Don’t get snagged by tax-filing errors

This year, there are many possible ways to make mistakes. A look at a few potential blunders,

What does preparing your taxes have in common with getting a nose job? Both are a lot less painful if they’re done right the first time.

This year, though, there are myriad possibilities for tax-filing errors that are more than cosmetic. Sure, you could file an amended return, but that takes time, not to mention money if you have to pay someone to do it.

One of the most effective ways to avoid costly errors is to make sure you dig out a copy of last year’s tax return before you tackle your taxes. There are numerous items on the 2011 tax return that could be affected by information from the previous year’s returns, says Bob Scharin, senior tax analyst for Thomson Reuters.

Here’s a look at some potential blunders that could cause you problems long after April 17:

-Failing to report a non-deductible contribution to a traditional individual retirement account. If you contributed to a non-deductible IRA last year, you may think it’s not the IRS’ concern, since the money you’re saving is after-tax. But failing to report the contribution will create problems for you when you withdraw the money, because you’ll need to prove to the IRS that the money was already taxed, says Tim Steffen, director of financial planning for Baird’s Private Wealth Management group.

To avoid that hassle, you should report your contribution to a non-deductible IRA on Form 8606. “That’s a form that’s often missed,” Steffen says. If you fail to file the form for the year you made the contribution, the IRS will permit you to file it later, but it will charge you a $50 penalty, he says.

Until recently, non-deductible IRAS had fallen out of favor, but a law that took effect in 2010 has given them a new lease on life.

The law lifted income restrictions on Roth IRA conversions, allowing high-income taxpayers to convert to a Roth for the first time.

Since the law didn’t change income restrictions on Roth contributions, a lot of high-income investors have adopted a back-door strategy: They open a non-deductible IRA, then turn around and convert it to a Roth.

-Failing to report income from a 2010 conversion. When you convert a traditional IRA to a Roth, you have to pay taxes on any pretax contributions and gains. IRA owners who converted to a Roth in 2010 were given the option of splitting income from the conversion between 2011 and 2012.

Lots of people took advantage of that one-time deal, but now, it’s time to pay up. Don’t expect your IRA provider to send you a reminder, Steffen says. Your IRA provider only knows that you converted to a Roth in 2010, which it reported to the IRS. It doesn’t know what you decided to do about the tax bill.

If you’re using the same accountant or tax software you used last year, this shouldn’t be a problem. But taxpayers who do their returns manually or have switched to a new preparer this year need to make sure they have their 2010 return close at hand. The amount of income deferred will show up on Form 8606.

-Leaving unused losses on the table. Some investors with taxable portfolios still have losses left over from 2008, when the Standard & Poor’s 500 index fell 38.5%. There’s a reason for those leftover losses: Once you’ve offset any gains, you can only deduct up to $3,000 in losses from your ordinary income each year.

However, losses that exceed the cut-off can be carried over to future years, Scharin says, which is another reason it’s important to review last year’s tax return. You can deploy unused losses to offset any capital gains you realized in 2011. If you had no gains, you can deduct up to $3,000 from your ordinary income.

-Claiming an energy-efficient credit that you’ve already exhausted. For 2011, taxpayers are eligible to claim a tax credit of up to $500 for energy-efficient home improvements, such as insulation, new windows, air conditioners and heat pumps. However, you must first subtract any energy-efficient credits claimed since 2006, Scharin says. If you claimed $500 or more, you’ll have to be satisfied with lower energy bills, because you’re ineligible for the tax credit.