Filing your taxes doesn’t have to be stressful, but it can get expensive if you fall into some of the most common traps. Even small oversights may lead to lost savings, surprise tax bills, or IRS headaches. The good news? With some planning and awareness, you can sidestep these pitfalls and keep more of your hard-earned money.
Here are a few areas where mistakes often happen and how you can avoid them.
Investment-Related Mistakes
Investments are a powerful way to grow wealth, but they can also lead to unpleasant surprises at tax time. Take mutual funds, for example. Many investors don’t realize that mutual funds can distribute capital gains even if you never sell a single share. These “phantom taxes” can create unexpected bills, especially for retirees, sometimes running into tens of thousands of dollars.
ETFs (Exchange-Traded Funds) usually don’t trigger these surprise distributions, which makes them a more tax-efficient choice in many cases. Similarly, if your income crosses certain thresholds ($200,000 for single filers or $250,000 for married couples), you could face an additional 3.8% Net Investment Income Tax on dividends, capital gains, or rental income.
The “backdoor Roth IRA” is another area where investors sometimes get tripped up. The strategy itself can be smart, but missing IRS Form 8606 or overlooking the Pro-Rata Rule can lead to unintended taxes. A quick conversation with a tax advisor before making the move is far less costly than trying to fix things afterward.
Retirement Account Missteps
Retirement accounts are designed to give you tax advantages, but only if you manage them carefully. One of the biggest trouble spots is Required Minimum Distributions (RMDs). These withdrawals, now starting at age 73 for many, must be taken on time or you risk steep penalties. Waiting until the last minute can also push you into a higher tax bracket.
A smarter approach is to think about withdrawals before you’re required to take them. Sometimes, taking smaller distributions earlier at lower tax rates can reduce your lifetime tax bill.
It’s also worth paying attention to where you hold different investments. For example:
- Bonds, which generate steady taxable income, are often best kept in IRAs.
- Growth-oriented investments can be more tax-efficient in Roth accounts.
This simple shift, known as “asset location”, can help maximize returns after taxes.
Charitable Giving Opportunities
If you’re already committed to giving back, smart timing and strategy can help your generosity go further. For households near the threshold for itemizing deductions, “bunching” donations into a single year can make a big difference. Instead of spreading gifts evenly each year, you might group them together, so they help you clear the itemizing hurdle.
Keeping clear records is equally important. Donation receipts, year-end statements, and a well-documented giving plan will help ensure that your charitable efforts also translate into real tax savings.
Your Tax Planning Checklist
Tax planning isn’t something to think about once a year in April; it’s an ongoing process. Some good habits include:
- Reviewing your deductions annually (standard vs. itemized)
- Checking income thresholds for surtaxes
- Tracking charitable contributions
- Planning Roth conversions and RMDs early
Above all, remember this: taxes don’t have to be intimidating. With a thoughtful plan and the right guidance, you can approach tax season with confidence, and keep more of what you’ve worked so hard to earn.
This article is general in nature. Please consult a qualified tax professional about your unique situation.