When most people think about tax mistakes, they imagine major red flags that could trigger an IRS audit. In reality, the most common tax pitfalls fall into two far more ordinary categories: simple human error and missed opportunities to legally reduce what you owe.

Both can quietly erode your wealth.

The IRS has reported that the most frequent issues with tax returns involve basic math errors, incorrect filing status, inaccurate Social Security or bank account numbers, and mistakes tied to complicated credits like the Child Tax Credit or Earned Income Tax Credit. In fact, the agency sent out roughly 1 million math-error notices for the 2023 tax year alone.

Those errors may only cost you a few stressful moments.

The more expensive mistakes?
Forgetting to report investment income.
Selling assets at the wrong time.
Failing to harvest losses.
Missing tax-saving strategies entirely.

As a financial advisor, I often tell clients: tax efficiency is part of investment performance. If you ignore taxes, you’re giving away returns unnecessarily.

Here are 8 tax traps to avoid—and how to protect your money.

1. Missing Investment Income

One of the most common and costly mistakes is failing to report all investment income.

If you earn more than $10 in dividends, interest, or capital gains distributions, your brokerage firm will issue a Form 1099. The IRS receives the same form. If your return doesn’t match what they have on file, you will receive a notice.

This happens more often than people think—especially for investors with multiple brokerage accounts.

Another frequent misunderstanding:
If you reinvest your dividends, you still owe taxes.

Even if you never physically receive the cash because it’s automatically reinvested, the distribution is taxable in the year it’s paid. The only time capital gains taxes are deferred is when appreciation remains unrealized—meaning you haven’t sold the investment.

Failing to report investment income can result in penalties and interest, not just a correction.

Best practice:
Reconcile all 1099 forms against your tax return before filing. If you have multiple accounts, double-check them all.

2. Selling Investments Too Soon

The holding period of your investments directly affects your tax rate.

• Held 1 year or less → Short-term capital gains (taxed as ordinary income)
• Held more than 1 year → Long-term capital gains (preferential tax rates)

For example, if you are in the 22% federal income tax bracket, your short-term gains may be taxed at 22%. But long-term capital gains might only be taxed at 15%.

That difference can materially impact your after-tax returns.

High earners face an additional complication:
If your modified adjusted gross income (MAGI) exceeds $200,000 (single) or $250,000 (married filing jointly), you may also owe the 3.8% Net Investment Income Tax on top of your capital gains.

A premature sale could push you into a higher bracket or trigger surtaxes unnecessarily.

Strategic move:
Before selling, check your holding period and estimate the tax impact. Sometimes waiting just a few weeks can reduce your tax bill significantly.

3. Poor Recordkeeping and Cost Basis Errors

Capital gains taxes are calculated based on:

Sale price – Cost basis = Taxable gain (or loss)

Your cost basis is what you paid for the investment, adjusted for certain factors like reinvested dividends, splits, or corporate actions.

The IRS requires reporting details on:

• Form 1040
• Schedule D
• Form 8949

Brokerages report adjusted cost basis for “covered securities,” but the responsibility ultimately falls on you to ensure accuracy.

If your cost basis is incorrect, you may overpay taxes—or underpay and face penalties.

This becomes especially complex when:

• Transferring accounts between brokerages
• Holding older securities
• Reinvesting dividends for years

Advisor tip:
Maintain organized records. Even if your brokerage tracks basis, keep your own documentation.

4. Forgetting to Use Capital Losses

Many investors know they pay taxes on gains—but fewer realize how powerful losses can be.

If your capital losses exceed your gains:

• You can deduct up to $3,000 per year against ordinary income ($1,500 if married filing separately).
• Any additional losses carry forward indefinitely.

Example:
If you have $10,000 in net capital losses:

• Deduct $3,000 this year
• Carry forward $7,000 to future years

Over time, this can materially reduce tax liability.

Yet many investors fail to leverage this benefit.

Key principle: Losses are not just setbacks—they are tax assets.

5. Waiting Too Long to Plan

Tax strategy doesn’t begin in April. It begins in January.

Your year-end tax documents arrive after December 31. By then, it’s too late to offset realized gains with new losses.

One powerful strategy is tax-loss harvesting—intentionally selling investments at a loss to offset realized gains, then reinvesting in similar (but not identical) securities to maintain market exposure.

This requires monitoring throughout the year.

If you only review your taxes when preparing your return, you’ve already lost opportunities.

Professional guidance matters here. Tax planning should be integrated into your investment management—not treated as an afterthought.

6. Violating the Wash Sale Rule

Tax-loss harvesting comes with one important caveat: the wash sale rule.

A wash sale occurs when you:

• Sell a security at a loss
• Then buy a “substantially identical” security within 30 days before or after the sale

If that happens, the loss is disallowed for current tax purposes and added back to your cost basis.

Example:

• Buy stock at $50
• Sell at $40 (realizing a $10 loss)
• Repurchase within 30 days

That $10 loss cannot be claimed this year.

Active traders frequently fall into this trap.

One notable exception:
Wash sale rules currently do not apply to cryptocurrencies, since they are treated as property by the IRS. That means crypto investors may sell at a loss and immediately repurchase, potentially capturing the tax loss while maintaining exposure.

However, tax laws evolve—always verify current rules.

7. Missing Valuable Tax Credits and Deductions

This is where many people leave real money on the table.

Tax Credits

A tax credit reduces your tax bill dollar-for-dollar.

Example:
If your tax liability is $5,000 and you qualify for a $2,200 Child Tax Credit, your new liability becomes $2,800.

That’s a direct reduction.

Credits are often more valuable than deductions.

Tax Deductions

A deduction reduces taxable income.

If you are in the 24% tax bracket and claim $5,000 in mortgage interest:

• You save approximately $1,200 in taxes

Failing to itemize when beneficial—or forgetting eligible deductions—means overpaying.

Commonly missed deductions include:

• Student loan interest
• Health Savings Account (HSA) contributions
• Retirement contributions
• Business expenses (for self-employed individuals)

The IRS flags underpayments—but it does not notify you if you overpay.

That responsibility is yours.

8. Forgetting Contribution Deadlines

Timing matters.

Most deductions are calculated through December 31:

• 401(k) contributions
• Mortgage interest
• Student loan interest

However, some contributions can be made up until the tax filing deadline (typically April 15):

• Traditional IRA contributions
• Roth IRA contributions
• HSA contributions

This provides a valuable post-year-end planning window.

Too many taxpayers assume December 31 is the final cutoff for everything—and miss opportunities to reduce their tax bill.

Bottom Line: Taxes Are Part of Your Investment Strategy

Tax mistakes are rarely catastrophic—but they are often expensive.

Even when using tax software or working with a professional, human input is involved. Errors happen.

The solution is not fear.
It’s education and proactive planning.

Understand:

• Your income sources
• Your tax bracket
• Your investment holding periods
• Your unrealized gains and losses
• Your eligible deductions and credits

Tax season should not simply be about compliance.

It should be a strategic financial review.

Every dollar saved in taxes is a dollar that can compound for decades.

Smart investors don’t just focus on returns.
They focus on after-tax returns.

And that difference can define long-term wealth.

If you’re unsure whether your tax strategy is optimized, consider consulting both a financial advisor and a tax professional. The coordination between the two can often uncover savings opportunities that neither would identify alone.

Your future self will thank you.