayers, a category many more people fell into for the first time in 2020. Whether you qualify for the credit and just how large the break will be depends on your filing status, income, and number of dependents.

Number of DependentsMaximum Income for Single or Head of Household FilersMaximum Income for Married Joint FilersMaximum Credit
Zero$15,820$21,710$538
One$41,756$47,646$3,584
Two$47,440$53,330$5,920
Three or More$50,594$56,844$6,660

One catch: At least some of your income must come from compensation paid by an employer or from self-employment work. Unemployment benefits, Social Security and child support, for instance, do not count for this credit, says Greene-Lewis.

To make it easier to qualify and get the largest possible credit, the IRS is allowing you to use either your 2020 or 2019 income in your calculations.

Mistake No. 8: Overlooking the Saver's Credit

One in five Americans who qualify for the Saver's Credit miss it when filing their tax returns, according to the IRS. And that number is likely to swell further this year thanks to an increase in the number of taxpayers able to claim this tax break because of a drop in income in 2020.

It's a costly mistake: The credit, given to lower-income earners who save for retirement, is worth up to $1,000 for single filers and $2,000 for married joint filers and reduces your tax bill dollar for dollar, says Greene-Lewis.

Depending on your income, the credit will be either 50 percent, 20 percent, 10 percent, or zero percent of the amount you contributed to an IRA, Roth IRA, 401(k), 403(b) or other retirement plan. Here's who qualifies and how much they'll get:

Credit RateMarried Joint FilersHead of Household FilersSingle Filers
50% of your contributionIncome not more than $39,000Income not more than $29,250Income not more than $19,500
20% of your contribution$39,001 - $42,500$29,251 - $31,875$19,501 - $21,250
10% of your contribution$42,501 - $65,000$31,876 - $48,750$21,251 - $32,500
0% of your contributionmore than $65,000more than $48,750more than $32,500

Mistake No. 9: Passing Up Valuable Tax Breaks to Avoid an Audit

Claiming a home office deduction and taking a mileage tax deduction are examples of tax breaks many people believe act as red flags to the IRS, possibly triggering an audit.

Not so, says Weston. "Less than 1 percent of people get audited and claiming a certain tax credit or deduction doesn't automatically mean you're going to become one of the few who does," the CPA says.

In fact, the IRS only audits about 0.45 percent of all returns, or about half as many as it did just five years ago largely because of cuts to the agency's workforce. And wealthy taxpayers earning $10 million or more are the most likely group to be audited.

So if you can rightfully claim a certain deduction or credit and have supporting documentation, go ahead and take it, Weston says. Odds are your return won't ever come into question, and, if it does happen to be one of the unlucky few that does, the tax savings are worth the inconvenience of an audit.

Mistake No. 10: Using the Wrong Filing Status

Most taxpayers who are unmarried, file as a single. But that isn't always the best move if you can qualify for another tax status: head of household, which offers a higher standard deduction and more generous tax breaks than filing as a single does, Guarino says.

The reason so many people get it wrong? They typically don't know they're eligible, thinking head of household status only applies to parents with children under the age of 19 (or 24, if the child is a full-time student), Guarino says. But if you care for a disabled relative or provide more than half of another dependent's support, even if they don't live in your home (as is often the case with an ill parent), you're likely eligible. Review the IRS's definition here to see if you qualify.

Be mindful when using the head of household status that no one else in the family is claiming the same dependent as you. Often this can be problematic for divorced or separated parents who both try to file as head of household with the same children listed as dependents, says Greene-Lewis. Ultimately, only one will be successful and that is usually whoever filed first, but it is better to have already worked out an arrangement over this matter with your co-parent.

Mistaking No. 11: Failing to Use Up Leftover Tax Breaks

You'll also want to look over your most recent tax returns for any deductions or losses that you couldn't use fully before, in case the remainder can be claimed on your 2020 return, says Guarino. It's a step many forget to take, leaving behind potentially hundreds or thousands of dollars in tax savings they're entitled to.

A common example of this is if you sold an investment for less than the price you paid for it. The IRS only allows you to use up to $3,000 of losses to offset taxable income in a single year. So if you sold a stock in 2019 at a loss of, say, $4,000, you'd still have a $1,000 loss left that you can claim on your 2020 return.

Mistake No. 12: Thinking You Can Delay Payment

While you can file an extension to complete your tax return, which will move this year's deadline from May 17 to October 15, you can't push back the day your tax bill is due.

"A lot of people think an extension to file is also an extension to pay, but that extension is only for filing," says Greene-Lewis. " If you owe and don't realize this, you'll be hit with a penalty."

How big a hit? The penalty equals 0.5 percent of the unpaid taxes you owe for each month you carry a balance, up to 25 percent of the total tax bill.

Even if you can't afford to pay the full amount you owe, though, you should still file. Last year, a third of taxpayers who couldn't settle their tax bill skipped filing, according to a survey conducted by LendEDU. But that results in an additional, far worse penalty, says Weston: 5 percent of your total unpaid taxes for each month your return is late, up to 25 percent of the amount you owe—10 times more expensive than the penalty for failing to pay your tax bill.

If you're struggling to come up with the funds, contact the IRS at 1-800-829-1040. You may be able to get a short-term extension to pay or an installment payment agreement. The agency might even waive any penalties, though it will still charge interest on your unpaid taxes.

Mistake No. 13: Not Reporting All of Your Income

Keeping track of where all your money comes from throughout the year sounds straightforward, but unless you've got just a single employer and a single financial account, it can be surprisingly tricky.

Freelance and gig workers may have dozens of 1099-MISC or 1099-NEC (Non-Employee Compensation forms) as the IRS renamed them this year, to tally up when reporting their income. People with dormant investment or savings accounts may have interest payments coming in they've completely forgotten about. Or you may not recall winning that betting prize money from last February.

But the IRS does. If the income you report fails to match what they've got on record for you, using information supplied by the companies you work for and do business with, your return will get kicked back, says Weston.

With so many tax forms from employers and investment companies now only arriving digitally, it may be worth carefully reviewing your email inbox to be sure you have indeed got a copy of every last one, or go directly to the provider's website where the forms are usually available for download, and have entered all such info onto your return. You may also want to revisit your bank accounts to review deposits or checks cashed to be sure you didn't leave any payment off the books accidentally.

Mistake No. 14: Forgetting to Sign Your Return

This one's a classic. Forget to sign and all your hard work completing your return goes down the drain. The IRS considers any return without a signature invalid, meaning you could get hit with a failure-to-file penalty and have to redo the process. And remember, if you're filing a joint return, you need both spouses' signatures. An easy way to avoid this is to file electronically, as most tax software will prompt you to digitally sign before allowing it to be sent to the IRS.