Most Costly Tax Mistakes
While Benzinga mostly covers actionable trading ideas and news stories, we've decided to delve a bit deeper into personal finance.
The team at Benzinga would like to assist readers with not just their investing endeavors, but their financial lives as a whole. And today, we continue this effort with information on the most costly tax mistakes – those that will leave Uncle Sam with more of your money or, worse, make the IRS an unwelcome guest in your life.
Tax evasion is by far the most costly tax mistake in the land. The maximum penalty is $250,000 and five years in prison.
Not Using Tax-Advantaged Retirement Accounts
With a 401(k) or IRA, you'll defer taxation until retirement. Doing so will allow you to invest more upfront and thus have a larger principal to generate interest from. If you're going to pay taxes anyway, you may as well take advantage of this opportunity to delay them and grow your retirement savings.
Meanwhile, while contributions are taxed on the front end on a Roth 401(K) or Roth IRA, earnings grow tax-free. For example, if you contribute $5,000 per year to a Roth IRA from age 25-65, you'll pay taxes on the $200,000 you contributed. But, assuming nine percent interest, you'll earn an additional $1.64 million – and Uncle Sam won't get a dime of that.
Neglecting Estimated Taxes
Self-employed individuals must pay estimated taxes quarterly to the IRS. Those who owe more than 10 percent or $1,000 of their tax liability after estimated taxes are paid may be penalized. According to Kiplinger, the interest rate on this penalty is four percent.
The IRS charges five percent of the unpaid tax per month for late returns. However, by filing a return, the penalty drops to 0.5 percent. Send the paperwork in on time, even if you can't afford to pay.
The IRS gets a bit draconian when it doesn't get “its” money on time. According to the IRS website, “If taxes are not paid, and no effort is made to pay them, the IRS can ask a taxpayer to take action to pay the taxes, such as selling or mortgaging any assets owned or getting a loan. If effort is still not made to pay the bill, or make other payment arrangements, the IRS could also take more serious enforced collection action, such as levying bank accounts, wages, or other income, or taking other assets.”
The Bottom Line
Be sure to pay estimated taxes and, even if you cannot pay any amount owed by April 15, to at least file a tax return. Save for retirement via a tax-advantaged account, as well, to minimize your tax liability. Finally, tax evasion is never a good idea, as the federal government could confiscate a substantial portion of your wealth and freedom for doing so.
The mentioned items are just a fraction of the potential tax mistakes out there. For specific advice, contact a professional tax advisor.
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