Common tax return mistakes

10 things to watch for as you prepare your tax return.

1. Incorrect Social Security numbers or misspelled names
2. Using incorrect forms and schedules
3. Wrong filing status
4. Claiming ineligible dependents
5. Misapplied Earned Income Credit and Child Tax Credit
6. Lack of receipts
7. Failure to report all income
8. Not checking for Alternative Minimum Tax
9. Not signing the return – note the taxpayer and the spouse must sign and date the tax return
10. Not attaching Form W-2 and other forms that indicate taxes withheld during the year

Bonus items:

1. Applying for a Refund Anticipation Loan (RAL) without W-2 Earned Income
2. Omitting the Social Security Number or EIN of your caregiver for the Child and Dependent Care Credit
3. Mailing the tax return to the wrong address. Here is where to mail tax forms.
4. Making your check payable to the IRS. The correct payee on checks and money orders should be the United States Treasury.
5. Misreading the income tax tables
6. Failure to make a copy of the return for the taxpayer's records
7. Computation errors
8. Incorrect bank account numbers for Direct Deposit
9. Insufficient postage on envelopes. Better yet, use registered mail so there is a record that IRS received your tax return especially if you are paying a balance due.

Here are some other suggestions to avoid tax problems.

You could owe the IRS this year

Taxpayers could have a surprise when they file their taxes this year. It's the result of the Making Work Pay credit.

The credit began in 2009 and is also available to taxpayers in 2010 as part of the American Recovery and Reinvestment Act (ARRA). It consists of two components:

1. the new form Schedule M which includes a $400 credit for most taxpayers ($800 for married couples filing together) and
2. a change in employer withholding.

Starting April 1, 2009 employers began withholding less federal income tax so most workers may have noticed an increase in their take-home pay. The idea is this decrease in withholding will be offset by the Making Work Pay Credit when taxpayers include the Schedule M as part of their income tax return.

Don't forget to take the Making Work Pay Credit

In 2009 and 2010, the Making Work Pay Credit has been added to the tax code under the American Recovery and Reinvestment Act (ARRA). It's a refundable credit of 6.2 percent of earned income with a maximum of $400 per individual and up to $800 for married filing joint tax returns.

The credit phases out for taxpayers with modified adjusted gross incomes over $75,000 and $150,000 for married couples filing together.

Income Tax Benefits increase in 2011.

The IRS announced last week the increases to deductions and limits for the 2011 year. These amounts are revised every year due to inflation. Typically, the IRS announces these increases in October but waited until after the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 became law on December 17, 2010.

Increased personal exemption is $3,700 ($3,800 in 2012, $3,650 in 2010 and 2009, $3,500 in 2008).

Increased Standard Deduction:

• Married filing Joint / Qualifying Widower: $11,600 ($11,900 in 2012, $11,400 in 2010 and 2009)
• Head of Household: $8,500 ($8,700 in 2012, $8,400 in 2010, $8,350 in 2009)
  
• Single / Married filing Separate: $5,800 ($5,950 in 2012, $5,700 in 2010 and 2009)
• The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50.

Tax bracket thresholds have increased. For example, a married couple filing a joint return reaches the 25% bracket with $69,000 ($70,700 in 2012) in taxable income compared to $68,000 in 2010.

Earned Income Tax Credit amounts have increased. The maximum credit for taxpayers with three eligible children rises to $5,751, up from $5,666 in 2010 and $5,657 in 2009. The maximum income limit rises to $49,078, up from $48,362 in 2010 and $48,279 in 2009. The ability to claim three qualifying children for Earned Income Tax Credit was originally only available for 2009 and 2010 tax years under the 2009 American Recovery and Reinvestment Act (ARRA). Last week's tax bill extended this provision for the 2011 and 2012 tax years.

Modified Gross Income for the lifetime learning credit increases to $102,000 for joint filers, up from $100,000 and $51,000 for singles and heads of household filing statuses, up from $50,000.

Please note the following for the 2011 tax year:

• The $400 ($800 if married filing jointly) Making Work Pay Credit will expire,
• The Social Security payroll tax rate will decrease by 2%, as will Self-Employment Tax for self-employed taxpayers, and
• The estate tax will return with a rate of 35% and a lifetime exclusion of $5 million for 2011 and 2012.

Recovery Act Recap

The Obama stimulus plan, also known as ARRA - the 2009 American Recovery and Reinvestment Act, is over a year old. Here's a summary of all the tax code changes:

March 3 Did you receive an Economic Recovery Payment?
Feb. 8 You could owe the IRS this year
Jan. 24 Don't forget to take the Making Work Pay Credit
Dec. 28 Make home improvements & lower your tax bill
Dec. 26 Tax break for the unemployed
Dec. 24 Bought a car? Don't forget Sales Taxes
Dec. 22 More Eligible for Child Tax Credit
Dec. 20 Earned Income Tax Credit going up
Dec. 19 Higher credit for college students
Dec. 17 I'm a First-Time Homebuyer. What can I claim on my taxes?

In addition, the ARRA included:

• Extension of AMT relief for 2009
• Increased Transportation Subsidy
• Health Coverage Tax Credit

Did you receive an Economic Recovery Payment?

Don't forget the $250 when you prepare your income taxes or the IRS will reject your return.

As part of the 2009 American Recovery and Reinvestment Act (ARRA), taxpayers who receive social security benefits, SSI benefits, railroad retirement benefits, veterans' disability, or pension benefits received a $250 economic recovery payment sometime in late spring/early summer.

In addition, taxpayers who did not work in 2009 but received a pension or annuity in 2009 for services performed as a government employee were eligible for the new $250 Government retiree credit. The credit cannot be taken if the taxpayer received a $250 economic recovery payment.

For working taxpayers, the Making Work Pay Credit has been added to the tax code under ARRA. It's a refundable credit of 6.2 percent of earned income with a maximum of $400 per individual and up to $800 for married filing joint tax returns.

To take advantage of the Making Work Pay credit, complete Schedule M and report the total on Form 1040, line 63.

Caution:
When completing the Schedule M, you need to indicate the amount received under the economic recovery payment on line 10 or the Government retiree credit line 11. Failure to report the correct amount will result in your tax return getting rejected by the IRS.

You may not have realized you received the $250. If you typically received your monthly Social Security via direct deposit, the Economic Recovery Payment would have been deposited into the same bank account. The payment itself isn't taxable income and is not listed on Form SSA-1099 the annual benefits statement Social Security recipients are sent for tax purposes.

For additional information, review Schedule M instructions.