Top 10 Mistakes on Tax Returns in 2025
At DiversiFi, tax return reviews are a core part of how we support our clients. Even with experienced preparers, mistakes happen, especially when equity compensation, investment income, or self-employment is involved.
Whether you file your own taxes or work with a professional, understanding what to look out for can save you money, time, and stress.
In this post, we go over the most common mistakes we saw on tax returns in 2025.
1. State-Exempt Money Market Funds Misreported
Some money market funds are partially exempt from state income taxes, but many returns don’t properly account for this, resulting in inflated state taxable income.
2. Backdoor Roth Conversions Reported Incorrectly
A common issue: if Form 8606 is missing or filled out incorrectly, the conversion can be mistaken as a taxable distribution, leading to double taxation.
3. Estimated Quarterly Tax Payments Not Fully Applied
Quarterly payments are often made but not reported—or only partially reported—on tax returns, which can cause clients to owe money they’ve already paid.
4. Double Taxation on RSU Stock Sales
W-2 income already includes RSUs, but if the cost basis isn’t adjusted when stock is sold, you might pay tax again on the same income.
5. Charitable Donations Left Off When Itemizing
We frequently see clients who itemize but fail to include their charitable contributions, often because their preparer defaulted to the standard deduction.
6. Self-Employment or Rental Expenses Missed
From home office deductions to depreciation on rental properties, many eligible expenses are left off, unnecessarily increasing tax liability.
7. Dividend & Interest Income Not Shared with Advisor
When clients forget to update us on new sources of income, tax estimates can be off, leading to surprise balances due at tax time.
8. Stock Sales Reported with $0 Cost Basis
If a sale is reported without the correct cost basis, the IRS assumes the entire sale is profit. That can inflate your tax bill by tens of thousands.
9. Incentive Stock Options (ISOs) Not Reported (Form 3921)
Exercised and held ISOs must still be reported, even if you don’t sell. Forgetting to report these can trigger AMT (Alternative Minimum Tax) issues.
10. Incorrect Mortgage Interest Deduction
Depending on when your mortgage originated, different deduction limits apply. If your preparer doesn’t factor in the start date, your deduction may be incorrectly capped.
DID YOU KNOW?
At DiversiFi, tax season comes with a perk.
We offer complimentary tax return reviews to all our clients, and it often results in them saving thousands of dollars. Whether it's catching missed deductions or helping you plan smarter for the year ahead, our team is here to ensure your strategy works harder for you.
If you'd like your tax return reviewed next season or want to explore ways to optimize your tax approach, get started here.
3 Success Stories from DiversiFi Tax Reviews
Behind every mistake is a chance to correct course, and the savings can be significant. Here are a few recent examples from clients who benefited from our tax return review service.
🚪 Avoiding a $5K Mistake: Backdoor Roth Conversion Rescued
💬 What happened:
One client converted non-deductible IRA contributions to a Roth IRA for two tax years. Their tax preparer mistakenly treated the conversion as a taxable distribution and didn’t include the full contribution amount.
🤝 How we helped:
We spotted the issue, got on a call with the preparer, and helped the client get corrected forms, saving them $5,000 in taxes.
💸 From Over-Taxed to Overjoyed:$6,683 Refund Recovered
🤝 How we helped:
After our review, the return was updated, resulting in an extra $6,683 in their refund.
💬 What happened:
Another client’s backdoor Roth and HSA distributions were both reported as taxable income. Required Form 8606s were missing, and the preparer used the standard deduction even though the client had enough charitable donations to itemize.
🚀 A $52K Turnaround: Fixing a Cost Basis Disaster
💬 What happened:
A client sold a large block of Tesla stock, but the preparer listed a $0 cost basis. The return also failed to include $9,553 in itemized deductions.
🤝 How we helped:
We caught the errors, provided corrected documentation, and their tax bill dropped from $115,215 to $63,178 — a savings of more than $52,000.
Final Thoughts
Filing taxes isn’t just about compliance; it’s about making sure your return reflects your true financial picture. Especially if you have equity comp, investments, or multiple income streams, a second set of expert eyes can make a huge difference.
DiversiFi Capital LLC is a registered investment adviser located in CA and may only transact business or render personalized investment advice in those states and international jurisdictions where we are registered, notice filed, or where we qualify for an exemption or exclusion from registration requirements. Any communications with prospective clients residing in jurisdictions where DiversiFi Capital LLC is not registered or licensed shall be limited so as not to trigger registration or licensing requirements.
Past performance is not indicative of future returns, and investing always carries inherent risks, including the potential loss of principal capital. Any investment strategies are specific to individual clients and may not be representative of the experiences of all clients.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed.
Tax information given is provided as a general strategy and not intended as tax advice.