Switched Keys

On an annual basis, taxpayers may be surprised by the additional taxes they may be liable for. Here's a few of those situations.

Employer provided credits

In anticipation of providing credits for some expenses you may have, some employers include those credits during the year by not withholding taxes on them. If you don't fully qualify, you may have to pay more. One example is the Child & Dependent Care Credit. If you are provided $2000 for this but only have qualifying expenses of $1000, the other $1000 is taxable.

Another allowance that can be tricky is the Travel Allowance. Employers may provide this for workers that serve clients on-site. If the on-site work is less than a year, that is good. If it is more than a year, that allowance is taxable. If you also try to take a credit on your tax return for the excess expenses, you are just adding to the amount the IRS could reclaim following an audit.

Bartering, Other Income

Other Income that you receive that is not reported to you is still taxable, whether you report it or not. Bartering also may be a surprise, because you do not get cash for your services, but the value of what you get is taxable as income.

On the other hand, ironically, some taxpayers may be minimizing their income in order to minimize taxes when in fact they may be minimizing tax credits like the earned income tax credit and other credits based on earned income.

Health care coverage taxes

You won't see it this year, but it may surprise a lot of people a year from now. Some people know about the $95 penalty for not having health care coverage in 2014. Many of those people may be surprised when they have to pay it to find that $95 is the minimum and that their penalty is actually 1% of their income.

Employment taxes from 1099-MISC

I've surprised a few people when it comes to reporting income from a 1099-MISC form. Depending on the nature of that income, taxpayers could be liable for self-employment income on that amount. In the worst case scenario where the deduction doesn't help reduce tax liability, the taxpayer will be paying more than 15% of that in self-employment taxes. Not all 1099-MISC is subject to self-employment taxes, however.

These are the kinds of things that tax preparers with minimal training do not consider. Working for a big box company like H&R Block, their goal may be simply to maximize refunds, so they focus on the primary credits. Unfortunately, this may leave the taxpayer in risk of audit and the resultant interest and penalties.

What may be worse than the quick tax return process is that taxpayers don't consider the need for financial planning (including tax planning) for the new year. Intelligent financial planning will likely net much greater gains than skimping on what you are reporting on your income tax return, and with less risk of being the target of IRS investigation.

Get smart about your finances.