Common income tax mistakes cost money

Small mistakes can be costly when it comes to filing state or federal income taxes. Though most people endeavor to pay as little in taxes as possible, many filers are still overpaying every year. Maryland residents can avoid such mishaps by remembering a few tips.

First, there are several different kinds of investment accounts that qualify for beneficial tax treatment. Traditional individual retirement accounts and 401(k)s both allow the taxpayer to reduce current taxable income. Roth IRAs, by contrast, defer taxes on asset growth in the account.

Second, people should be sure to keep certain tax records. One of the worst things about being audited is digging up all the required documents, but it can be even worse if some of those documents have not been saved in a safe place. Charitable gift deductions, for example, require an acknowledgment of the donation, perhaps in the form of a receipt, from the relevant charity.

Third, sometimes it's a good idea to hold onto an investment to take advantage of capital gains tax rates. In a case where an investor has held a stock for one year or less and then sells it, they will be taxed on any gain at the ordinary income rate. This can be as much as 37 percent. If one holds onto it for a year or longer, capital gains rates apply. Capital gains rates range between 0 and 20 percent.

An attorney with experience in tax law might be able to help a Maryland taxpayer put together filings and minimize tax payments. During audits, the lawyer could help the client by gathering materials and communicating with IRS or state officials. An attorney could attempt to negotiate a settlement if taxes are owed.

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