As financial advisors, we review many clients’ tax returns each year, especially when new clients come on board. In doing so, we consistently see several common tax filing mistakes made by individuals who prepare their own returns or rely solely on tax software. While platforms like TurboTax can be helpful for straightforward situations, they often become confusing for more complex scenarios and may lead to costly errors. Here’s a closer look at some of the most common issues we encounter or foresee happening.
Common Filing Errors
Although less frequent, basic mistakes still occur and can delay processing or trigger IRS notices. These may include:
- Failing to report all income for the year
- Filing before receiving all necessary tax documents
- Entering incorrect personal information (particularly for dependents or after a name change)
- Double-counting income, such as interest, dividends, or capital gains
In most cases, if a return is accepted but contains errors, it is best to wait until any refund is received or the balance is paid before filing an amended return. Additionally, some taxpayers are now required to include an Identity Protection PIN (IP PIN). If this is missing, the return may be rejected. These PINs are issued annually by the IRS and can be retrieved online if needed: Get an identity protection PIN | Internal Revenue Service
Misreporting Backdoor Roth IRA Contributions
High-income earners are often ineligible to contribute directly to a Roth IRA. However, many utilize the well-known “backdoor” strategy by first making a nondeductible contribution to a traditional IRA and then converting those funds to a Roth IRA.
The issue typically arises during tax reporting. Taxpayers receive a Form 1099-R and must also file Form 8606 to properly document the transaction. A common mistake is reporting the conversion as taxable income, which can result in unnecessary taxes and potential penalties. When corrected, this error often leads to meaningful refunds.
Rental Property Depreciation Errors
Rental property owners are required to report income and expenses on Schedule E, but depreciation is frequently overlooked. Depreciation is not optional and is considered “allowed or allowable” by the IRS. Even if it is not taken annually, it must still be accounted for when the property is sold. Residential property, excluding land, is depreciated over 27.5 years.
This deduction can help offset rental income and, in some cases, generate passive losses. However, upon sale, depreciation is recaptured and typically taxed at a rate of 25%. If depreciation was missed, a single year can usually be corrected by amending the return, while multiple years may require filing Form 3115 to request a change in accounting method.
Missing the Foreign Tax Credit
Investors who hold international securities may have foreign taxes withheld, which are reported on Form 1099-DIV. These taxes may be eligible for a Foreign Tax Credit at both the federal and, in some cases, state level. A common oversight is failing to claim the credit entirely or only applying it to the federal return while neglecting the state return. Properly claiming this credit can help avoid double taxation on the same income.
Home Office Deduction Misuse
The home office deduction is often misunderstood and sometimes avoided due to concerns about triggering an audit. To qualify, the space must be used both regularly and exclusively for business purposes. This means it cannot serve as a shared or personal-use area.
There are two methods for calculating the deduction. The simplified method allows a deduction of $5 per square foot, up to 300 square feet. The actual expense method allows taxpayers to deduct a percentage of home-related expenses, such as mortgage interest, rent, utilities, insurance, and repairs, based on the portion of the home used for business. Errors typically occur when taxpayers claim more than the allowable percentage or fail to maintain proper documentation, particularly when using the actual expense method.
Incorrect Married Filing Separately (MFS) Elections
Married Filing Separately is rarely the most beneficial filing status and comes with several limitations. It is sometimes used in situations involving student loan repayment strategies, divorce considerations, or liability concerns, but it must be handled carefully.
Common mistakes include making Roth IRA contributions despite strict income limits, failing to align deduction methods (both spouses must either itemize or take the standard deduction), and improperly allocating income from joint accounts. Decisions about who claims dependents should also be evaluated carefully, as the optimal approach depends on the couple’s overall tax situation.
Taxability of Student Loan Forgiveness
From 2021 through 2025, most student loan forgiveness was federally tax-free under the American Rescue Plan Act. With that provision now expired, forgiven student loan debt is generally treated as taxable income at the federal level. An important exception remains for borrowers in the Public Service Loan Forgiveness (PSLF) program, where forgiveness continues to be tax-free.
However, borrowers in other programs, such as income-driven repayment plans, may face a tax liability. In addition, some states—including North Carolina—may tax forgiven amounts even if they were previously exempt at the federal level. Borrowers will typically receive a Form 1099-C and should plan accordingly for the potential tax impact.
While many of these issues can be corrected, they often result in unnecessary stress, penalties, or missed opportunities. Working with a qualified tax professional or coordinating between your financial advisor and CPA can help ensure your return is accurate and optimized for your situation.
This information is for educational purposes only and should not be considered tax advice. Please consult your accountant or tax professional regarding your specific circumstances.
