Are you making one of these seven key tax mistakes?

I just saw Santa Claus at the supermarket this past week. Unbelievably, as I walked into a local grocery store, I saw an inflatable Santa Claus lawn decoration. I think the grocery store is way too early on this one. But it did get me thinking about the year end that is quickly coming. The signs are everywhere-- cooler temperatures, changing leaves, the Colorado Rockies in the playoffs. Well, I guess the last one doesn't happen every year, but sure would be great if it did. Now is a great time to ask yourself whether you are making one of the following tax planning mistakes. If you are, there is still time to change things before it's too late.

1. Failing to plan

One of the biggest mistakes you can make when it comes to tax planning is failing to plan. Nothing is more disheartening than going into your accountant in April with your stack of receipts, fingers crossed, only to find out that if you had done a little planning before the end of the year, you may have been able to save some tax dollars. Once the bell tolls on New Year's Eve, there are precious few tax planning opportunities available. Don't fail to plan.

2. Misunderstanding audit odds

Over time, I have actually had clients that did not take absolutely legitimate deductions because they were afraid of "red flags." The idea of an IRS audit was so frightening to them that they preferred to pay more taxes than legally required by the law, in the misplaced hope of staying off that mythical IRS radar screen. In reality, the IRS audited approximately one out of every 102 returns during its 2006 fiscal year. Respect the IRS, don't fear them. They are working for us, the taxpayers. As long as you stay within the bounds of the law, you don't need to be afraid of an audit. Planning so you can get your affairs in order so you pay the least amount of tax required by law is completely above board.

3. Paying too much self employment tax

There are many ways to organize your business and affairs as you earn a living. Do you know if you are paying too much self-employment tax? If you are organized as a sole proprietorship, or partnership, the answer may be yes. Find out before the year is over.

4. Using the wrong retirement plan

Retirement planning has become a popular topic in recent years as many wonder whether Social Security will really stand the test of time, and as others find themselves closer to those golden years. Yet the extent to which many peoples' knowledge of retirement planning begins and ends with 401(k)s and IRAs. If you are a public service employee, you may also have heard of 403(b)s. The tax incentivized retirement plans and structures available go well beyond these well-known favorites. Changes in recent years have created opportunities, and plan types, for some individuals to save as much as $40k or more on a tax-deferred basis. If you aren't sure whether your retirement plan is the best one for your situation, get help before the year ends. You might find that you could put more away for retirement than you thought.

5. Missing family employment

Don't miss the opportunity to effectively move income from your higher tax bracket to a zero, or lower tax bracket of your child. If you have a business, you should really be considering whether it makes sense for other members of your family to participate in your business as employees. There can be some tremendous tax savings available by hiring your family. Check out my prior postings for more information on this topic.

6. Not making the most of your medical expenses

Don't pay for medical expenses with after tax dollars. If you are self employed, you absolutely should consider a Section 105 medical reimbursement plan. If you work as an employee for someone else, don't make the mistake of not utilizing a cafeteria plan, or medical expense reimbursement plan that would allow you to pay for medical expenses with pre-tax dollars. Many individual taxpayers will never reach the incredibly high threshold for deducting medical expenses on their tax returns. So, they never get the tax value for the deduction. If these expenses are paid with using pre-tax dollars, your money goes a lot farther. Properly plan to take advantage of your medical expenses before the year ends.

7. Not using a professional

I have often wondered throughout my career why some people prefer to do their taxes themselves rather than using a professional help them. Others, trust their taxes to an untrained "good friend" or an "uncle" to take care of things for them. Would you try to perform a medical procedure on yourself, or allow your untrained "good friend" or "uncle" to do the procedure for you? Likely never. With the tax code and regulations extending to over 16,000 pages, filling approximately 20 volumes, plus multitudes of tax cases and rulings, why wouldn't you get a professional to help you with your taxes and tax planning? As Albert Einstein said, "The hardest thing in the world to understand is the income tax."

Sure, it may cost you some money, but so does the doctor and for good reason. Anyway, that several hundred dollars may seem completely insignificant if your tax professional shows you how to save a few thousand bucks every single year or if they keep you from making a mistake on your return that could cost you a bundle in penalties and interest and hours of headache with the IRS. You have enough to worry about; don't make the mistake of not using professional help.

This is intended for general interest and not as specific legal or accounting advice for anyone. You should consult your tax advisor to get more information.

Scott Jensen, CPA is a public accountant practicing with Bailey Saetveit & Co, P.C. in Greenwood Village and resides with his family in Parker. He can be reached at sjensen@baileysaetveit.com or 303-799-4100 with comments or questions.