Watch out for common errors when filing a tax extension

If you’re racing to meet the Oct. 17 tax extension deadline, make sure you don’t skip key forms as you’re rushing to the finish line, experts say.

It’s critical to file a complete and accurate return to avoid processing delays, according to the IRS, including details from all the necessary forms.

Further, you may prevent stalled refunds and future IRS notices by filing an error-free return online with direct deposit.

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You may miss tax-savings opportunities with incomplete information, said certified financial planner Edward Jastrem, director of financial planning at Heritage Financial Services in Westwood, Massachusetts.

Before filing your return, you’ll need forms for each source of income. These may include a W-2 from your job, 1099-NEC forms for contract work and 1099-G for unemployment income. You can double-check these by pulling a free IRS transcript.

As for write-offs, forms may include 1098 for mortgage interest, 5498 for individual retirement account deposits and 5498-SA for health savings account contributions, among others.

But you may skip some of the lesser-known or easier-to-miss forms, resulting in an incomplete return, tax experts say.

Here are three potential problems to watch out for:

The most frequent omissions are 1099-B for capital gains and losses and 1099-DIV for dividends and distributions, he said.

“There is a common misconception that if a client didn’t physically receive payment from their investment, then it is not taxable,” Marshall said, suggesting filers always check their accounts for tax documents and review past returns.

Another continual mistake is skipping Form 8606 for nondeductible IRA contributions, said Marianela Collado, a CFP and CPA at Tobias Financial Advisors in Plantation, Florida.

It’s an issue because you may need this paperwork to verify contributions for so-called Roth conversions, a move that bypasses the income limits for Roth IRA deposits, allowing future tax-free growth. Without proof of the original deposits, you may get taxed on the same income twice. 

Investors age 70½ and older may use qualified charitable distributions, or QCDs, to donate up to $100,000 per year from a pre-tax IRA, allowing the retiree to reduce adjusted gross income.

However, the move often triggers a mistake since brokerages don’t separate the QCD transfer on Form 1099-R, which reports retirement plan distributions, said Jastrem from Heritage Financial Services.

For example, if you withdrew $50,000 from an IRA in 2021 and $20,000 was for the QCD, your 1099-R will show $50,000 for distributions, even though only $30,000 is taxable income. 

“If the individual or tax preparer does not make a manual adjustment and record the QCD, the entire IRA distribution could be reported as taxable,” he said.