Baby boomers nearing retirement can't afford to make tax mistakes. Instead, they need to shore up their capital for the future. The penalties for making these tax mistakes include triggering an audit, incurring a penalty and owing additional taxes.
Here are the three biggest tax mistakes made by baby boomers:
Not checking the preparer's work
In a small study of randomly selected tax preparers in 2014, the U.S. Government Accountability Office found that only two of 19 randomly selected preparers calculated the refund amount properly. The refund errors ranged from giving the taxpayer $52 less to $3,718 more than the correct refund amount.
Taxpayers should be sure to tell their accountant about major life changes that might affect their tax situation, said Crystal Stranger, an enrolled agent and president of online preparer 1st Tax. Trusting the tax preparer to know it all "can lead to both unreported income and not taking advantage of tax deductions they are legally entitled to," she said.
Not maxing out retirement investing opportunities
For working baby boomers, not contributing the maximum to your tax-advantaged retirement accounts can cost you large sums of taxes today, as well as lost spending money in retirement. If it's a choice between helping out your older children or saving for your own retirement, choose retirement.
If you're over age 50 you're eligible to contribute to your workplace 401(k) or 403(b) a base amount of $18,000, plus an additional "catch-up" sum of $6,000, for a total of $24,000. If you're in the 25 percent tax bracket, then contributing the maximum reduces your taxable income by the same amount and reduces your tax bill by $6,000.
You might also go beyond investing in your workplace retirement plan and consider an IRA, suggested Yvette D. Best, CEO of Best Services Unlimited LLC. For 2015 and 2016, individuals over 50 can contribute up to $6,500 to a traditional IRA for a full tax deduction, even if they are covered by a retirement plan at work.
This applies to individuals earning under $61,000 and couples making under $98,000. There is a partial deduction allowed for income between $61,000 and $71,000 for singles and between $98,000 and $118,000 for couples. "This deduction can result in thousands of dollars saved on your tax bill," Best said. "You have until April 18, 2016, to avoid the tax mistake of not contributing the maximum to your retirement account."
Consider this scenario: Invest just $1,000 per month beginning at age 50, and by age 68 you might have a retirement account worth over $430,000. That assumes your investments yield an annual 7 percent return from a diversified stock index mutual fund.
Making a mess of your small business tax reporting
Many baby boomers are starting new businesses or have up-and-running entrepreneurial ventures. If you treat the expenses from these concerns inappropriately, then you could owe Uncle Sam not only additional taxes but penalties as well.
If you're starting a new business and racking up expenses, you might not be aware that any expenses incurred before the first sale are considered startup costs and can't be deducted until the first sale, accountant Gail Rosen said. After the first sale, the startup costs can be deducted over 15 years, and you can also elect to deduct the first $5,000 in the first year of business.
Another tax mistake is made by those who have small business sales. They might think the income is so small that it's not worth reporting. "If it is a real sale, at a bona fide sales price, you should report your business sales and deduct your business expenses," Rosen said.