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Most Americans would get an F when it comes to income-tax basics, according to a new NerdWallet.com survey of 1,015 adults. The average respondent scored a mere 50 out of 100 on questions about the tax implications of Roth IRAs, volunteering expenses that are deductible and what the worst tax mistake is. (Answer? Not filing a return at all.)
From start to finish, the average taxpayer filing a Form 1040 spends 16 hours on his or her taxes—including eight hours combing through records. Yet despite that scrutiny, you could still be leaving money on the table. Common errors and overlooked deductions can add up quickly when filing your tax returns. Here are 10 tips to keep more money in your bank account.
—By CNBC's Kelli B. Grant
Posted 25 March 2015
For a document just two pages long, Form 1040 poses plenty of pitfalls for taxpayers—errors that could needlessly boost your bill, require an amended return or even trigger an audit.
A telling sign of its complexity: The 1040 has a 104-page instruction booklet detailing what you need to know to fill out those two pages. (Itemizing? Have a home business? Instructions for those schedules and others are separate.)
"Believe it or not, one of the most common errors is not putting in the right Social Security numbers for yourself, your spouse and your dependents," said Barbara Weltman, a tax and business attorney in Vero Beach, Florida. Make sure you haven't transposed any of the digits.
"Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards," the IRS warned consumers in a statement last year. Wrong names were one of eight common errors the agency called out.
One of the most important things taxpayers can do to limit errors is to double-check the information they input into software or the form. Take the time to look up numbers such as cost basis for investments sold and real estate tax paid, rather than guessing, said Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants. "If you type in the wrong basis amount, you could be under-reporting or over-reporting your capital gains," she said.
Read MoreWhat does "tax bracket" mean?
Recheck what you've entered before moving to the next line or screen. It's very easy to put a figure on the wrong lines—problematic if you mistakenly report all your Social Security benefits as taxable, for example, said attorney Weltman. Transposing numbers isn't unusual, either. "If you're claiming a credit for tuition and you paid $3,100 but put in $1,300 instead, you've cost yourself big-time there," she said.
Some errors represent missed opportunities. "That's a mistake that people make," said attorney Weltman. "They assume, 'I didn't qualify for that break last year.'" Income limitations for breaks such as deductible IRA contributions rise annually. Depending on how your tax situation has changed, you might be eligible now even if you weren't before.
Calculating credits often proves challenging. In tax year 2012, 12.1 percent of math errors pertained to the earned income-tax credit, according to the IRS. Another 4.6 percent involved the child tax credit, 4.4 percent the hope and American opportunity education credits, and 5.9 percent "other credits." Read the instructions carefully to help determine which credits you're eligible for, how to calculate them and—in the case of the higher-education credits—which is the most valuable, said Labant at the American Institute of Certified Public Accountants.
We're not just talking doctor's appointments and prescriptions, but even the cost of adding a swimming pool, getting regular therapeutic massages or taking dance lessons. Provided that your doctor deems the expense "medically necessary," you may be able to claim it for the medical expenses deduction. Don't forget to include miles driven to those doctor's appointments.
Another possible miss? The dependent-care credit, which depending on your income is worth as much as 35 percent of up to $3,000 in qualifying expenses for one child (or other qualifying person) and $6,000 for two or more. Most parents know to grab the break for day care and nanny services, but the IRS also allows some qualifying medical expenses and day camps.
The retirement savers credit is a bigger-ticket benefit that often gets passed over. "That's a tax break of up to $1,000, or up to $2,000 if you're married, for making contributions to retirement accounts," said Labant at the American Institute of Certified Public Accountants. Taxpayers just starting out don't often know about it, so they miss out.
Others don't even consider the break due to its low-income threshold—single filers making more than $30,500 and married filing jointly making more than $61,000 don't qualify. But if you were unemployed or retired for part of the year or had a bad year as a freelancer, your income might have dipped enough to grab at least a partial credit, she said.
If you hit it big at the blackjack table, start making a list of times the house won that year. (Your casino loyalty card can provide a good log.) The IRS lets you deduct gambling losses to the extent of your winnings, helping you lessen the tax implications of a jackpot.
"The one I see that gets overlooked a lot is charitable contributions," said Labant of the American Institute of Certified Public Accountants. Consumers usually comb through their checkbook and credit card statements but can miss cash donations and donations of physical goods. Some companies let workers donate from their paycheck, but that won't show up on your W-2, she said—you'll need to look at your year-end paystub for the total.
And volunteers might not realize they can deduct mileage driven to and from charitable activities, at 14 cents per mile.
Line 61. Don't miss this new addition under the Affordable Care Act. "If you had [health] coverage all year, you just have to check a box," said Weltman. Fail to check it, however, and you'll need to include another form to either claim an exemption or assess a penalty.
If you itemize, you can choose to deduct state income tax paid, or state sales tax paid over the tax year. And no, you don't have to save every receipt. The IRS has a calculator to help figure out typical spending. They let you add in big-ticket purchases, like cars and boats.