<![CDATA[ Latest from Kiplinger in Tax-returns ]]>

<![CDATA[ Latest from Kiplinger in Tax-returns ]]> https://www.kiplinger.com Thu, 09 Oct 2025 17:07:00 +0000 en <![CDATA[ Standard Deduction 2026 Amounts Are Here ]]> The IRS released the 2026 standard deduction amounts you’ll use for your 2026 tax return — and they're higher than ever.

The IRS adjusts these amounts for each filing status every year. Since these adjustments are based on inflation, the standard deduction is higher for 2026 compared with last year. The increased standard deduction amount was recently made permanent under the 2025 GOP spending bill, also referred to by some as the “One Big Beautiful Bill” (OBBB).

Knowing the standard deduction amount for your status can help you determine whether you should plan to itemize or claim the standard deduction next year.

Here's more to know.

For information on the current standard deduction, see: What's the 2025 Standard Deduction?

What is the new standard deduction amount for 2026? (Returns normally filed in 2027)

The IRS has just announced that the standard deduction amounts are increasing between $350 and $700 from the 2025 numbers.

Below are the 2026 amounts:

Standard Deduction For 2026
Married, Filing Jointly and Surviving Spouses	$32,200	Increase of $700 from the prior tax year
Single and Married, Filing Separately	$16,100	Increase of $350 from the prior tax year
Heads of Household	$24,150	Increase of $525 from the prior tax year

2026 standard deduction age 65 and older

Taxpayers age 65 and older, as well as those who are blind, can claim an additional standard deduction. For 2026, that additional amount will be $1,650 ($2,050 if unmarried and not a surviving spouse).

Those eligible can add the extra standard deduction to the regular amount for their filing status. A single taxpayer 65 or older (or who is blind) can claim a total standard deduction of $18,150 on their 2026 federal tax return.

Additionally, as Kiplinger has reported, the OBBB introduces a new bonus standard deduction of $6,000 for those age 65 and older. This might be added per eligible individual to the additional standard deduction for 2026; however, the "bonus" amount is temporary and phases out for incomes above certain thresholds. (It's also available for those who itemize.)

Standard deduction if you're claimed as a dependent

Your standard deduction amount might differ if you can be claimed as a dependent on another taxpayer’s federal tax return.

The 2026 standard deduction for dependents is limited to either $1,350 or the sum of $450 and the dependent’s earned income, whichever is greater.

Note: The standard deduction for dependents cannot exceed the regular standard deduction for your filing status, even if your earned income is higher than the basic standard deduction amount.

What's the highest standard deduction amount possible?

The standard deduction is adjusted for inflation each year, and the OBBB further increased those amounts in 2025. The new law also introduced a $6,000 temporary bonus deduction for qualifying adults age 65 and older ($12,000 if both spouses qualify).

For 2026, the IRS is raising the standard deduction amount from anywhere from $350 to $700. The extra standard deduction has been increased by $50.

This brings the highest possible 2026 standard deduction amount to $47,500. This amount is for married, filing jointly couples who are both age 65 and older, qualify for the bonus deduction and can claim the extra standard deduction for both spouses.

For more information on how to calculate your total standard deduction, see: The Extra Standard Deduction for People Age 65 and Older.

]]> https://www.kiplinger.com/taxes/standard-deduction-2026-amounts-are-here LGKXkv36JoPcmBw8dLAbsL Thu, 09 Oct 2025 17:07:00 +0000 <![CDATA[ An IRS Enrolled Agent's Top 10 Reasons to Stop Doing Your Own Taxes ]]> I do not do my own taxes.

That will shock a lot of my readers and clients who know that I own a business that offers tax planning and tax preparation.

Also, I am an IRS enrolled agent, licensed to prepare taxes and represent taxpayers in front of the IRS.

I did my own taxes in high school, college and early in my career, when my taxes were simple and the stakes were lower. But today, I own a few businesses and would rather have someone else — someone who spends all day doing this — wrestle with all the complexities.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

I should also mention that the intent of this column is not to try to persuade you to stop doing your own taxes. We work with retirees who typically have about $2 million to $10 million invested. I would guess about 30% do their own taxes, and for the majority of them, that's totally fine.

Here are the situations on the other end of the spectrum, primarily folks in the demographic we help, where I think using a professional tax preparer makes sense.

1. You are selling your primary residence

On one hand, this can be a simple thing to report on Schedule D.

On the other hand, the stakes are high. We have a number of clients every year selling homes well into seven-figure territory that they bought for a fraction of that.

There are significant tax benefits to selling your primary residence vs an investment property, but you must ensure you qualify, calculate your adjusted basis, account for any periods when the home was rented, etc. Things can get complicated quickly.

2. You are considering selling an investment property or a vacation property

Investment properties are typically tax-advantaged during the period you own them, but a big bill often comes due at sale.

This calculation is much more complicated than the one for selling your primary residence. You must calculate the adjusted basis and factor in depreciation recapture.

Vacation homes tend to be simpler, but there may be planning opportunities here if you're willing to convert a vacation home into your primary residence for a period of time.

The accountant's job is to report the transaction. A financial planner may be able to help with the planning strategies.

We rely on tax planning and financial planning software to walk through the different scenarios and the estimated tax due, or saved, in each one. You can access a free version of the planning software.

3. You are starting a business or own one

Sole proprietors report income on Schedule C. It's a fairly straightforward form that you may be able to do on your own. However, a good CPA's job extends beyond just reporting and compliance to strategy.

Should you actually be a sole proprietor? Would an S corp or C corp be more advantageous? If so, things will get much more complicated, but it may be worth it.

Either way, it makes sense to have a pro weigh in.

4. You have significant K-1 income

K-1s report your share of income, losses, deductions and credits from a pass-through entity. That sounds like a different language to anyone who hasn't lived this life.

I have brought on many clients over the years who had straightforward tax situations but had to file extensions every year because their former adviser put them in a few private investments that issue K-1s.

These can be simple to plug into a tax-preparation software program like TurboTax, but the larger the proportion of your income these are, the more beneficial it will be to hire someone to correctly report the income.

This is especially true in years when one of these entities is sold or has a liquidity event.

5. You are planning a large gift

I'll define "large" as anything over the annual gift tax exclusion ($19,000 per recipient in 2025) because that's when you have to start reporting personal gifts on IRS Form 709.

However, the larger the gift, whether charitable or personal, the more important this is to get right.

I see people give kids money all the time for educational or medical expenses that would be better off going directly to the institution.

Similarly, I see charitable gifts done in an extremely inefficient manner.

To get this right often takes the coordination of a financial planner and a CPA.

6. You've received an inheritance

Inheriting capital assets (taxable investment accounts, real estate, etc.) is great because beneficiaries receive a step-up in basis.

However, this doesn't happen automatically. You are responsible for calculating date-of-death values and any subsequent gains. A CPA can help.

Inheriting an IRA or other retirement account has become much more complicated since the SECURE Act became law. You want to make sure you are taking RMDs when you are supposed to.

7. You have a taxable estate and/or there are irrevocable trusts

I don't think I've come across anyone with a taxable estate ($13.99 million per person in 2025) who is doing their own taxes, but this may be you.

In this situation, the investment income is likely high enough to warrant a second set of eyes. There are often gift and estate considerations that would also be reflected on your 1040.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

When you have a taxable estate, you often incorporate irrevocable trusts in your estate plan to help mitigate estate taxes and protect assets for the next generations. Irrevocable trusts will have their own trust tax return.

8. You are a dual citizen or have foreign assets/income

This could take all sorts of different forms:

You could be living in the U.S. but have foreign investments and foreign income.
You could be a U.S. citizen living abroad who has to file income taxes in multiple countries.
You may have dual citizenship, live here, but still own a house back home.

The IRS has specific rules, credits and forms that must be filed in all of these situations. You'll want to engage someone who specializes in cross-border tax planning.

9. You earn income in multiple states

In the U.S., you must report income in the state in which it was earned. Our clients who retired from big law firms saw the complexity of their returns implode the year after retirement. The same is true of the partners at Big Four accounting firms.

This is not the only situation where this is the case. We often see multiple state returns for clients with rental properties in different states.

Sometimes this is simple. Other times, it makes sense to get help.

10. You are divorced or getting divorced and have joint assets

I recently had a retired accountant reach out to figure out how to report joint income from a private investment with her ex-spouse. I had to refer her to our internal tax team.

Divorce creates a lot of complexity. Taxes can be one of those things. If you're trying to figure out how to report mortgage interest, who gets the various deductions/credits, etc., you're going to want professional help. Sorry for yet another bill!

My bottom line on DIY taxes

In 2019, I decided to do my own return on TurboTax. I had so many clients using the software that I thought it would be helpful for my clients if I had used it myself.

Two things surprised me: First is how intuitive the software is. The second is how many terms it uses that I know only because I am in the business.

At the end of the exercise, even I wasn't fully confident in the output. I have to assume most people feel this way.

Final thought: I wanted to keep this article to 10 reasons, but if I were to add an 11th, I'd suggest that if you're just guessing a lot, it's time to ask for help.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

]]> https://www.kiplinger.com/taxes/tax-returns/an-irs-enrolled-agents-top-reasons-to-stop-doing-your-own-taxes 43S3MWzyjhJFExWVQv6FnP Sat, 06 Sep 2025 09:30:00 +0000 <![CDATA[ Five Ways Trump’s 2025 Tax Bill Could Boost Your Tax Refund (or Shrink It) ]]> You’ve heard about the recent “Trump megabill,” but how will it affect your tax refund? While some provisions could increase your tax liability next year, others might give you a serious payday.

For instance, the IRS reports that nine out of 10 taxpayers don’t itemize deductions. If that’s you, a permanently higher standard deduction could give you more money back.

However, new provisions, such as some involving the federal child tax credit, might squeeze your bottom line if you’re a noncitizen, potentially costing you more in taxes.

Several provisions in the new tax law are temporary. Those new tax benefits could go away as early as 2029.

Here are five tax policies in the so-called “One Big Beautiful Bill” (OBBB) that might increase or decrease your bottom line come tax season.

Standard Deduction

1. The standard deduction affects tax refunds

While the IRS already increased the standard deduction last fall due to inflation, the OBBB further raises it. For 2025, the standard deduction amounts are as follows:

Married couples filing jointly receive $31,500.
Single filers receive $15,750.
Heads of household receive $23,625.

If you’re someone who claims the standard deduction (rather than itemizing), you could see a bump in next year’s tax refund or a corresponding reduction in your tax liability.

For instance:

If you’re single, you’ll get $1,150 more in standard deduction dollars on your 2025 federal return compared with last year.
If you’re married and filing a joint return, you’ll see a $2,300 increase in your standard deduction compared with last year’s return.

Note: The above amounts reflect the IRS's change to the 2025 standard deduction plus the OBBB increases.

If you’re an older adult, you could receive even higher savings on next year’s federal return under the new tax law, because the OBBB added a new bonus standard deduction of $6,000 (in addition to the usual extra standard deduction for older adults).

However, the temporary bonus deduction is dependent on modified adjusted gross income (MAGI), so you could miss out on this benefit.

The limits are $150,000 for married, filing jointly couples and $75,000 for single filers. The phaseout is 6% for every dollar above the income limits.

Here's an example to show how this works.

A married, filing jointly couple who earns $150,000 and where both adults are 65 and older could receive a full $12,000 bonus deduction on their return.
Yet, if that same couple were making $160,000 ($10,000 above the limit), the deduction is reduced by $1,200 (6% x $10,000 multiplied by two, since both adults are above 65).
This would result in a deduction of $10,800 for the couple, rather than the full $12,000 benefit.

It’s also important to note that the OBBB permanently ended the personal and dependency exemption, which was $4,050 per qualifying taxpayer, spouse and child (indexed for inflation).

That change is likely to permanently decrease your tax refund, especially if your household has many people who would’ve qualified for the exemption.

SALT Deduction Cap

2. The ‘SALT refund’: How much is it?

If you itemize your federal return and live in a high-cost area, you could see a reduction in your tax liability. That’s because the state and local tax deduction (SALT) changed under the OBBB.

Most taxpayers claim the standard deduction these days. However, more Americans itemized their deductions before the 2017 Tax Cuts and Jobs Act (TCJA) capped SALT at just $10,000. Before that, the deduction was unlimited.

States with high property taxes and/or state income taxes, such as New York, New Jersey or California, might have suffered the most from the $10,000 cap on the SALT deduction, since they haven’t been able to fully deduct these types of taxes on their federal return since the TCJA was enacted.

But the OBBB temporarily increases the SALT cap to $40,000, meaning you could save more on federal 2025 taxes if you live in a high-cost area.

Let’s look at an oversimplified example to see how that might work:

A couple with $200,000 in income claims the standard deduction for tax year 2025 and has no other credits, deductions or alternative minimum tax (AMT) liability. Their taxable income is $168,500 ($200,000 gross income minus $31,500 standard deduction).
If that same couple were to pay $43,000 in state and local taxes that year, they might choose to itemize. This would reduce their taxable income to $160,000 ($200,000 gross income minus the $40,000 SALT cap).
The net effect is an $8,500 reduction in taxable income on their federal return.

It’s worth mentioning that the SALT cap increase is temporary and will revert to $10,000 in 2030.

Taxpayers with $500,000 or more will have a 30% phaseout for every dollar their income exceeds the limit. The SALT cap reverts completely to $10,000 for incomes of $600,000 and higher.

Are you a high-income taxpayer? If so, here’s a simple example of how the new SALT cap deduction might impact you:

A single filer makes $505,000 per year in MAGI and wishes to itemize to take the SALT deduction.
Yet, $505,000 is $5,000 above the income limit, meaning the deduction is reduced by $1,500 ($5,000 times 30%).
The total SALT deduction for this filer would be $38,500.

Child Tax Credit

3. How much money will I get back for a child tax credit?

The OBBB also changed the federal child tax credit (CTC) for qualifying children 17 and under by increasing the maximum amount from $2,000 to $2,200 (adjusted annually starting in 2026).

If you’ve got qualifying kids, the extra $200 you’re getting from the child tax credit could raise your next tax refund (or at the very least, lower your tax bill).

For example, a couple with $350,000 and two children under 17 would see $4,400 in child tax credit savings.
That’s $400 higher than last year’s federal return.
Families with four children could also see an increase in child tax credit breaks from $8,000 to $8,800.

However, the CTC is reduced by $50 for every $1,000 (or fraction thereof) that your MAGI is above specific income thresholds.

These income caps remain at $200,000 or more (for single filers) and $400,000 or more (married filing jointly couples). If you make above those amounts, you’ll likely see less benefit from the new child tax credit in your tax refund:

A single filer with one child age 17 and under and an income of $200,000 would see $2,200 in child tax credit savings.
But if that same filer made $205,000 instead, their maximum child tax credit would be reduced by $250 ($5,000 is five times above the income limit, so $50 times 5 is $250).
The total tax credit would then be $1,950 ($2,200 minus $250).
Before the OBBB, the single filer with $205,000 would’ve seen a total tax credit of $1,750 ($2,000 minus $250).
The net gain under the new law is $200.

U.S. Treasury check with — *While some 2025 tax refunds could be bigger due to the so-called "Trump megabill," others might be smaller or see no change at all.* (Image credit: Getty Images)

But the new child tax credit doesn’t benefit everyone. Households with noncitizen parents might see an increase in their 2025 tax bill. That’s because the child tax credit now requires parents to have a Social Security Number (SSN).

As Kiplinger reported, this means that nearly 2.7 million children in the U.S. who previously qualified will no longer be eligible for the credit due to their parents’ immigration status, leading to a potential $5.94 million loss in tax savings ($2,200 multiplied by 2.7 million).

Tax on Tips and Overtime

4. Will I get a bigger tax refund if I work overtime or for tips?

Tax on tips also changed under the new Trump tax bill, though perhaps in an unexpected way. Prior law dictated that cash tips (including credit and debit card charges) were taxed like ordinary income.

Now, under the OBBB, there’s a temporary deduction for tips up to $25,000, subject to an income phase-out (more on that below).

Are you a service worker? Here’s a simple example of what the no tax on tips law might look like for you:

A server at a popular restaurant earns $20,000 in annual tip income.
On last year’s tax return, the server claimed the standard deduction and had no other income or tax breaks. The total taxable income on their federal return was $5,400 ($20,000 minus the $14,600 standard deduction for single filers).
In 2025, that same server could have zero federal income tax if they claim the tip deduction ($20,000 minus $15,750 standard deduction, minus the $25,000 maximum tip deduction).

It’s important to note that the IRS hasn’t yet squared away the definition of what a “tipped employee” is, yet. It’s unclear which workers will be affected.

Once more, workers who don’t ordinarily receive tips, such as retail sales clerks, cooks or childcare workers, will most likely not gain a benefit from this law. Meanwhile, tipped workers earning more than $150,000 (or $300,000 for joint filers) will see a phaseout of the tip tax deduction.

For more information, check out Kiplinger’s report New 'No Tax on Tips' Bill Approved for 2025: What to Know Now.

Similarly, overtime rules changed with the new tax bill. The OBBB created a no tax on overtime deduction worth up to $12,500 for tax years 2025 through 2028. The deduction has the same income phaseouts as “no tax on tips” at $150,000 for single filers and $300,000 for married, filing jointly couples.

Are you an overtime worker? The “no tax on overtime” could increase your tax refund or lower your federal tax liability, regardless of whether you itemize or claim the standard deduction.

Note: Non-cash tips (like artwork) are still fully taxable as ordinary income and not eligible for a tip income deduction. Payroll taxes and state/local income taxes also still apply.

Business tax provisions

5. Key small business taxes: QBI, bonus depreciation and more

Several key tax provisions affecting small businesses are included in the OBBB. Here are a few:

Permanently extending the “Qualified Business Income” (QBI) tax rate. QBI is the income your business earns after deducting qualified expenses (such as rent, utilities, business loan interest, etc.). The OBBB made the 20% deduction rate permanent.
Making permanent “bonus depreciation.” Qualified property that you buy and place into service after January 19, 2025, is now eligible for immediate 100% expensing. Ordinarily, you’d have to wait to expense the asset above five, 10, 15, even 20 years.
Providing more opportunities to use “Section 179” expensing. Similar to bonus depreciation, Section 179 allows businesses to deduct 100% of qualified equipment and software. But there’s a deduction limit, which makes it more beneficial for small businesses vs large corporations. OBBB increased the maximum deduction amount and phase-out threshold for expensing.

All three of these provisions could help small businesses save on their taxes in 2025.

For instance, QBI only applies to businesses set up as a “pass-through entity,” like plumbers, accounting firms, and graphic designers (certain limits might apply). Maintaining the rate allows business owners to deduct more income (compared with before the TCJA), and lower income taxes paid.

Another helpful provision in the OBBB affects Section 179 expensing.

This special type of expense is generally for small to midsize businesses due to its dollar limits.
The OBBB increased these limits, allowing businesses to now deduct up to $2.5 million in property (up from $1.25 million).
Likewise, the phase out is $4 million (up from $3.13 million).

Are you a small business owner? Let’s look at a very simplified example to understand how Section 179 and bonus depreciation can work together to maximize your tax savings:

Pineapple Plane Company purchased one new plane for $2 million in 2025. Under Section 179, the company deducts the entire cost this year, resulting in a $2 million reduction in taxable income.
Now, let’s say Pineapple instead purchased a megaplane for $3 million. Under Section 179, the company can only deduct $2.5 million per year. That leaves $500,000 undeducted.
But bonus depreciation allows Pineapple to deduct the remaining $500,000 if the company started using the plane after January 19, 2025.

Note: The Section 179 deduction cannot exceed the business’s taxable income. The example also assumes the planes have a depreciable life of 20 years or less.

What to watch for next tax season

While we covered five major ways your tax refund might be affected this year, other provisions in the OBBB and IRS changes could affect your taxes. Here are a few more to watch:

New temporary car loan interest deduction, allowing you to deduct up to $10,000 in interest paid on new vehicles, subject to income phase-outs.
New Trump Accounts, which might help your child save for future educational, homeownership, and entrepreneurial costs.
After September 30, the IRS will stop sending paper checks. If you're someone who likes to receive your tax refund via the mail, you'll need to opt for a digital payment instead next filing season.

As always, it’s important to keep an eye on the ever-changing tax landscape, both on Capitol Hill and in your state and local governments. Consult with a tax professional on your specific financial situation.

Several provisions listed above are expected to receive additional clarification from the IRS by October 2025. Stay tuned for more updates.

More OBBB Changes

]]> https://www.kiplinger.com/taxes/ways-trumps-tax-bill-could-boost-or-shrink-your-refund 4mTNRYjfeHM4tQwNi7MkP6 Thu, 24 Jul 2025 13:57:00 +0000 <![CDATA[ Ask the Editor, June 27: Tax Questions on Disaster Losses, IRAs ]]> Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on paper checks, hurricane deductions, IRAs and timeshare losses (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. The IRS and Paper Checks

Question: I heard that the IRS will no longer accept paper checks from taxpayers after September 30. Is that accurate?

Joy Taylor: Yes and no. President Trump signed an executive order earlier this year mandating that the Treasury Department get rid of paper checks for recipients of benefits, tax refunds and other payments, effective October 1. He is ordering all federal departments and agencies to use electronic funds transfers, including direct deposit, prepaid card accounts and other digital payment options. That means that after September 30, the IRS should no longer be sending out tax refunds in the form of paper checks. There will be limited exceptions.

That executive order also discusses prohibiting people from mailing paper checks to the government, such as when a taxpayer sends in a tax payment via paper check to the IRS. However, it doesn’t appear that the September 30 deadline applies to government receipts, as it does to government disbursements. Instead, the White House executive order doesn’t set a date, but uses the phrase “as soon as practicable” for this purpose.

2. Traditional IRA and Roth IRAs

Question: Can an individual have a traditional IRA and a Roth IRA at the same time, and can they make contributions to both accounts in the same year?

Joy Taylor: Yes, an individual may have a traditional IRA and a Roth IRA at the same time, and the owner can make contributions to both in the same year. However, the aggregate amount of contributions to those IRAs (traditional and Roth) in a year is limited. For 2025, the IRA contribution limit is $7,000 ($8,000 if you are 50 or older). For example, if you are 55 and contribute $3,000 to a traditional IRA in 2025, you can only contribute up to $5,000 to a Roth IRA in 2025.

Note that you must also have compensation, such as wages or self-employment earnings. And there is an income ceiling on making contributions to a Roth IRA. For 2025, the ability to make contributions to a Roth IRA phases out at adjusted gross incomes of $236,000 to $246,000 for joint filers and $150,000 to $165,000 for single filers. This income ceiling doesn't apply to contributions to a traditional IRA.

3. Prior-Year Hurricane Losses

Question: I live in Florida, and in 2022, my home suffered serious damage from Hurricane Ian. I’ve heard the government has recently changed the deduction for disaster losses. But I already filed my 2022 tax return in early 2023. How can I take advantage of this change?

Joy Taylor: Personal casualty losses can be deducted to the extent the losses are attributable to federally declared disasters, such as hurricanes, earthquakes, wildfires, blizzards or flooding, that affect a wide area. Individuals can deduct personal losses on their Form 1040 to the extent not reimbursed by insurance. Your loss is equal to the smaller of the damaged property’s adjusted basis or decline in value, less any insurance proceeds you received or expect to receive.

Legislation passed by Congress last year has tax easings similar to those given to victims of federally declared disasters in 2018-2020. The relief generally applies to disasters that took place in 2021-2024. This would include damage to your home from Hurricane Ian. The law lets individuals deduct personal disaster losses even if they don’t itemize on Schedule A. You can write off uninsured personal losses in excess of a $500 threshold without regard to the "10% of adjusted gross income" offset that generally applies to disaster loss deductions. This net loss is treated as an additional standard deduction for nonitemizers.

Since you have already filed your 2022 Form 1040, you can amend it to take the more generous disaster loss deduction by filing Form 1040-X. Note that you generally have three years from the date you filed your original return to file Form 1040-X to amend your return. If you filed your original return before the April 15 due date, then you have three years from the original April 15 due date to file an amended return. For example, if you filed your 2022 return on March 24, 2023, you have until April 15, 2026, to amend it. When amending your return, you would use Form 4684 to calculate the loss. Follow the instructions on Form 4684 for reporting a “qualified disaster loss.”

4. Selling a Timeshare

Question: I own a timeshare, and I am thinking of selling it. Will I have to pay federal income tax on the sale?

Joy Taylor: Most people who sell a timeshare sell it at a loss. Losses from sales of timeshares held for personal use are nondeductible. If you’re one of the lucky few that sells a timeshare at a profit, you will have capital gain equal to the sales price less your tax basis in the timeshare. Different tax rules apply to sales of timeshares held for rental or mixed personal/rental use.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to inherited IRAs, energy upgrades made to a home and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

1. Hobby Loss or Business Loss

Question: I own a dog-breeding business, and for the past few years, I have reported losses from the business on Schedule C of my Form 1040. What are the odds that the IRS will audit my return?

Joy Taylor: The odds of an IRS audit are quite low for most people. In recent years, the IRS has audited significantly less than 1% of all individual tax returns, and we expect that number will remain low for the foreseeable future. However, there are some audit red flags that could increase the chance of drawing unwanted attention from the IRS. One of those is deducting a hobby loss. Filers who report multiple years of big losses on Schedule C of Form 1040, run an activity that sounds like a hobby, and have lots of income from other sources that the losses offset are prime IRS audit targets.

To deduct a Schedule C loss, you must show that the activity is a business. It needs to be conducted with continuity and regularity in a businesslike manner, and you must have a reasonable, good-faith objective of making a profit from it. The IRS’s regulations provide a safe harbor. If your activity generates profit in three out of five consecutive years (or two out of seven years for horse breeding), the law presumes you’re in business to make a profit unless the IRS establishes otherwise. The hobby-business analysis is trickier if you can’t meet the safe harbor. That’s because the determination of whether an activity is properly categorized as a hobby or a business is then based on each taxpayer’s facts and circumstances. The IRS and the courts generally look at the following nine factors (note that no one factor is determinative, but some are routinely given more weight):

Expertise of the taxpayer and advisers
Manner in which one carries on the activity
Time and effort devoted to the venture
Expectation that assets used in the activity may appreciate
History of income and losses (the more years of large, consecutive losses, the harder it is to demonstrate a profit motive unless the activity is still in its start-up stage)
Amount of occasional profits
Success in carrying on other activities
Elements of personal pleasure or recreation that one gets from the activity
Whether the taxpayer has substantial income from other sources, such as wages, other business income, retirement income or investment income

For more information, here is an online story that I wrote on the hobby loss rules

2. I Bonds and College Education

Question: I have owned Series I bonds for many years. I heard that if I cash in the bonds and use the bond proceeds for higher education for my children, then I won’t have to pay tax on the interest when I cash my I bonds in. Is that true?

Joy Taylor: I bond buyers have a choice when they acquire the bonds. They can pay federal income tax each year on the interest earned or defer the tax bill to the end. Most people choose the latter, which is what I assume you did. Thus, you would generally report interest income on your Form 1040 for the year the bonds mature or when they are cashed in, whichever comes first.

One way to avoid paying federal income tax on accrued I bond interest is to cash in the bonds on or before the maturity date and use the proceeds to help pay for college or other higher education expenses for you, your spouse or your dependent. Note that there are lots of hurdles to jump over to be able to take advantage of this tax perk. Here are some of them:

You must have purchased the bonds after 1989 when you were at least 24 years old.
The bonds must be in your name only.
The bonds must be redeemed to pay for undergraduate, graduate or vocational school tuition and fees for you, your spouse, or your dependent (grandparents cannot use this tax break to help pay for their grandchild’s college tuition unless the grandparents can, on their Form 1040, claim the grandkid as a dependent).
Room and board costs aren’t eligible for the exclusion.
The exclusion is subject to strict income limits. For 2025, it begins to phase out at modified adjusted gross income (MAGI) of more than $149,250 for joint filers and completely phases out at MAGI of $179,250. For all other filers, the phase-out range for 2025 is $99,500 - $114,500. These figures are adjusted for inflation each year, so they would be higher for 2026 and so forth. MAGI for this purpose starts with the AGI on line 11 of your Form 1040 (figured without taking into account any I-bond interest exclusion). Then you add back any tax breaks from working abroad, the exclusion for employer-provided adoption assistance and any deductions for student loan interest.

If the proceeds from all I bonds cashed in during the year exceed the qualified education expenses that you pay for the year, the amount of I bond interest you can exclude is reduced proportionally. You would use IRS Form 8815 to compute your MAGI and the amount of any I-bond interest exclusion that you would be entitled to.

3. Medicare Premiums and IRMAA

Question: How do I calculate MAGI to determine whether I owe an income-related monthly adjustment amount (IRMAA) on top of my basic monthly Medicare Part B and D premiums? Is the untaxed portion of Social Security benefits added back in for this purpose?

Joy Taylor: True to the complexity of the federal tax code, the definition of MAGI often differs, depending on what it is used for. MAGI for purposes of determining IRMAA for Medicare purposes is your adjusted gross income shown on line 11 of your Form 1040 plus any tax-exempt interest income. As a result, the untaxed portion of your Social Security benefits is not included in MAGI.

If you'd like to learn more, here is a link to an explainer I wrote on modified adjusted gross income (MAGI).

About Ask the Editor, Tax Edition

We have already received many questions from readers on topics related to inherited IRAs, Roth IRA conversions, responding to an IRS tax notice and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

1. Legislative forecast

Question: Now that the House passed the One Big Beautiful Bill, when will the Senate pass it?

Joy Taylor: In the wee hours of May 22, the House passed its One Big Beautiful Bill on a 215-214 vote. The proposal would extend many of the expiring tax provisions in the 2017 Tax Cuts and Jobs Act and enhance them in several instances, provide brand new tax breaks, repeal clean-energy credits for individuals and businesses, and make Medicaid cuts to offset some of the bill’s cost.

It’s now time for the Senate’s turn. And the process to passage in the upper chamber won’t be easy. Republicans senators are already saying they will make changes to the package. For example, some don’t like the extent of the Medicaid cost reductions, others want certain business tax changes to be made permanent, some oppose big cuts to clean-energy credits, and the list goes on. There is also the impact on the federal deficit. The bill is estimated to hike the deficit by $2.8 trillion over 10 years. After the Senate makes its changes, the House would then have to approve them.

Republicans are pushing to get a finished bill to President Trump by July 4, but this compressed time frame seems unlikely. A more likely scenario is for a final Senate vote by late July.

2. Impact on Muni bonds

Question: Does the House-passed tax bill make interest on state and local bonds (Munis) taxable?

Joy Taylor: No. The tax break is safe for now. Interest earned on Munis is tax-free for federal income tax purposes. Some Republicans floated the idea of repealing the interest exemption as an option for raising revenues to help offset the cost of other proposed tax relief in the bill. But a lobbying push by affected groups and industries helped to save the break. Also, states and local governments rely on Munis to fund all sorts of infrastructure projects.

Question: I receive Social Security benefits, and I have to pay federal income tax on a portion of the benefits. Does the House-passed bill make Social Security benefits tax-free?

Joy Taylor: Many Social Security recipients pay federal income tax on up to 85% of their benefits, depending on their provisional income. President Trump vowed to end the tax. But the process that Republican lawmakers are using to pass their bill by circumventing the 60-vote filibuster rule in the Senate won’t allow this income tax change to Social Security benefits. So the answer to your specific question is that your Social Security benefits will be taxed as usual for federal income tax purposes.

However, congressional Republicans found an alternative means of providing tax relief for seniors. The House-passed bill would give a $4,000 bonus deduction to filers who are age 65 and up. Individuals 65 and older who take the standard deduction would add the extra $4,000 to their standard deduction amounts. Married couples with both spouses who are 65 or older would be able to deduct $8,000. Filers who are 65 or older and itemize on Schedule A would also get the deduction. The proposal would first take effect on 2025 returns filed next year and end after 2028.

But not every senior would qualify for this bonus deduction. There is an income limit. The deduction would begin to phase out for taxpayers with modified adjusted gross incomes over $150,000 on joint returns and $75,000 on single and head-of-household returns.

4. Who can claim the $4,000 bonus deduction?

Question: My wife are I are both retired federal employees. We receive a Civil Service Retirement System (CSRS) pension, but we do not receive Social Security benefits. Will we be able to claim the proposed $4,000 bonus deduction that is included in the House-passed bill even though we do not receive Social Security benefits?

Joy Taylor: Yes, if the One Big Beautiful Bill is eventually enacted, and you are age 65 or older, you would be able to claim the bonus $4,000 deduction (per spouse), subject to the income phaseouts discussed above. You do not have to receive Social Security benefits to take the deduction.

About Ask the Editor, Tax Edition

We have already received many questions from readers on topics related to tax basis in a home, IRA contributions and distributions, and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

1. The annual exclusion amount for gifts

Question: What is the annual exclusion amount for gifts made in 2025?

Joy Taylor: The annual gift tax exclusion is $19,000 per donee this year. This means in 2025, you can give up to $19,000 per person without paying federal gift tax, tapping your lifetime estate and gift tax exemption, or filing a federal gift tax return. Here’s an example. Say you have two sons and three grandchildren, and you want to gift the maximum amount to each of your relatives, including your son’s spouses, without having to file a gift tax return in 2025. The most you can give is $19,000 to each relative. That’s $133,000 in excludable gifts.

2. Gifts over the annual exclusion amount

Question: I am planning to gift my son $100,000 this year. Do I have to pay federal gift tax on this?

Joy Taylor: It is unlikely that you will have to pay any federal gift tax on this gift to your son. Although the $100,000 gift would exceed the $19,000-per-donee annual gift tax exclusion amount, you will not owe any federal gift tax, provided that your total lifetime gifts don’t exceed the lifetime estate and gift tax exemption, which for 2025 deaths is $13,990,000. You will have to file a federal gift tax return on Form 709 to report the gift to the IRS because the gift is over the $19,000 annual exclusion amount.

3. Stepped-up basis

Question: My spouse and I jointly own our home, which has substantially appreciated. How do the stepped-up basis rules work if one of us dies?

Joy Taylor: Under the tax law, a decedent’s unrealized gains aren’t hit with federal income tax at death, and heirs step up their basis in the assets they receive, equal to fair market value on death. With regards to your house, if you don’t live in a community property state, half of the home will get a step-up in basis upon the death of the first-to-die spouse. For example, let’s say you and your spouse bought a home for $100,000 many years ago, and it is worth $750,000 on the date the first of you dies. The surviving spouse’s basis in the home would be $425,000 (his or her half of the original $100,000 basis plus half of the deceased spouse’s $750,000 date-of-death value). The rules are more generous if the house is held as community property. The entire basis is stepped up to fair market value when the first spouse dies.

4. Estate taxes and the house bill

Question: Does the one big, beautiful House bill extend the larger lifetime estate tax exemption?

Joy Taylor: Currently, the federal lifetime estate and gift tax exemption for 2025 deaths is $13,990,000, and the highest estate tax rate is 40%. After 2025, the $13,900,000 figure is slated to drop to about $7 million or so unless Congress passes legislation to extend the higher amount. That is because the higher lifetime estate tax exemption is one of the provisions in the 2017 Tax Cuts and Jobs Act that was made temporary.

The one big, beautiful bill passed by the House would not only make the larger lifetime estate and gift tax exemption permanent but would also increase it. If the bill is enacted, the lifetime estate and gift tax exemption amount for decedents dying in 2026 would be $15 million. And this figure would increase for inflation each year.

About Ask the Editor, Tax Edition

We have already received many questions from readers on topics related to inherited IRAs, hobby losses, IRS payment letters and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

1. Capital gains tax rates

Reader Question: What are the federal capital gains tax rates for 2025? And what are the income cut-off points for the various rates?

Joy Taylor:
Long-term capital gains, which are profits from the sale or exchange of capital assets held for more than a year, get favorable federal tax rates. They are taxed at 0%, 15% or 20%. Prior to 2018, the determination of which rate you'd qualify for was based on your tax bracket. Through the end of 2025, the rate is based on set income thresholds, which are adjusted annually for inflation. Note that these same favorable rates also apply to qualified dividends.
For 2025, the income thresholds are:

The 0% rate applies at taxable incomes up to $48,350 for single filers, $64,750 for head-of-household filers and $96,700 for joint filers.
The 20% rate starts at $533,401 for single filers, $556,701 for head-of-household filers and $600,051 for joint filers.
The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

Though most long-term capital gains are taxed at the 0%, 15% or 20% rates discussed above, there are a couple of exceptions. Long-term capital gains from the sale of art, antiques, coins, historical documents and other collectibles have a 28% top rate. Depreciation recapture from real estate sales is taxed at as much as 25%. Short-term capital gains, which are profits from the sale or exchange of capital assets held for 12 months or less, are taxed at ordinary income rates.

2. The 0% tax rate

Reader Question: Can you explain how to qualify for the 0% federal tax rate on long-term capital gains and qualified dividends?

Joy Taylor:
For 2025, if taxable income other than long-term gains and dividends doesn't exceed $48,350 on single-filed returns, $64,750 on head-of-household returns or $96,700 on jointly filed returns, then qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal income tax rate until they push you over the threshold amounts.

These figures are a bit lower for 2024 tax returns, since they are adjusted annually for inflation: $47,025 for single filers, $63,000 for head-of-households, and $94,050 for joint filers. Note that although these 0%-rate gains might not be taxed at the federal level, they do increase adjusted gross income. Also, some states tax capital gains as ordinary income.

Here are three scenarios to illustrate the 0%-rate rule. In all three scenarios, you have a married couple with $18,000 of qualified dividends and long-term capital gains in 2025, which are included in taxable income.
In the first scenario, the couple has $77,000 of taxable income.
The full $18,000 of gains and dividends is taxed at the 0% rate.
In the second scenario, the couple has taxable income of $104,000.
$10,700 of the gains and dividends ($96,700 - ($104,000 - $18,000)) gets the favorable 0% tax rate, and $7,300 is taxed at the 15% rate.
In the third scenario, the couple has $120,000 of taxable income.
The 0% rate doesn't apply, and the full $18,000 of gains and dividends is taxed at 15%.

3. Capital gains indexing

Reader Question: Is there any effort in Congress to provide some sort of inflation indexing for capital gains?

Joy Taylor
As you might be aware, the White House and congressional Republicans are negotiating a tax package that would extend the expiring provisions in the 2017 Tax Cuts and Jobs Act and make some other tax changes.

There has been no talk about changing the taxation of capital gains, with one exception. Free-market groups and some Republican lawmakers would like to see capital gains indexed to inflation each year. Essentially, if this concept were enacted, taxpayers could increase their tax basis in capital assets by the rate of inflation between the purchase date and the time of sale. For example, say you bought stock in early 2010 for $10,000 and sold it in January 2024 for $35,000. Absent indexing, you would have a $25,000 long-term capital gain. With indexing, using the Chained CPI inflation measure, your basis in the stock would jump to $13,740, making your gain $21,260, thus lowering the amount of capital gain tax you would pay.

Senator Ted Cruz (R-TX), a long-time proponent of capital gains indexing, has introduced a bill that would allow inflation indexing for purposes of calculating a capital gain or loss. His proposal would use the gross domestic product deflator as the index for measuring inflation.

It's hard to know right now whether capital gains indexing would make it into the tax package. There are lots of complexities associated with it, including choosing the appropriate index; tax basis doesn’t remain static over time; and indexing would add to the federal debt. And we don't know where President Trump stands on the idea. During his first term as president, he was all over the board. He touted the idea several times, but then also nixed it.

About Ask the Editor, Tax Edition

We have already received many questions from readers on topics related to gifts, tax credits for installing solar panels in a home and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

1: QCDs and 401(k)

Reader Question: Can I make a qualified charitable distribution (QCD) from my 401(k) this year?

Joy Taylor, Editor, The Kiplinger Tax Letter
No, QCDs cannot be done from a 401(k) or other workplace retirement plan. A QCD can only be done from an IRA.
People age 70½ and older can transfer up to $108,000 in 2025 from a traditional IRA directly to charity. QCDs can count as all or part of your required minimum distribution (RMD), but they are not taxable, and they are not added to your adjusted gross income. The QCD strategy is a good way to get tax savings from charitable gifts for taxpayers not itemizing because of higher standard deductions.

2: How to do a QCD

Reader Question: Someone told me that the only way I can do a QCD is for my IRA custodian to directly transfer the money from the IRA account to the charity. Is this true?

Joy Taylor, Editor, The Kiplinger Tax Letter
It depends on the IRA custodian. It is true that only transfers from your IRA directly to charity are considered QCDs, but different IRA custodians have their own procedures for complying with this. Some will require that the check go directly from the custodian to the charity. Others will, at the account owner’s request, have the check written from the IRA account and send the check to the IRA owner to forward to the charity. Vanguard, for example, allows this second approach. Both procedures work for QCDs. What is not acceptable is for the custodian to write the check to the IRA owner, who then deposits the money and writes a check from his or her own account to the charity.

3: Charitable Gift Annuity

Reader Question: I’ve been receiving requests from my alma mater about doing a QCD through a charitable gift annuity. I thought QCDs could only go to a section 501(c)(3) charity. Have the rules changed?

Joy Taylor, Editor, The Kiplinger Tax Letter
As a general rule, in a QCD, the money must generally go to a section 501(c)(3) organization. The 2022 SECURE 2.0 legislation provided an easing to this. It allows IRA owners to do a one-time (not annual) QCD of up to $55,000 for 2025 through a charitable gift annuity, charitable remainder unitrust or a charitable remainder annuity trust. Many private colleges with charitable gift annuity programs are touting the QCD option. If you already did this in 2023 or 2024, you can’t do it again.

4: Deductible IRA Contributions

Reader Question: I am working and made a tax-deductible contribution of $3,500 to my traditional IRA in 2024. I also did a QCD that year. My accountant told me that I don’t get the full advantage of the QCD because I also contributed to my IRA. Is that true?

Joy Taylor, Editor, The Kiplinger Tax Letter
Yes. There’s a special rule if you do a QCD and you make tax-deductible contributions to a traditional IRA after 70½. Essentially, these post-70½ contributions reduce your allowable tax-free QCD amount until used up. Post-70½ deductible contributions to a SEP or SIMPLE IRA aren’t affected.
Let’s take a simple example:
A 75-year-old working man is planning to do a QCD for the first time in 2025. For 2021, 2022, 2023 and 2024, he made tax-deductible contributions to his traditional IRA totaling $23,000. In 2025, the man does a QCD and transfers $20,000 from his IRA directly to charity. He would owe income tax on the full $20,000 because it is less than the $23,000 of post-70½ tax-deductible IRA contributions. Let’s say that in 2026, he then transfers another $15,000 to charity directly from his IRA. $12,000 will be a nontaxable QCD, and $3,000 will be treated as a normal distribution.

5: What's the maximum QCD for spouses?

Reader Question: My wife and I want to max out donations from our IRAs to charity this year. What is the maximum QCD we can make for 2025?

Joy Taylor, Editor, The Kiplinger Tax Letter
$108,000 per IRA owner. Since you are married, you and your spouse can each potentially give up to $108,000 in QCDs from your separate IRAs, making the maximum QCD $216,000, provided each of you has substantial amounts in your IRAs. But let’s say you have a $70,000 balance in your IRA, and your wife has an IRA worth $1.2 million. In this situation, your QCD cap is limited to $70,000, and your wife’s QCD cap is limited to $108,000. Your wife won’t be able to make a QCD of $146,000 to make up for the deficit.

About Ask the Editor, Taxes

We have already received many questions from readers on topics related to charitable contributions, gifts and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

1. Assess investment tax efficiency

Your tax return can offer a wealth of insight into how your investments are impacting your overall tax liability.

Capital gains and losses. If you sold investments during the year, your return will reflect realized gains or losses. This information is essential when considering strategies such as tax-loss harvesting, which can help offset future gains, or when thinking about rebalancing out of highly concentrated positions.
Interest and dividend income. Form 1040 and Schedule B (Interest and Ordinary Dividends) detail the income generated by your accounts. If your taxable accounts are generating high levels of non-qualified dividends or interest, it may be worthwhile to revisit how your assets are allocated across taxable and tax-advantaged accounts.
Maximize tax-advantaged account contributions. If you’re not yet maxing out your contributions to a 401(k), health savings account (HSA) or individual retirement account (IRA) on an annual basis, your return can help identify room for increased savings. In some cases, a Roth IRA or Roth 401(k) may be appropriate, particularly for those in lower tax brackets or earlier in their careers.
Review asset location strategy. Your return can also help clarify whether the right assets are held in the right types of accounts. Income-generating assets, for instance, are often best placed in tax-deferred or tax-exempt vehicles, while tax-efficient investments can typically be held in taxable accounts to help minimize your overall tax burden.

2. Optimize giving and medical expense strategies

Your deductions also serve as an opportunity to be more strategic with charitable giving and health care planning.

Charitable contribution planning. If you typically give to charitable organizations but do not itemize deductions, you may benefit from bunching multiple years of contributions into a single tax year. Donor-advised funds (DAFs) and gifts of appreciated securities can further enhance both tax efficiency and philanthropic impact.
Medical expense timing. If your qualified medical expenses approach the deductibility threshold — 7.5% of adjusted gross income — consider consolidating planned procedures or care costs into a single tax year to maximize their potential deductibility.

3. Refine cash flow and withholding management

Beyond deductions and investment income, your tax return offers valuable insights into your cash flow management. Understanding your options is especially important in times of economic uncertainty.

Evaluate withholding and estimated payments. An unexpected balance due or an overly large refund may indicate that your withholding or estimated tax payments are out of sync with your actual income. Adjusting now can help avoid surprises — and penalties — when you file your 2025 return.
Reinvest surplus income strategically. If you’re receiving dividend or interest income that you do not rely on for living expenses, reinvesting that income can help build wealth over time. This approach supports dollar-cost averaging, a strategy that can reduce the impact of market volatility while building your portfolio for the long term.

4. Begin planning for next year now

Your recent tax return offers a clear view of where you were financially in 2024. Leveraging it thoughtfully allows you to chart a more intentional course forward.

For example, if you’re able, consider frontloading contributions to accounts like IRAs or 529 plans early in the year. This allows your investments more time to grow and helps you take full advantage of tax benefits.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

You can use this moment to meet with your financial planner. Together, you can work to ensure your investment and tax strategies are working in harmony — and that your financial plan is evolving alongside your life and your goals.

We believe tax planning should never be a once-a-year exercise. When integrated into your broader financial strategy, it can become an engine for long-term growth and greater peace of mind.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

]]> https://www.kiplinger.com/personal-finance/how-to-use-your-tax-return-as-a-financial-planning-tool LGCEFgatwwwoFdB6NXBGem Wed, 07 May 2025 09:35:00 +0000 <![CDATA[ Ask the Editor, May 4 — Questions on Tax Deductions, Losses ]]> Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at five questions on tax deductions and losses. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1: Theft loss

Q. I was a victim of internet fraud and lost a lot of money. Can I claim this loss on my Form 1040?

A. Depending on the circumstances, this might be a deductible theft loss that you can claim on Schedule A of your 1040 if you itemize. A deductible theft loss must be incurred in a transaction entered into for profit or in a trade or business. Personal theft losses not connected with these two factors aren’t deductible through 2025. The analysis is based on facts and circumstances.

The IRS released a legal memorandum in mid-March that can help with this analysis. In the memo, IRS lawyers addressed five scenarios involving common internet scams and ruled whether a victim could deduct a theft loss. In each fact pattern, the victim owned IRAs or taxable accounts and transferred funds from the accounts to the scammer or to new accounts that the scammer controlled. Essentially, individuals who were victims of kidnapping or romance scams can’t deduct their theft losses because they are personal. The result is more favorable for victims of scams in which the scammer convinced them that their existing account was compromised or that they could put funds into an investment with better returns.

You can read the IRS memo [opens PDF]. You can also read more on the subject in IRS Publication 547, Casualties, Disasters and Thefts. Additionally, I would suggest that you consult with a tax professional, such as a CPA, before making any decision as to the deductibility of your loss.
— Joy Taylor, Editor The Kiplinger Tax Letter

2: Leasing a car for business

Q. I am self-employed. I lease a car that I use 80% for business and 20% for personal use. Can I deduct my car lease payments on Schedule C of my Form 1040?

A. Yes. If you lease a vehicle for use in your business, you can opt to use actual expenses to figure your deductible expense. You can deduct the part of each lease payment that is for business. There’s also this oft-forgotten rule: If you lease a car worth more than a certain value ($62,000 in 2025), you must pay income tax for each year of the lease term on an amount shown in IRS tables. The extra income partially offsets the lessee’s tax deduction of the lease payments and is intended to approximate the squeeze on buyers from the cap on depreciation. Note that you don’t add the amounts to your income when filling out your tax return. Instead, you reduce the size of your deduction for the lease payments on the vehicle.

Here’s a simple example.
You’re self-employed and in 2025, you lease a car for use in your business that is valued at $71,000. You must reduce the deduction for the lease payments on Schedule C of your Form 1040 each year by the amount shown in Table 3 of IRS Revenue Procedure 2025-16 [opens PDF]. If you use a leased car in business 80% of the time, you can only deduct 80% of the lease payments, and you would include 80% of the numbers in Table 3 of Revenue Procedure 2025-16 as a reduction to your deductible lease payments.

IRS Publication 463, Travel, Gift and Car Expenses, delves into these rules in more detail.
— Joy Taylor, Editor The Kiplinger Tax Letter

3: Qualified Business Income (QBI) deduction

Q. The 20% qualified business income deduction is set to expire after 2025. Do you think Congress will extend this tax write-off?

A. Yes, it’s quite likely that the qualified business income (QBI) deduction will be extended if Congress is able to pass its large tax, border security and energy bill this year.

Self-employed people, independent contractors and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their QBI, subject to limitations for individuals with taxable income in 2025 of more than $394,600 for joint filers and $197,300 for single filers and head-of-household filers. (The 2024 amounts are $383,900 and $191,950.)

This deduction ends after 2025, unless Congress acts. It was first enacted in the 2017 Tax Cuts and Jobs Act to provide some federal income tax parity between C corporations, which are taxed at a 21% rate, and pass-throughs, in which the individual owners pay income tax on earnings up to a 37% tax rate. Republican lawmakers want to extend the QBI deduction. And they have lots of support from lobbying groups representing Main Street businesses.
— Joy Taylor, Editor The Kiplinger Tax Letter

4: Deduction for rental profit

Q. I own rental homes and generate a profit from them that I report on Schedule E of my 1040. I heard that I can get a tax deduction for 20% of the profit. Is that true?

A. It depends. Rental income reported on Schedule E of the Form 1040 may, in some cases, be eligible for the 20% qualified business income deduction (discussed above). The IRS’s regulations say the rental activity must generally rise to the level of a trade or business, a standard which is based on each taxpayer’s particular facts and circumstances. Alternatively, there is a safe harbor if at least 250 hours a year of qualifying time are devoted to the activity by the taxpayer, employees or independent contractors. Time spent on repairs, collecting rent, negotiating leases and tenant services counts. Taxpayers who use the safe harbor must meet strict recordkeeping requirements and attach an annual statement to their tax returns. Meeting the safe harbor will let you treat the rental activity as a trade or business for QBI purposes. Note that you would take the QBI deduction on line 13 of your Form 1040 after completing Form 8995 or 8995-A.
— Joy Taylor, Editor The Kiplinger Tax Letter

5: Home office deduction

Q. My employer closed its office, and I now work fully remote from home for that employer. Can I claim the home office deduction if I itemize on Schedule A of the Form 1040?

A. No. Prior to 2018, certain employees could deduct the cost of home office expenses as unreimbursed employee costs included in Schedule A miscellaneous itemized deductions, subject to the 2%-of-adjusted-gross-income threshold. But the 2017 Tax Cuts and Jobs Act repealed this group of tax breaks through the end of 2025. We don’t know yet whether this prohibition on deducting employee business expenses will get extended past 2025.

The home office deduction is still available to self-employed people or independent contractors who file Schedule C with their 1040 and use a room or space in their home or apartment exclusively and regularly as their principal place of business. If you are self-employed and qualify for the write-off, there are two ways to figure the deduction. You can allocate your actual costs on Form 8829. Or you can use a simplified option by deducting $5 per square foot of space used exclusively for business, up to 300 square feet, resulting in a $1,500 maximum write-off.
— Joy Taylor, Editor The Kiplinger Tax Letter

We have already received many questions from readers on topics related to inherited IRAs, gifts, qualified charitable contributions and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about a tax topic. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

Q1: Unused Funds

We funded a 529 college savings plan for my son. We used money in the account for his college. He is now done with school, and there are still unused funds in the 529 account. What can we do with this money without paying tax on it?

If you funded a 529 plan, and the beneficiary decides not to go to college, or he or she did go to college, and there are funds remaining at the end, there are several tax-free options for using the leftover money:

Keep the funds in the account for the beneficiary’s grad school, etc.
Use the 529 money to pay for certain apprentice programs for the beneficiary.
Roll over leftover funds to a 529 plan for another family member’s education needs.
Use up to $10,000 to help pay off the beneficiary’s college debt. It’s important to note that this $10,000 is a lifetime limit, not an annual limit. 529 distributions for student loan repayments that exceed $10,000 are taxable in part to the extent of the excess and are also subject to a 10% penalty.
Roll over funds from a beneficiary’s 529 plan to an ABLE account for a disabled beneficiary or the beneficiary’s disabled siblings.
Some excess 529 funds can be transferred tax-free to a Roth IRA for the 529 beneficiary in a direct trustee-to-trustee transfer. There are key rules to meet: The 529 account must have been open for at least 15 years, with the same beneficiary. There is a $35,000 lifetime cap. 529 contributions made in the prior five years are ineligible for the transfer. And annual 529 distributions for this purpose can’t exceed the annual contribution limit for Roth IRAs, which is $7,000 in 2025.

Note that any actual contributions for the year made to any IRA owned by the beneficiary count against this limit. For example, let’s say a 529 plan beneficiary contributes $2,000 to his traditional IRA in 2025. Only $5,000 of leftover 529 funds can be transferred to his Roth IRA in 2025.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q2: Off-Campus Housing

My daughter is currently a sophomore in college. Next year, she and some friends are planning to live in an apartment off-campus. Can I use 529 funds to pay for her share of the rent, utilities and food?

Distributions from 529 plans used for college are tax-free. Eligible expenses include the cost of room and board for students enrolled at a college or university at least half-time, tuition, books, supplies, fees, computers and internet access. 529 funds can be withdrawn tax-free to cover off-campus housing, food and utilities, but the distribution amount cannot exceed the room and board allowance that the college includes in the cost of attendance. You should be able to get this figure from the college’s website.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q3: Study Abroad

Can I use 529 funds to pay for a college student’s studies abroad?

In many cases, yes. A 529 plan can be used for any college that participates in the U.S. federal student aid program. If a student is enrolled in a U.S. college and chooses to study abroad through the school’s program for a semester or two, the study-abroad program will be 529-eligible, provided the U.S. college is eligible and the college accepts the study-abroad credits. If the child decides to enroll in a non-U.S. college for his or her full college education, then that foreign university must participate in the U.S. federal student aid program. Believe it or not, many foreign colleges do participate and would therefore qualify as eligible schools for 529 purposes.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q4: Funding a 529 Plan

I am currently taking required minimum distributions (RMDs) from my traditional IRA. Can I roll over part of that RMD tax-free to fund a 529 plan for my granddaughter?

Unfortunately, there is no tax-efficient way to use money in your IRA to fund a 529 plan. So, for example, if you want to use your RMD money to put into a 529 account for your granddaughter, you will be treated as first receiving the RMD, which would be all or partially taxable to you, and then making a post-tax contribution to the 529 plan.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q5: Refund from the University

I used 529 funds to pay for my son’s college tuition and board. My son received a check from the college refunding some of the amount that was paid. Is that amount taxable to me?

The tax laws give relief in this situation, provided you act in a timely manner. Tax legislation enacted in 2015 waives tax and penalties if, after a distribution is made from a 529 account, the student gets a refund from the college or university. To qualify for relief, you generally must redeposit the funds into the 529 account for the same beneficiary within 60 days. The recontribution is treated as principal.
— Joy Taylor, Editor The Kiplinger Tax Letter

We have already received many questions from readers on topics related to annuities, health savings accounts and much more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

]]> https://www.kiplinger.com/taxes/ask-the-editor-reader-questions-529-plans B66PwwCjxP9YcgVxkeXusV Fri, 25 Apr 2025 16:26:00 +0000 <![CDATA[ Ask the Editor: Reader Questions, April 18 — Amended Returns ]]> Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions related to amended returns, reverse mortgages and depreciation deductions. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

Q1: Amended returns

I mailed amended tax returns on Form 1040-X to the IRS in early January. They show up in the IRS system as received by the agency, but I have not yet received my refunds. Do you know when I might see my money?

The IRS is still lagging on processing amended returns. The delay began with the COVID-19 pandemic, and the IRS has not yet fully caught up. But the wait isn’t as bad as it used to be. The IRS says that it is now processing amended paper-filed returns that were received in January 2025, so you should see your refund shortly. Note that the IRS’s processing time is longer for paper returns with errors or paper returns that require special handling. You might want to check the IRS’s online tool, Where’s My Amended Return.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q2: Reverse Mortgages

I am planning to take out a reverse mortgage on my primary home. Will I have to pay federal income tax on the money that I receive in the transaction?

No. The payments you get from a reverse mortgage are treated as nontaxable loan proceeds, not income. Also, if you itemize, you cannot deduct, on Schedule A of the Form 1040, the interest you eventually pay because you are not using the reverse mortgage proceeds to buy, build or substantially improve the home securing the mortgage.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q3: Converted Rental Property

I bought a home in 2008 for $294,000 that I used as my primary residence. In 2014, when the property was valued at $225,000, I moved and converted the home to a rental property. I then used $225,000 to calculate depreciation on the rental property. I sold the home last year for $362,000. What is the tax basis for determining the gain on the sale of the rental home?

First, you were correct to use the $225,000 amount for figuring annual depreciation deductions when you converted your primary home to a rental property. Second, since you sold the rental property at a gain last year, your tax basis for determining your gain is the original cost of the home ($294,000) plus any amounts you paid for capital improvements, less depreciation that you deducted on the home. If you had sold the rental home for a loss, your basis starting point would have been the lower of your original basis ($294,000) or the value when you converted the home to a rental ($225,000).
— Joy Taylor, Editor The Kiplinger Tax Letter

Q4: Investment Subscription Costs

I am aware that I cannot deduct the fees I pay to my broker to manage my investments. However, can I deduct the costs of subscriptions to stock advice letters, some of which are quite expensive?

No. Unfortunately, you cannot deduct the cost of subscriptions to stock advice letters unless you use that information in your trade or business. This type of investment expense used to be deductible as a miscellaneous itemized deduction on Schedule A of the Form 1040 (subject to the 2%-of-adjusted-gross-income limit), but the 2017 Tax Cuts and Jobs Act temporarily eliminated that entire group of deductions through the end of 2025. It’s too soon to know whether you would be able to deduct the costs for 2026 and later years. Republican lawmakers are currently negotiating a big tax package that would extend many of the expiring provisions in the Tax Cuts and Jobs Act.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q5: Deducting One’s Time

Can a self-employed person deduct the value of his or her time on Schedule C of the Form 1040?

No. A self-employed person cannot deduct the value of his or her time. As the United States Tax Court said in a recent case, “labor performed by a taxpayer does not constitute an amount paid or incurred by him, and the taxpayer is not entitled to deduct the value of such labor.”

Also, if a self-employed person pays wages to himself or herself, he or she cannot deduct the wages on Schedule C because he or she isn’t employed by the business for tax purposes. The person can take withdrawals from his or her Schedule C business, but those withdrawals aren’t taxable and aren’t deductible.
— Joy Taylor, Editor The Kiplinger Tax Letter

We have already received many questions from readers on topics such as leasing a car for business use, what to do with unused funds in a 529 college savings plan, using U.S. savings bonds to pay for college and much more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Subscribers of The Kiplinger Tax Letter can ask Joy questions about a tax topic. You'll find full details of how to submit questions in The Kiplinger Tax Letter. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

]]> https://www.kiplinger.com/taxes/ask-the-editor-reader-questions-april-18-2025-amended-returns-property-deductions m5p63GSow9suGfHGj7gG7b Fri, 18 Apr 2025 11:33:00 +0000 <![CDATA[ Trump Plans to Terminate IRS Direct File program ]]> This tax season has been rife with disruptions and layoffs set off by the Trump administration, now the president reportedly plans to eliminate the IRS’ Direct File program. The program is available to over 30 million taxpayers this year.

The tax prep software, which is under scrutiny, was successfully piloted last year under the Biden administration and allows taxpayers to prepare and file their federal taxes for free with the IRS. However, Republican lawmakers and commercial tax preparation companies like H&R Block and Intuit’s TurboTax say the program is “wasteful” because there are already reputable third-party free filing options available.

It should be noted that the Federal Trade Commission (FTC) has previously flagged companies like H&R Block for pressuring people to overpay for tax prep services and making it harder to downgrade to cheaper filing options. Intuit’s TurboTax has also been cited for engaging in deceptive advertising practices, which have fooled consumers into believing they were eligible for “free” tax products and services.

GOP lawmakers allege that Direct File can create confusion for state taxpayers. Meanwhile, Elon Musk declared that he had “deleted” 18F, the digital services agency responsible for developing the IRS Direct File system in early February. More planned layoffs at the IRS could impact the program further.

The comments come despite favorable feedback from taxpayers who used Direct File. A study found that 90% of users rated their experience as positive and said the software was easy to use and trustworthy during the pilot.

Even though the federal deadline to file and pay 2024 taxes was April 15, taxpayers in 25 participating states have until Oct. 15, 2025, to file through IRS Direct File.

But the permanence of the Direct File remains largely uncertain under the Trump administration, sources say. Here’s what taxpayers had to say about the program.

Taxpayers are interested in Direct File

According to the Tax Policy Center, more taxpayers would like to use Direct File if the free tax-filing program is available in their state. Among those who filed a tax return last year:

73% of respondents across all age groups, education, and race said they would be interested in using Direct File if they were eligible for the program.
69% of those who paid to file taxes said they were interested in Direct File.
85% of people who filed for free last year said they would like to file directly with the IRS via Direct File.

Still, there was some hesitancy among respondents. Two-thirds of tax filers, or 68%, said they didn’t know enough about Direct File to feel comfortable using it. The study found that 88% said that their most recent filing method met their needs.

How many people used Direct File during its pilot?

For fiscal year 2023, over 140,000 tax filers with simple tax situations used Direct File across 12 states during its pilot, which ran from February 1 to April 20, 2024. According to an analysis by the Treasury Inspector General, more than 35,000 tax returns were rejected due to various reasons.

The rejections were mainly due to two reasons:

Mismatches between prior year adjusted gross income (AGI)
Inability to reconcile advance payments of the Premium Tax Credit (PTC). This was because the IRS did not include Form 8962 for the PTC in its Direct File pilot.

Why choose Direct File

picture of the IRS website — Direct File is accessible in Spanish and English, and can be accessed by smartphone, laptop, tablet, or desktop computer at directfile.irs.gov. (Image credit: Getty Images)

Last year, the IRS announced that Direct File would be a permanent option for filing federal tax returns as of the 2025 tax season.

“The clear message is that many taxpayers across the nation want the IRS to provide more than one no-cost option for filing electronically,” former IRS Commissioner Danny Werfel said in a statement.

As reported by Kiplinger, the program was expanded to residents of 25 states this year and could be used by as many as 30 million eligible taxpayers. The move to make Direct File permanent came after multiple lawmakers and organizations urged IRS leaders to renew the program.

Today, Direct File offers live support from IRS staff Monday through Friday from 7 a.m. to 10 p.m. ET. You can also file from your smartphone, tablet, or computer if your state is eligible. Assistance is offered in Spanish and English.

Separately, the IRS Free File also offers taxpayers the option to file their federal income tax returns directly with the agency. There’s one caveat: Your adjusted gross income (AGI) must be 84,000 or less to qualify.

IRS online Free File also offers eight private-sector partners you can choose to file with.

GOP lawmakers target Direct File

A report from the Economic Security Project found that Direct File could save taxpayers $8 billion in filing fees and an additional $3 billion in time costs each tax season. That’s $11 billion in savings.

Additionally, the analysis found that the program could spare more than 400,000 filers a year from enduring the stress of IRS correction proceedings and audits. Finally, Direct File could close long-standing credit gaps for people who unknowingly miss out on tax benefits like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).

Still, 29 GOP lawmakers urged President Trump to immediately end Direct File.

Mainly, some Republicans claim the program would cause taxpayers to miss their refunds or suffer penalties if they were unaware that they must file their state taxes separately from their federal taxes.

As reported by Kiplinger, tax preparation companies H&R Block and Intuit’s TurboTax have opposed the IRS launching a free tax preparation program.

Ending Direct File would be a gift for big corporations, said supporters of the free filing program.

The Institute on Taxation and Economic Policy (ITEP) characterized Trump’s plans to end Direct File as a move to ramp up private profits for big corporations that have lobbied to prevent the IRS from providing free filing options to taxpayers for years.

“Ending Direct File is another gift from this administration to large corporations, this time to the multibillion-dollar tax prep industry that wants to make money off of you filing your taxes,” said ITEP Executive Director Amy Hanauer. “This is yet another piece to the ongoing attack on the IRS at the benefit of the wealthy and exploitative tax preparers.”

What’s next for Direct File?

Elon Musk declared on his social media platform X that he had “deleted” 18F, the digital services agency responsible for developing the IRS Direct File system. The CEO of Tesla echoed sentiments from GOP lawmakers who alleged that the program would create confusion for state taxpayers and was a waste of government spending.

Direct File is expected to remain operational for the 2025 tax season, per Treasury Secretary Scott Bessent. As mentioned, taxpayers in 25 participating states have until Oct. 15, 2025, to file their 2024 federal tax return with IRS Direct File.

However, with layoffs threatening the IRS workforce, there is no telling if the program will be impacted. Internal sources have also told the Associated Press that the Trump administration plans to eliminate the program.

Stay tuned to our latest coverage on the matter on our live tax blog.

]]> https://www.kiplinger.com/taxes/will-irs-direct-file-continue-under-trump DpZcHhwERUHmpJMcXkcRbg Thu, 10 Apr 2025 17:07:20 +0000 <![CDATA[ Taxpayer Revolt? Why More People Are Avoiding Filing Taxes This Year ]]> If you feel less than enthusiastic about filing your federal income taxes this year, you're not alone. IRS filing data and a recent survey shed light on a growing trend: Many are hesitant to file taxes in 2025.

Ths tax season, the IRS has reported a notable downturn in tax return submissions compared to previous years.

Why? Possible reasons range from concerns about IRS workforce reductions to general economic uncertainty.

A March survey of 1,003 respondents conducted by Qualtrics on behalf of Intuit Credit Karma also revealed some interesting data points. Nearly a quarter of respondents felt less concerned about making errors on their tax returns this year, while almost half worried about receiving a timely refund.

Meanwhile, according to the survey, 17% of millennials have contemplated not filing at all. They reported a belief that audit risk has decreased due to recent downsizing at the IRS.

So, what does all of this mean for you? Here’s more to know.

Filing taxes 2025: Slowdown at the IRS

Since the start of the 2025 tax filing season on January 27, the number of returns processed by the IRS has fallen by 1.7% ( just over 1.2 million returns) compared to the same period in 2024.

That decline comes despite an average increase in refund amounts and suggests that significantly fewer taxpayers are filing early this year — or at all.

According to Bloomberg (paywall), former IRS Commissioner Charles Retitig relayed the following: “I know thousands of accountants, tax professionals, tax return preparers — and they’re all getting the question, ‘Why should I file my taxes? Why should I pay my taxes? My understanding is the IRS is going to be abolished.”

The impact? The IRS reportedly anticipates a $500 billion decrease in tax revenue this year. (That’s a more than 10% decline compared to last year.) That projected revenue loss is particularly striking compared to the $5.1 trillion collected by the IRS in 2024.

Some attribute the estimated shortfall to widespread disruptions caused by staff reductions and operational changes initiated by the Trump administration’s Department of Government Efficiency (DOGE), led by Elon Musk of Tesla and SpaceX.

Here’s what’s been happening that could be contributing to the tax-filing hesitancy this tax season.

DOGE IRS workforce cuts

As Kiplinger has reported, Trump’s DOGE has implemented substantial budget cuts at the IRS, resulting in significant staff reductions. Some say the cuts have impacted the tax agency's ability to process returns efficiently and enforce compliance.

For more information, see IRS Layoffs Cause Doubt, Fear This Tax Season.

As mentioned, reports also suggest the IRS could face a potential revenue drop of as much as half a billion dollars due to some taxpayers betting on the tax agency's diminished audit capabilities.

Some experts caution that, going forward, these cuts could severely hamper the IRS's functionality, weaken the government's ability to collect taxes effectively, and lead to processing delays.

Other things to keep in mind:

Republican lawmakers have proposed abolishing the tax agency. Trump has floated the idea of replacing the IRS with an ERS (External Revenue Service) and eliminating income taxes in favor of tariffs.
Trump’s pick for IRS Commissioner, former congressman and auctioneer Billy Long, still hasn’t been Senate-confirmed.

Egg prices and economic uncertainty: Recession ahead?

carton of brown eggs — *Eggs have become incredibly expensive in 2025.* (Image credit: Getty Images)

Beyond IRS-specific issues, many people in the U.S. are grappling with significant economic challenges, including inflation, low or stagnating wages, and rising costs.

For instance, egg prices have soared to $10 or more per dozen in some areas, and consumer confidence is down. Additionally, economic uncertainty in 2025 has intensified partly due to President Donald Trump's tariff policies.

Many experts warn that tariffs (i.e., taxes on imports that often impact consumer prices) could slow economic growth and increase recession risks. Some point to tariffs as a major factor behind reduced spending and consumer pessimism.

Though it’s worth noting that some U.S. economic forecasts remain optimistic.

Meanwhile, additional surveys find many taxpayers are simply overwhelmed when it comes to filing taxes. The tax code and tax filing process can be incredibly complicated.

Additionally, many who rely on tax refunds to pay bills or purchase essentials worry their refunds will be delayed. Data show that most people use their tax refunds for practical purposes. As of March 17, the average IRS tax refund is $3,271..

Reportedly, 49% of taxpayers will use their refund to “make ends meet,” about 25% of taxpayers plan to deposit their refunds into a savings account, while 35% intend to use their refunds to pay down debt.
Other common uses include replenishing emergency funds, boosting retirement savings, and investing in education or home improvements.

IRS audit risk?

Fewer IRS workers focusing on tax compliance is leading some taxpayers to consider taking risks with their returns that they might usually avoid.

According to the Credit Karma survey, millennials are at the forefront of this trend. A notable percentage indicated they might not file taxes this year due to a perceived lower chance of being audited. Nearly half of the surveyed taxpayers doubted the federal tax agency's capacity to double-check filings.

Those findings reflect a broader lack of confidence in the IRS' ability to enforce compliance effectively without a Senate-confirmed Commissioner and with much of its staff already let go or on its way out the door soon.

Can you not file taxes?

Despite these issues and real concerns, most experts caution against failing to file or pay taxes. There are several consequences of not filing or paying.

Financial Penalties: The IRS imposes significant penalties for failing to file or pay taxes. These can include a percentage of unpaid taxes for each month the return is late. There are also penalties for failing to pay, which can increase if the IRS issues a notice of intent to levy.

Even if you owe a relatively small amount, penalties can add up. Interest also accrues daily on unpaid balances annually, compounding the financial burden over time.

Legal Consequences: Tax evasion, which involves deliberately avoiding paying taxes, carries legal risks. It can also result in hefty fines for individuals and businesses, potential prison time, and additional penalties for negligence or underreporting income.

In extreme cases, as Kiplinger has reported, the IRS can revoke passports for individuals with significant unpaid tax debts exceeding a certain threshold.

Other Enforcement Actions: The IRS has various tools to recover unpaid taxes. These include wage garnishment, bank levies, and filing a Substitute for Return (SFR), where the IRS files a return on your behalf based on available data, often resulting in higher tax liabilities.

Filing taxes: Bottom line

For those struggling financially or feeling overwhelmed by their tax obligations, experts recommend exploring options for paying the IRS if you owe like repayment plans or filing extensions, rather than avoiding filing altogether.

And concerning common tax filing mistakes, some experts note that human beings aren’t necessarily the ones who will catch errors on “average taxpayer” returns.

The agency may rely more on automated software to uncover unpaid taxes or filing errors and focus on what some experts have described to Kiplingers as “low hanging fruit,” i.e., Individuals behind on their taxes, non-filers, or taxpayers on repayment plans.

For those daunted by this year's tax season, consult a trusted and qualified tax preparer or financial planner who can help you through the process and ensure compliance with current tax laws.

]]> https://www.kiplinger.com/taxes/why-people-are-avoiding-filing-taxes-this-year isW3cGKTo9Y8T6J6xxw9Pg Tue, 01 Apr 2025 14:17:00 +0000 <![CDATA[ Don’t Make These Five Mistakes on Your Tax Return ]]> Tax season is in full swing and the last thing you want is to file an incorrect return and wait through delays or worse — a rejected return.

The IRS has pointed out the most common errors taxpayers make as they file their taxes, from a mistake as small as a misspelled name to accidentally entering the wrong bank account number for a direct deposit.

These subtle tax preparing flaws can be easy to miss, especially when dealing with multiple documents. However, watching for these inaccuracies can save you the headache of correcting or re-filing your tax return if you’re filing.

Here are some common tax errors you should avoid on your current tax return.

Related: Check out Kiplinger's tax blog for the 2025 filing season. We're providing live updates, news, information, and commentary to help you navigate your taxes.

Common tax return mistakes to avoid

Note: These are just five mistakes the IRS points out as commonly made on federal income tax returns. If you're uncertain about whether your return is correct, you may want to consult a trusted tax professional.

The IRS requires taxpayers to include their Social Security number (SSN) on a tax return exactly as the number is printed on their Social Security card.

The same goes for other identification numbers on your tax return, such as an individual taxpayer identification number (ITIN) and employer identification number (EIN).

If you don’t have a SSN, but are eligible for one, you must fill out a Form SS-5 to apply and receive your Social Security number. This form can be used to apply for an original SSN, request a replacement for your card, or change or correct information on your SSN record.

There is one exception, if a child or dependent is age 12 or older and never received a SSN, the application process must be in person. The Social Security Administration will determine if you are eligible for the SSN.

Don’t have a SSN? There’s another option:

Taxpayers not eligible for an SSN must have an IRS individual taxpayer identification number (ITIN).
ITINs are 9-digit numbers issued by the IRS to taxpayers that don’t have a SSN for U.S. federal tax purposes.
If you do not have one, you must apply for the ITIN using a Form W-7.

Additionally, businesses, tax-exempt organizations, and other employers engaged in business as a sole proprietor must have an Employer Identification Number (EIN). If you don’t have an EIN, you can apply online.

2. Filing with an expired ITIN

Speaking of identification numbers, another common mistake is filing with an expired individual taxpayer identification number.

An ITIN expires if it remains inactive on a U.S. federal tax return for 3 consecutive tax years. The identification number effectively expires on December 31 after the third tax year of non-use.

This may happen to individuals who don’t earn enough to file for taxes, and more commonly, younger adults or students. You can check the status of your ITIN on your IRS Online Account.

What happens if you filed taxes with an expired ITIN? You may face a delay in processing your return, or not be able to claim certain credits unless you renew your ITIN. Worse off, that may result in penalties and interest, or a reduced refund.

Notably, you don’t need an ITIN to request an extension or pay an estimated tax.

3. Typos and math mistakes

It’s only human error to have a typo once in a while, but having one on your tax return may result in a rejected return or delayed return. What are some common slip-ups?

Misspelled names: The name on your tax return should match the name on your Social Security card, for example.

Incorrect bank account number: If you entered the wrong bank account number, you should contact the IRS to stop the direct deposit. The IRS will mail you your refund.

Math mistakes: Even a simple calculation error on your return may lead to delays in some circumstances. Generally, math errors are caught during processing and corrected by the IRS, so you don’t have to worry about filing an amended return.

The IRS should notify taxpayers of the correction with “math error notice” and would receive further instruction if more information is needed.

Math errors were a big problem during the pandemic. For example, some taxpayers have waited years to receive their Employee Retention Credit (ERC) refund. The pandemic-era credit was riddled with errors leading to significant delays. As of October 2024, the IRS reported a backlog of 1.2 million ERC claims, and these may worsen as President Trump works to shave down the IRS workforce.

4. Incorrect filing status, dependents, and more

If you accidentally filed your tax return with an incorrect filing status, dependents, total income, or deductions or credits — you’ll have to file an amended return. To do so, use Form 1040-X, (Amended U.S. Individual Income Tax Return).

Avoid errors when figuring tax credits and deductions: If you’re unsure how to figure your Earned Income Tax Credit (EITC), or Child and Dependent Care Credit. The IRS offers an interactive tax assistant that can help you calculate your credits and deductions, and identify the required forms and schedules you must complete.

5. Unsigned forms

Lastly, an unsigned tax return is not considered a valid return by the IRS. This error may result in a delinquency penalty on your tax return if the agency finds the taxpayer willfully did not sign the tax return.

The IRS will return unsigned income tax returns requesting that you sign and resubmit the form for processing.

Filing taxes: What you can do

As you prepare to file your tax return in 2025, review your tax documents before submitting them to the IRS.

One pro-tip to avoid errors this tax season is to file your taxes electronically. According to the IRS, this reduces errors because the tax software does the math for you, and flags common errors or missing information as you complete your return.

You can file for free using IRS Direct File, or with the help of a Volunteer Income Tax Assistance (VITA) or tax counselor for elderly programs. You should also opt for a direct deposit to avoid getting your refund lost or stolen in the mail.

Lastly, using a reputable tax preparer, a certified public accountant, or a commercial tax preparing software can help you avoid unwanted mistakes on your tax return.

]]> https://www.kiplinger.com/taxes/common-tax-return-mistakes r7FQ6Y8mrWtvH7jXjQah7N Wed, 12 Mar 2025 13:57:10 +0000 <![CDATA[ Ten IRS Audit Red Flags for Retirees in 2025 ]]> As you bask in your retirement years, traveling, enjoying dinners with your friends, spending time with family, finding new hobbies, and returning to old ones, you may think your chances of an IRS audit would be low. After all, why would the IRS examine tax returns that you file in your golden years? And generally, you would be right.

Over the past few years, the IRS has been auditing significantly less than 1% of all tax returns filed by individuals. The audit rate is likely less for retirees, who don’t claim as many refundable credits as other taxpayers and whose returns are generally not very complicated. However, not all retirees are in the clear in terms of IRS audits.

The Inflation Reduction Act gave the IRS $80 billion in extra funds over 10 years, with a large chunk of that money to be used by the agency for enforcement activities. Congress has since clawed back a sizeable chunk of the funding, and Republican lawmakers are itching to entirely repeal the IRS's windfall.

A retiree’s chances of being audited, or otherwise hearing from the IRS, can escalate depending on various factors, including the complexity of your return, the types and amounts of deduction or other tax breaks you claim, and whether you happen to still be engaged in a business.

Other actions or activities can boost the odds of an audit, too. In the end, there’s no way to predict whether you will be audited in your retirement years. But, these ten audit red flags could increase the chances that the IRS will give your return unwelcome attention.

Related: Check out Kiplinger's tax blog for the 2025 filing season. We're providing live updates, news, information, and commentary to help you navigate your taxes.

1. Failing to report all taxable income

Failing to report taxable income from wages, dividends, pensions, IRA distributions, Social Security benefits, and other sources will almost certainly draw unwanted attention for retirees from the IRS.

The IRS gets copies of all the 1099s and W-2s you receive. This includes the 1099-R (reporting payouts from retirement plans, such as pensions, 401(k)s and IRAs), SSA-1099 (reporting Social Security benefits), and 1099-K (reporting online payment sources such as PayPal, Airbnb, Etsy, etc.).
This year, a 1099-K is required to be sent to individuals who, in 2024, received $5,000 or more in payments from these third-party settlement networks for providing goods and/or services.
So, if this applies to you, be sure you received the 1099-K form before you file your return. The threshold for 2025 1099-Ks mailed out in 2026 is $2,500.

The IRS’s computers cross-check the numbers on the 1099 and W-2 forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a notice that the IRS will send to you.

So, be sure to report all income, whether you receive a form such as a 1099 or not.

2. Making a lot of money

While the overall individual audit rates are extremely low, the odds increase significantly as your income goes up, as it might if you sell a valuable piece of property or get a big payout from a retirement plan.

The U.S. Treasury Department and the IRS say that the extra enforcement funds they are receiving courtesy of the Inflation Reduction Act will be used in part to audit more high-net-worth individuals and pass-through entities, such as LLCs, S corporations, and limited partnerships, among other taxpayers.

Treasury officials have made a big promise, saying that taxpayers earning under $400,000 won’t see increased audit rates relative to recent years. However, only time will tell if the IRS can keep this promise.

Also, the IRS has been criticized for ignoring wealthy taxpayers and instead putting too much scrutiny on lower-income individuals who take refundable tax credits. Partly in response to this criticism, but also to close the tax gap, the IRS is increasing its focus on wealthy individuals.

So, it's not that you shouldn't try to make less money in your retirement – everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you will be hearing from the IRS

3. Claiming large deductions or losses

If the deductions or losses on your return are disproportionately large compared with your income, the IRS may pull your return for review.

A large medical expense could send up a red flag, for example.
Taking a big loss from the sale of rental property or other investments can also spike the IRS’s curiosity, especially if the loss offsets income from wages, pensions, or other sources.
Also on the IRS’s radar are deductions taken for bad debt and worthless securities, especially if you report the amount as an ordinary loss.

But if you have the proper documentation for your deduction, loss, or credit, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you owe.

4. Gambling winnings and losses

Retirees generally have more time to spend on entertainment activities. Maybe you enjoy going to the casinos and gambling. Or perhaps you started betting more on sporting events now that sports betting is legal in most states. Whether you're playing the slots, gambling on sporting events, trying your luck at a lottery jackpot, or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut.

Recreational gamblers must report gambling winnings as other income on the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially because the casino or other venue likely reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings. Writing off gambling losses, but not reporting gambling income, is sure to invite scrutiny. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get an extra look from IRS examiners, who want to make sure that these individuals really are gaming for a living.

5. Not taking required minimum distributions

The IRS wants to be sure that owners of IRAs and participants in 401(k)s and other workplace retirement plans are properly taking and reporting their required minimum distributions (RMDs). The agency knows some people aged 73 and older (75 and older beginning in 2033, 72 and older for 2020-22, and 70½ and older for years before 2020) haven’t taken their annual RMDs. Those who fail to take the proper amount can be hit with a penalty of as much as 25% of the shortfall.

It is also important to know that there have been changes to the rules for many non-spousal beneficiaries of IRAs inherited after 2019. If you're unsure about when you are required to take RMDs, consult a professional.

6. Taking an early distribution from an IRA or 401(k)

The IRS wants to be sure that owners of traditional IRAs and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions. Special attention is being given to payouts before age 59½, which, unless an exception applies, are subject to a 10% penalty on top of the regular income tax.

The IRS knows that a substantial number of filers make errors on their income tax returns concerning retirement payouts, with most of the mistakes coming from taxpayers who don't qualify for an exception to the 10% additional tax on early distributions.

The IRS has a chart listing withdrawals taken before the age of 59½ that escape the 10% penalty. Some of the exceptions apply only to IRAs, some apply only to workplace retirement plans, and others apply to both.

7. Claiming large charitable deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. And retirees especially like to make donations to their alma mater, place of worship, a non-profit arts organization, an animal protection shelter, or to any other charities that are near or dear to their hearts. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

That's because the IRS knows what the average charitable donation is for people at your income level. Also, if you don't get a written appraisal for donations of property valued at more than $5,000, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target. And if you've donated a conservation or facade easement to charity, or if you are an investor in a partnership, LLC or trust that made such a donation, your chances of hearing from the IRS rise exponentially.

Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.

8. Running a business

Schedule C is a treasure trove of tax deductions for self-employed individuals. But it’s also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don't report all their income.

The IRS looks at both higher-grossing sole proprietorships and smaller ones. Sole proprietors reporting at least $100,000 of gross receipts on Schedule C, cash-intensive businesses, and business owners who report a substantial loss and have income from other sources such as wages or retirement income, have a higher audit risk.

If you’re semi-retired but still running your own business, or if you have a side business in your golden years, be sure to accurately report all your income and keep good records and receipts to document expenses you claim on your return. Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.

9. Deducting hobby losses on Schedule C

Your chances of "winning" the audit lottery increase if you file a Schedule C with large losses from an activity that might be a hobby, such as dog breeding, jewelry making, horse racing, or coin and stamp collecting. Your audit risk grows further if you have multiple years of hobby losses and lots of income from other sources. So be careful if your retirement pursuits include trying to convert a hobby into a moneymaking venture.

To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit.
If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise.
The analysis is trickier if you can't meet these safe harbors. That's because the determination of whether an activity is properly categorized as a hobby or a business is then based on each taxpayer's facts and circumstances.

10. Claiming large rental losses

Do you own some rental properties that help to provide a consistent revenue stream in your retirement years? Maybe you regularly claim large depreciation deductions and other write-offs on Schedule E that end up generating a tax loss from your rental activity. Claiming a large rental loss can command the IRS's attention, especially if the loss helps to offset income from other sources that you report on your return.

Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as modified adjusted gross income exceeds $100,000 and disappears entirely once your modified AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and more than 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off rental losses.

The IRS actively scrutinizes large rental real estate losses. If you're managing properties in your retirement, you may qualify under the second exception. Or, if you sell a rental property that produced suspended passive losses, the sale opens the door for you to deduct the losses. Just be ready to explain things if a big rental loss prompts questions from the IRS.

]]> https://www.kiplinger.com/taxes/irs-audit-red-flags-for-retirees adZRatB74wX9urMbx9syrE Sun, 16 Feb 2025 15:17:00 +0000 <![CDATA[ Why You Should Take Extra Care With Your Tax Return ]]> It’s tax season, the anxiety-inducing time of year when millions of Americans start thinking about all the things they’d rather do than prepare their tax returns.

But the task could be less onerous this year. There weren’t a lot of adjustments to the tax code in 2024, so if your personal circumstances didn’t change, your tax return probably won’t change much, either.

More important, chances are very good that Congress will extend the individual tax provisions of the 2017 Tax Cuts and Jobs Act, which are set to expire at the end of 2025 — so you likely won’t have to take steps to avoid a tax increase in 2026.

Still, you should take your time when preparing your return or gathering the information you’ll need to provide to your tax preparer. Otherwise, you may overlook tax-saving provisions or make errors that could lead to an unnerving letter from the IRS.

Key Tax Return Issues

Here are issues to watch out for when you tackle your 2024 tax return.

EV tax credit

Since January 1, 2024, buyers who purchase an eligible electric vehicle have been able to claim a tax credit of up to $7,500 for a new EV or $4,000 for a used one at the point of sale, either as a rebate or as a reduction in the cost of the vehicle, thanks to a provision in the 2022 Inflation Reduction Act. If you took advantage of the credit to lower the cost of an EV, you’ll need to report it when you file your tax return.

Learn More: How the EV Tax Credit Works

When you purchased the EV, the dealer should have given you a time-of-sale report and a document indicating that the IRS had accepted it. The report confirms that your vehicle was eligible for the credit, lists the amount of credit available for the specific vehicle you bought, and shows that the credit was transferred to the dealer by the IRS. If you didn’t receive a time-of-sale report (or if you lost it), contact the seller. Without it, you can’t claim the credit, the IRS says.

File Form 8936, “Clean Vehicle Credits,” with your tax return. You’ll also use this form if you didn’t receive the credit at the time of purchase. You’ll need your car’s vehicle identification number (VIN) to fill out the form.

Taxes on Bitcoin profits

Bitcoin investors have enjoyed a spectacular ride in recent months, with bitcoin trading at more than $100,000 in December. If you invested in bitcoin and took some of your profits off the table last year, it’s important to understand that those gains are taxable. Although many people refer to bitcoin as currency, the IRS views it as property, and gains are taxed the same way that gains from the sale of stocks, bonds, and other capital assets are taxed. You’ll owe taxes on your gains even if you used your bitcoin to buy something.

If you owned bitcoin or other cryptocurrency in a taxable account, your gains from selling any that you owned for a year or less will be taxed at your ordinary income rate (rates ranged from 10% to 37% in 2024). If you sold crypto you owned for more than a year, you’ll owe long-term capital gains taxes on your profits, with rates ranging from 0% to 20%, depending on your income.

When you fill out Form 1040, you will be asked whether you received, sold, exchanged or otherwise disposed of a digital asset in 2024. The IRS added that question to the form for tax year 2020 in response to concerns that many taxpayers weren’t reporting cryptocurrency profits on their returns.

The IRS is expected to increase scrutiny of digital-currency holdings in tax year 2025, when brokers will be required to report proceeds from the sale of digital assets on the newly introduced Form 1099-DA.

Taxpayers who sell digital currencies in taxable accounts this year will receive the forms in early 2026. The reporting requirement will allow the IRS to match reports from cryptocurrency brokers with information on taxpayers’ tax returns, just as the agency already does with Form 1099s for mutual funds, stocks and other investments. If you’re buying and selling cryptocurrency, keep good records—particularly of the amount you paid for your crypto, known as the cost basis.

Staying on the right side of the IRS has this advantage: If a digital currency you own takes a dive and you sell at a loss, you can harvest the loss to offset other capital gains.

Transactions that generate a Form 1099-K

The American Rescue Plan Act of 2021 required payment processors, such as Venmo and PayPal, to report to the IRS total payments of $600 or more to a user in a year. The requirement was delayed after tax professionals and advocates for small businesses argued that it would cause tax headaches for millions of self-employed and gig workers.

For 2023, payment processors were required to file a 1099-K form only for a user who received more than $20,000 in payments and had more than 200 transactions, but that threshold dropped to $5,000 for 2024. Many individuals who sell items on Etsy or receive payments for side gigs are going to get 1099-Ks for the first time this year, says Andy Phillips, vice president for the Tax Institute at H&R Block.

Vendors aren’t supposed to issue Form 1099-Ks for personal transactions, such as peer-to-peer transfers with friends and family. But as a result of the lower reporting threshold, some individuals may receive erroneous 1099-Ks, Phillips says.

If you receive a 1099-K for a personal transaction, report it on the line at the top of Schedule 1 of Form 1040 (“Additional Income and Adjustments to Income”) that is designated to correct errors. You can also use this line to report proceeds from the sale of a personal item at a loss — for example, the couch in your basement that you bought for $1,000 a decade ago and sold for $500, Phillips says. You can’t deduct such losses, but reporting them on Schedule 1 will exclude the proceeds from your adjusted gross income while also ensuring the income is reported to the IRS for compliance purposes (tax software will walk you through this process).

The goal of the reporting requirement is to make it easier for the IRS to keep tabs on self-employment income. But even if you don’t receive a 1099-K form, you’re required to report all of your income to the IRS.

And if you have a side gig or are self-employed, make sure you keep solid records, because there’s a good chance you’ll receive a 1099-K in the future. The threshold is scheduled to drop to $2,500 for 2025 and to $600 for 2026. Some payment apps offer a “friends and family” designation you can use to separate personal transactions from business payments.

Higher standard deduction

Even if you’ve itemized deductions in the past, don’t assume that it will be the best choice for 2024. You may end up with a lower tax bill by claiming the standard deduction, which is adjusted annually to account for inflation.

For 2024, the standard deduction is $14,600 for single taxpayers, $29,200 for married couples who file jointly, and $21,900 for heads of household.

If you’re blind or 65 or older, you can claim an additional deduction of $1,950 ($3,900 for joint filers if you’re both 65 or older and blind). If you’re married, you can claim an additional standard deduction of $1,550 for each spouse who falls into one of those categories.

That means a 65-year-old couple can claim a standard deduction of at least $32,300—or even more if one or both are blind. For that reason, most older adults will fare better by claiming the standard deduction than by itemizing.

However, the only way to figure out whether itemizing or claiming the standard deduction is most advantageous is to run the numbers both ways, which tax software programs will do for you. Make sure you assemble all of the receipts for eligible deductions, such as charitable contributions, mortgage interest, property taxes, and unreimbursed medical bills.

Keep in mind, too, that taxpayers who claim the standard deduction are still eligible for a long list of “above the line” deductions, which will lower your adjusted gross income, and other credits available to non-itemizers. For more on those tax breaks, see page 47.

Check Your Work

3D rendering of a stack of US money next to three check boxes — (Image credit: Getty Images)

While the IRS audits only a small percentage of taxpayers in person, the agency sends out thousands of letters every year to taxpayers who made errors on their returns. These correspondence audits typically involve a few issues the IRS believes it can resolve without deploying a full-scale audit. Still, these letters can be unsettling, especially if the IRS determines that you owe the government more money.

Even minor errors, such as forgetting to sign and date your tax return, could hold up processing and delay your refund. Here are some common (and avoidable) errors.

Not reporting all of your income

Filing your tax return early will speed up your refund, and it may protect you from tax return fraud because a criminal can’t file a return in your name and pocket your refund if you’ve already submitted your return.

But if you overlook a Form 1099 from your bank or brokerage firm, you’ll probably hear from the IRS. The agency compares statements it receives from financial institutions, employers, and other entities with your tax return, and if it discovers a mismatch, you could owe interest on the amount you should have paid and possibly a late-filing penalty, too.

Misreporting a qualified charitable distribution

QCDs allow individuals who are 70½ or older to contribute money directly from their IRA to a qualified charity, potentially satisfying all or part of their required minimum distribution. The contribution isn’t deductible, but the distribution will count toward your RMD and will be excluded from your taxable income. For 2024, individuals could contribute up to $105,000 through a QCD (for 2025, the maximum is $108,000).

However, reporting a QCD on your tax return can be tricky because the Form 1099-R you receive from your financial institution won’t reflect the QCD.

When filling out your 2024 Form 1040 (or 1040-SR), include on line 4a the total amount of distributions reported on Form 1099-R.
Then subtract the amount that was transferred directly to the charity and report the remainder (even if it’s $0) on line 4b.
Write “QCD” next to line 4b so the IRS knows why the numbers don’t match.
If you’re using tax software, a drop-down box for line 4b should give you the option to click “QCD.”

You should also obtain documentation from the charity in case you receive inquiries from the IRS, says Miklos Ringbauer, a certified public accountant in Los Angeles.

If you’re interested in making a QCD in 2025, it’s important to understand that the contribution must be made directly from your IRA to charity, Ringbauer adds. If you withdraw the funds from your IRA and send a check to charity, it won’t qualify as a QCD.

Related: What is a QCD?

Failing to file a tax return

If you have a tax bill you can’t afford to pay, the worst thing you can do is nothing. The IRS penalty for failing to file a tax return is 5% of the amount you owe per month, up to a maximum of 25% of the unpaid balance. “That can devastate a person,” Ringbauer says.

The penalty for failing to pay your taxes is less onerous—0.5% of the unpaid balance for the month or part of the month the balance is unpaid, up to 25% of your unpaid taxes. For that reason, if you can’t pay your tax bill by April 15, file your tax return and pay as much as you can. Once you’ve done that, you can explore an installment plan or other payment options the IRS offers. For more information, go to www.irs.gov/payments/payment-plans-installment-agreements.

Hiring an unscrupulous tax preparer

The availability of sophisticated tax software has made it easy for inexperienced or dishonest individuals to create a website and designate themselves as tax preparers, even if they know little or nothing about the tax code.

The IRS has warned taxpayers to be on the lookout for “ghost preparers”—individuals who encourage taxpayers to claim credits and benefits for which they don’t qualify, charge fees based on a percentage of the refund, and then disappear after the return is filed. Other scofflaws pose as tax preparers to steal taxpayers’ identities, the IRS says.

When you sign your tax return, you’re responsible for the information on the return — no matter who prepared it — so it’s in your best interest to hire a preparer you can trust. Start by looking for a preparer who is credentialed, including certified public accountants, enrolled agents, and attorneys. CPAs are licensed by state boards of accountancy, have studied accounting at a college or university, and have passed a rigorous exam.

You can get a list of local certified public accountants from your state’s CPA society. Enrolled agents, who are licensed to appear before the IRS, must pass a rigorous test and meet annual continuing-education requirements. To locate an enrolled agent in your area, go to www.naea.org. Attorneys are licensed and regulated by state courts and/or state bar associations. They must take continuing education classes and satisfy professional ethics requirements.

The IRS provides a resource you can use to search for preparers in your area who hold professional credentials, as well as individuals who aren’t CPAs, enrolled agents, or attorneys but have completed a certain number of continuing education hours. Find it at https://irs.treasury.gov/rpo/rpo.jsf.

Last-Minute Tax Savers

Time is money concept of clock and dollar sign overlapping on blue background directly above view. — (Image credit: Getty Images)

For the most part, the IRS operates on a calendar-year basis. But some exceptions could reduce your 2024 tax bill while helping you save more for retirement and lower your out-of-pocket health care costs.

Contribute to a retirement account

If you’re not enrolled in a workplace retirement plan, in 2024 you can deduct IRA contributions of up to $7,000, or $8,000 if you were 50 or older. (These contribution limits will remain unchanged for 2025.)

You have until April 15, 2025, to make your 2024 contribution. Contributions to a traditional IRA will reduce your adjusted gross income on a dollar-for-dollar basis, which could also make you eligible for other tax breaks tied to your AGI.

Workers who have a company retirement plan but earn less than a certain amount may qualify to deduct all or part of their IRA contributions. For 2024, this deduction phases out for single taxpayers with AGI between $77,000 and $87,000 and for married couples who file jointly with AGI between $123,000 and $143,000. If one spouse is covered by a workplace plan but the other is not, the spouse who isn’t covered can deduct the maximum contribution as long as the couple’s joint AGI doesn’t exceed $230,000. A partial deduction is available if the couple’s AGI is between $230,000 and $240,000.

If you worked for yourself in 2024 or had a side gig, you can sock away even more money. You have until April 15—or October 15 if you file for an extension—to set up and contribute to a SEP IRA, a retirement plan designed for self-employed workers, small businesses and sole proprietors. For 2024, you can deduct contributions of as much as 20% of net income, up to a maximum of $69,000.

You also have until April 15 to contribute to a Roth IRA for 2024. Contributions to a Roth are after-tax, so they won’t lower your tax bill. But as long as you’re 59½ or older and have owned your Roth for at least five years, withdrawals are tax-free.

Here, too, there are income limits. For 2024, single taxpayers with a modified adjusted gross income of less than $146,000 can contribute the full amount; those with income between $146,000 and $161,000 can make a partial contribution. Married couples who file jointly can make the full contribution if their MAGI is less than $230,000; those with MAGI between $230,000 and $240,000 can make a partial contribution.

In the past, you could make only pretax contributions to a SEP, but legislation enacted in late 2022 allows SEP providers to offer a Roth option.

Set aside funds for health care costs

You have until April 15 to set up and fund a health savings account for 2024. To qualify, you must have had an HSA-eligible health insurance policy that went into effect no later than December 1. The policy must have had a deductible of at least $1,600 for individual coverage or $3,200 for family coverage.

You can contribute up to $4,150 to a 2024 HSA if you had single coverage or $8,300 if you had family coverage. You can stash away an additional $1,000 if you were 55 or older in 2024. Contributions reduce your adjusted gross income. The money in your account will grow tax-free, and withdrawals to pay medical expenses are also tax-free.

Tips for Non-Itermizers

drawn lightbulb with blue paper on a yellow background — (Image credit: Getty Images)

The Tax Cuts and Jobs Act doubled the standard deduction, so the majority of taxpayers no longer itemize. However, there are numerous deductions and credits available to non-itemizers.

Child adoption credit.

If you adopted a child last year, take advantage of a tax credit to help cover expenses related to the adoption. (A credit is a dollar-for-dollar reduction in your tax bill, making it more valuable than a tax deduction.) For 2024, the adoption tax credit can be taken on up to $16,810 of qualified expenses per child.

You can’t claim the credit for more than you spent on the adoption unless you adopted a child with special needs. In that case, you can claim the full credit even if your expenses were less than the full amount. The credit phases out for families with a 2024 AGI of more than $252,150; those with AGI of more than $292,150 are ineligible.

To qualify, the child you adopted must have been younger than 18 or any age if physically or mentally incapable of caring for himself or herself. If you can’t use the entire credit’s value in the first year you claim it, you can carry forward any remaining amount for up to five years—a helpful provision because some adoptions take several years to complete.

Learn More: The Adoption Tax Credit Explained

College tax credits

If you’re paying for higher education, make sure to take advantage of college-related tax breaks. For parents with a child in college, your best bet is the American Opportunity Tax Credit (AOTC), available for up to $2,500 of college tuition and related expenses (but not room and board) paid during the year. Individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return) qualify for the full credit. Single taxpayers with MAGI greater than $90,000 and married couples with MAGI above $180,000 are ineligible for the credit. The credit covers all four years of college.

If you went back to school—whether to improve your employment prospects or just because you had a hankering to learn—you may qualify for the Lifetime Learning credit. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). You cannot claim both this credit and the AOTC for the same student in the same year.

Educator expense deduction

Teachers, counselors, and principals who spend their own money on school supplies can deduct up to $300 ($600 if spouses who are both educators file jointly). Qualified expenses include books, supplie,s and computer equipment.

Learn More: Educator Expense Tax Deduction for 2024

Student loan interest

If you’re paying off your student loans, you may be able to deduct up to $2,500 in interest, even if you don’t itemize.

To qualify for the full deduction, single taxpayers must have MAGI of less than $80,000; the deduction phases out if your MAGI is between $80,000 and $95,000. For married taxpayers who file jointly, the deduction phases out if your MAGI is between $165,000 and $195,000.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

]]> https://www.kiplinger.com/taxes/why-you-should-take-extra-care-with-your-tax-return xBwXBFJFDJnKtxNiEtWsUZ Sat, 15 Feb 2025 15:01:10 +0000 <![CDATA[ Ten IRS Audit Red Flags for Self-Employed Individuals ]]> Being in business for yourself can be exciting, lucrative, and a great way to draw the attention of the IRS's audit division.

The IRS has audited significantly less than 1% of all individual returns in recent years, so most taxpayers can rest easy. But if you file a Schedule C to report profit or loss from a business, your odds of drawing additional IRS scrutiny go up.

Schedule C is a treasure trove of tax deductions for self-employed people. And it's also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don't report all their income.

The IRS looks at both higher-grossing sole proprietorships and smaller ones. Special scrutiny is given to cash-intensive businesses, highly profitable companies, and small-business owners whose Schedule C's report a substantial net loss (especially if those losses offset in whole or in part other income reported on the return, such as wages or investment income).

The Inflation Reduction Act gave the IRS $80 billion in extra funding over ten years, with a large chunk of that money going to increased enforcement activities. This money is in addition to the IRS's annual funding.

Congress has since clawed back about $25 billion of that windfall, with another potential $20 billion on the chopping block, and Republican lawmakers are promising to slash it even more.

Reasons why the self-employed get audited

There's no sure way to predict an IRS audit, but if you're self-employed, these ten "red flags" could increase your chances of drawing unwanted attention from the IRS.

1. Taking excessively large deductions

If the deductions, losses, or credits on your Form 1040 are disproportionately large compared with your income, the IRS may want to take a second look at your return. The same is true with deductions taken on Schedule C.

The IRS is suspicious when it sees tax returns with Schedule C attached claiming large losses, and that is especially true if the deductions leading to those losses appear to be excessively large for the business. If your return is chosen for audit, the IRS will be on the hunt to make sure you have the documentation to fully substantiate your big write-offs.

Revenue agents will also want to make sure that there is a valid business purpose for the write-offs and that there are no shenanigans going on, such as taking deductions for personal expenses.

Make sure that you have a separate bank account for your business and that you have the documentation to support your deductions.

2. Making a lot of money

While overall individual audit rates are low, your audit odds go up as your income goes up, especially if you have business income reported on Schedule C.

The IRS has been lambasted in recent years for putting too much scrutiny on lower-income individuals who take refundable tax credits and ignoring wealthy taxpayers. Partly in response to this criticism, wealthy individuals are once again in the IRS's crosshairs.

Remember, the IRS is getting more money for audits, with a significant chunk of its extra funding over 10 years dedicated to enforcement activities and collection measures. The Treasury Department and the IRS say that some enforcement funds will be used to audit more high-net-worth individuals and pass-through entities, such as LLCs and partnerships, among other taxpayers.

During the Biden administration, Treasury officials and the IRS made a big promise that individuals and small businesses earning under $400,000 wouldn't see more audits compared to historic rates. That applied only to taxpayers with total positive incomes of less than $400,000, meaning income before taking losses and deductions on their federal tax returns.

The IRS isn't considering hiking the $400,000 figure for couples filing a joint tax return.
The agency says the audit rate on 2018 returns will be used for the historic rate comparison, which is good news for taxpayers.
The overall audit rate for 2018 returns was 0.3% for individuals.

We're not saying you should try to make less money. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

3. Writing off a hobby loss

Not every business ends up in the black every year, but too many years of losses can make the IRS think you're not really taking your business seriously enough—that it's just a hobby.

The IRS is on the hunt for taxpayers who year after year report large losses from hobby-sounding activities to help offset other income, such as wages, or business or investment earnings. The hobby loss rules are often litigated in the Tax Court. The IRS usually wins in court, partly because it tends to settle cases in which it doesn't believe it can prevail. But taxpayers also occasionally pull out a victory.

To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit.
If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes you're in business to make a profit, unless the IRS establishes otherwise.

The analysis is trickier if you can't meet these safe harbors. That's because determining whether an activity is properly categorized as a hobby or a business is based on each taxpayer's facts and circumstances.

If you're audited, the IRS will make you prove you have a legitimate business and not a hobby. Be sure to keep supporting documents for all expenses.

4. Claiming 100% business use of a vehicle

When you depreciate a car, you must list on Form 4562 the percentage of its use during the year that was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know it's rare for someone to use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.

The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. That's because these vehicles are eligible for favorable depreciation and expensing write-offs.

Make sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.

5. Trading vs. investing in securities

People who trade in securities have significant tax advantages compared with investors. The expenses of traders are fully deductible and reported on Schedule C (expenses of investors aren't deductible), and traders' profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are treated as ordinary losses that aren't subject to the $3,000 cap on capital losses. And there are other tax benefits.

But to qualify as a trader, you must buy and sell securities frequently and look to make money on short-term swings in prices. And the trading activities must be continuous over the full year and not just for a couple of months. This is different from an investor, who profits mainly on long-term appreciation and dividends. Investors hold their securities for longer periods and sell much less often than traders.

The IRS knows that many filers who report trading losses or expenses on Schedule C are actually investors. It's pulling returns to check whether the taxpayer is a bona fide trader or an investor in disguise.

6. Claiming rental losses

The IRS actively scrutinizes rental real-estate losses, especially those written off by taxpayers who say they are real-estate professionals.

Normally, the passive loss rules prevent the deduction of rental real-estate losses. But there are two important exceptions.

If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income.
This $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000.

A second exception applies to real-estate professionals. Real-estate pros who spend more than 50% of their working hours and more than 750 hours each year materially participating in real estate as developers, brokers, landlords, agents or the like, can write off their rental losses without limitation.

The IRS is pulling returns with large rental losses taken on Schedule C by individuals who claim they are real-estate professionals, and whose returns also report lots of income from other sources (wages, investment and retirement income, non-real estate businesses, etc.). Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real-estate business.

7. Taking the R&D credit

The research and development (R&D) credit is one of the most popular business tax breaks, but it's also one that IRS agents have found is prime for abuse.

The IRS is on the lookout for taxpayers who fraudulently claim R&D credits and promoters who aggressively market R&D credit schemes. These promoters are pushing certain businesses to claim the credit for routine day-to-day activities and to overinflate wages and expenses in the calculation of the credit.

To be eligible for the credit, a business must conduct qualified research—that is, its research activities must rise to the level of a process of experimentation. Among the activities that aren't credit-eligible are customer-funded research, adaptation of an existing product or business, research after commercial production, and activities in which there is no uncertainty about the potential for a desired result.

8. Operating a marijuana business

Marijuana businesses have an income tax problem. They're prohibited from claiming business write-offs, other than for the cost of the weed, even in the ever-growing number of states where it's legal to sell, grow, and use marijuana for medical or other purposes. That's because a federal statute bars tax deductions for sellers of controlled substances that are illegal under federal law, such as marijuana.

The IRS is eyeing legal marijuana firms that take improper write-offs on their returns. Agents come in and disallow deductions on audit, and courts consistently side with the IRS on this issue. The IRS can also use third-party summons to state agencies, etc., to seek information in circumstances where taxpayers have refused to comply with document requests from revenue agents during an audit.

Former President Biden's administration proposed rules to reclassify marijuana from a Schedule I drug to a Schedule III drug under the Controlled Substances Act. If the rules are adopted as final, marijuana businesses in states in which cannabis is legal could deduct business expenses on their federal tax returns. It is unclear how President Trump plans to handle this.

9. Big deductions for meals and travel

Is it business or pleasure? A large write-off on Schedule C for restaurant tabs and hotel stays will set off alarm bells, especially if the amount seems too high for the business or profession.

To qualify for meal deductions, you must keep detailed records that document the amount, place, people attending, business purpose, and nature of the discussion or meeting. Without proper documentation, your deduction is toast.

10. Claiming home-office deductions

Entrepreneurs can deduct on Schedule C a percentage of rent, real-estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to a home office. That's a great deal.

Alternatively, you have a simplified option for claiming this deduction: The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500.

To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business.
That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work.
"Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night.

There's no getting around the fact that the IRS is drawn to returns that claim home office write-offs. It has historically found success knocking down the deduction. Your audit risk increases if the deduction is taken on a return that reports a Schedule C loss and/or shows income from wages.

Currently, home office deductions are only available to people who are self-employed. If you are an employee, you cannot take a deduction for a home office on your tax return. This is so even in cases where your employer closes your physical office and classifies all workers as remote.

]]> https://www.kiplinger.com/taxes/irs-audit-red-flags-for-self-employed TdBXzzW9o4EwJV3dARR9y8 Sat, 08 Feb 2025 15:17:00 +0000 <![CDATA[ IRS Direct File: What You Need to Know for 2025 ]]> The IRS Direct File program will not be offered for the 2026 filing season, leaving potentially millions of taxpayers without this free file option.

The program, which allowed residents in 25 pilot states to file directly with the federal tax agency, was officially discontinued this month. The decision to shutter Direct File was set in motion by the 2025 Trump tax bill, though officially executed after a long-awaited U.S. Treasury Department task force report was released.

Here's more of what you need to know.

What was IRS Direct File?

Direct File was a free way for taxpayers to file directly with the IRS. It was created after the tax agency found that many filers would be interested in such a program, with funding from the Inflation Reduction Act (IRA), signature legislation from the Biden administration.

For last year's 2024 tax filing season, Direct File's initial pilot proved a success across 12 participating states, with over 140,000 taxpayers using the service.
According to the IRS, most reported their experience with the program as “Excellent” or “Above Average.”
In tax season 2025, the Direct File program opened on January 27 (the day the IRS officially began accepting returns), and 30 million taxpayers were expected to be eligible.)

However, participation was on a state-by-state basis. Basically, you could only use Direct File if you lived in a nonparticipating state, the District of Columbia, or a U.S. territory.

IRS Free File vs. Direct File: What’s the difference?

Although they may have similar names, the IRS Direct File program differed from Free File. Free File partners with private-sector companies to offer free tax filing services, while Direct File was an option to file directly through the IRS.

Unique eligibility requirements also separated the two programs. Free File is generally for taxpayers with lower- to middle-income. For tax year 2025, that’s an adjusted gross income (AGI) of $84,000 or less (for guided tax software).

Comparatively, Direct File had the following income limits:

Filing Status	Income Limit (must be less than)
Single Filer	$200,000 in one income source ($168,600 if multiple employers)
Married Filing Jointly	$250,000 in combined income ($168,600 if multiple employers) AND under $200,000 for one spouse
Married Filing Separate	$125,000 in income

However, Direct File was limited by the types of income the tool could accept.

Commonly accepted incomes included: W-2s, Social Security, unemployment benefits, interest income, and HSA distributions. If you had income types that fell outside of that, like gig economy income, business income, rental income, or capital gains and dividends, you could not use Direct File. Certain deductions and credits were also limited for Direct File.

When Did IRS Direct File End? The Final 2025 Status

According to the Associated Press, IRS official Cynthia Noe reportedly sent an email earlier this month to state comptrollers that typically participate in the program.

"IRS Direct File will not be available in Filing Season 2026," the email read. "No launch date has been set for the future."

The announcement came after a Treasury task force report recommended terminating the program last month. Among the reasons cited were cost and low participation. The report stated that the program had cost about $138 per return to administer, though the uptake had risen 111% compared to the year prior.

Instead of Direct File, the GOP seeks to further improve the IRS's Free File program, according to the Treasury report. However, Direct File was established to address the limitations of Free File, like income limits and varied tax situations.

Plus, limitations aside, some are concerned that the call to eliminate Direct File is mainly due to its competition with commercial tax preparation software like H&R Block and TurboTax. (Free File uses private tax software companies.)

Regardless, taxpayers who have used Direct File for the last two years should begin searching for other free ways to file taxes for the 2026 filing season.

]]> https://www.kiplinger.com/taxes/irs-direct-file-what-it-is-how-it-works 5G4hiNftu3w5D5WKytwDGP Fri, 24 Jan 2025 15:19:10 +0000 <![CDATA[ Tax Pros: Is Someone Fraudulently Filing Returns With Your PTIN? ]]> As tax season approaches, the IRS is reminding CPAs and other tax professionals to verify that their Preparer Tax Identification Number (PTIN) is current and valid.

This unique identifier, issued by the federal tax agency, is crucial for anyone preparing federal tax returns for compensation.

Notably, the risks associated with an expired PTIN extend beyond the possibility of incurring IRS penalties. Unfortunately, fraud involving PTINs is more common than one might expect. So, here’s more of what you need to know.

What does PTIN stand for?

A PTIN is an 8-digit number assigned to tax preparers by the IRS. It serves as an official identifier, starting with the letter P, that allows the tax agency to track and regulate tax preparation activities.

Every paid tax preparer should have their own PTIN, which should be included on all federal tax returns they prepare.

Preparing federal tax returns for compensation without a valid PTIN is against IRS regulations
Those who prepare their own taxes, file joint returns, or prepare taxes for friends and family without compensation don’t need a PTIN
A current PTIN can help ensure your client's tax returns are processed smoothly and without delays.
If you use an expired PTIN, you could face IRS penalties

According to the IRS, the penalty for returns filed in 2024 without a valid PTIN is $60 for each failure, and the maximum penalty is $30,000. For returns filed in 2025, the penalty is $60 for each failure, and the maximum penalty is $31,500.

PTIN Renewal 2025: How much does an IRS PTIN cost?

PTINs expire on December 31st each year. The renewal process typically opens in October for the following year and can be completed online at the IRS website.

If your PTIN has expired, the IRS encourages you to renew it to avoid complications.

The renewal fee is $19.75, and you can pay it to the IRS via eCheck, credit, ATM, or debit card.

Don’t have a PTIN? The IRS says that “most first-time PTIN applicants can obtain a PTIN online in about 15 minutes. The fee is $19.75 and is non-refundable. View this checklist to get started.”

PTIN risks

If you haven't renewed your PTIN and don’t actively use it, someone else might fraudulently misuse it to prepare tax returns. This could result in identity theft or liability for returns filed in your name without your knowledge.

For example, since PTINs must be included on tax returns prepared for compensation, they can be visible on those documents, making them susceptible to unauthorized use.

It’s also important to note that the IRS maintains a public directory of PTIN holders to help individuals find professional, credentialed tax preparers. Partly due to the Freedom of Information Act (FOIA), this information is available online, which could inadvertently contribute to potential fraudulent activity involving expired PTINs.

Some typical forms of PTIN misuse include:

Using Another Preparer's PTIN: A fraudulent preparer might use a valid PTIN belonging to a legitimate tax professional to file returns without authorization.
Preparing Returns Without a Valid PTIN: Some preparers may operate with an expired or revoked PTIN or prepare returns without obtaining one.
Identity Theft: Criminals could steal a tax preparer's identity and use their PTIN to file fraudulent returns.
Sharing PTINs: Multiple preparers might improperly share a single PTIN instead of each obtaining their own.

To protect against these risks, the IRS reminds tax professionals to regularly check their PTIN accounts for suspicious activity and report any suspected misuse using Form 14157.

IRS PTIN monitoring

The IRS also says it “actively monitors” PTIN usage and may take enforcement actions against non-compliant tax preparers.

For example, if your PTIN has expired, you might receive a letter from the IRS. These letters are supposed to alert tax professionals about their PTIN status and prompt action.

A typical notification letter states that your PTIN has expired, emphasizes the requirement for an active PTIN, provides renewal instructions, reminds you about potential penalties, and may include information about the annual renewal period.

What about emails from the IRS? Typically, the IRS won’t contact taxpayers via email. However, it could happen that you, as a tax preparer, receive a legitimate IRS email regarding PTIN issues.

If you do, the IRS points to the following two valid sender email addresses: irs@service.govdelivery.com and Taxpros@ptin.irs.gov.

Note: Those email addresses can be fraudulently spoofed, so be extremely cautious and don't reply to unsolicited emails. Instead, contact the IRS directly and/or report suspected phishing emails.

Is Your PTIN valid? Bottom Line

Given all this, it's crucial to check your PTIN status. If you discover yours has expired take action and if need be, renew it through the IRS website.

It's worth noting that some CPAs notice that tax returns continue to be filed with expired PTINs, which indicates potential fraudulent activity by unauthorized individuals.

If you haven’t prepared returns for compensation since your PTIN expired but suspect someone else is using your expired PTIN, report it by filing Form 14157 with the IRS.

]]> https://www.kiplinger.com/taxes/tax-pros-is-someone-using-your-expired-ptin xjDLkc3NxdbhEpdaypXSW9 Tue, 10 Dec 2024 18:39:00 +0000 <![CDATA[ Tax Software vs a Tax Professional: Which Should You Choose? ]]> Many tax filers find tax-preparation software to be very useful, and most tax software is simple to use, cost-efficient (especially when compared to the cost of hiring a certified public accountant, or CPA) and fast (some returns may be completed in just an hour).

The proof of its popularity: The tax-prep software market was valued at $17.9 billion in 2024 by Fortune Business Insights and is projected to grow to $47.9 billion by 2032.

As we approach a new tax year, you might be wondering whether you could ditch your tax professional and stick with tax software. It depends on the nature of your financial situation. Let’s consider some financial situations that are appropriate for tax software and some that might require the expertise of a tax professional.

When should you consider using tax software?

Tax-prep software is most appropriate when your financial situation is straightforward. In the world of tax, the following qualifies as a straightforward financial situation:

You opt for the standard deduction, a fixed amount that is subtracted from your income to arrive at your taxable income, instead of itemizing your deductions.
You earn only employment income and receive a Form W-2 from your employer.
You invest only in traditional assets like stocks and bonds.
You’ve resided in only one state all year.

In essence, the fewer your tax events and the fewer tax forms you will need to complete, the more you can rely on tax-prep software.

When should you stick to a tax professional?

However, the financial situations of many people are more complicated. If any of the following apply to you, tax-prep software might not be entirely up to the job:

You itemize your deductions rather than using the standard deduction.
You have multiple sources of income, such as 1099 income (dividends, rental income, earnings from a side hustle, etc.), or you juggle two or more jobs.
You are self-employed or own a business.
If you are a partner in a business, you will need to report your share of income, losses, deductions and credits on Form K-1. The form also applies if you have shares in an S corporation.
You earn income in multiple jurisdictions.
You own non-traditional assets such as commodities, derivatives and currencies, among others.
You are focused on retirement planning and estate planning and need help identifying tax-efficient strategies to maximize your retirement income and the estate you leave to your loved ones.
You sold a business. The tax implications will depend on the business structure (LLC, partnership, S corp, etc.) and whether it is an asset sale (selling the business assets) or stock sale (selling ownership). Tax professionals can help you minimize your tax liability.
You received equity compensation. Different tax rules apply to the four types of stock (or equity) compensation — restricted stock awards, restricted stock units, non-qualified stock options and incentive stock options. Tax professionals can help you plan how to hold and exercise these options to minimize your tax liability.
You got divorced. If you file taxes jointly with your partner, then a divorce can complicate tax matters.

One point that you should note is that the more complicated your financial situation is, the more tax planning you need to minimize your tax liability.

While tax software can help with tax compliance — filing the necessary tax returns and paying the right amount — it cannot help much with tax planning — making decisions that will help reduce your tax liability.

Which tax professional do you need?

Though we have used “tax professional” throughout this article to refer to experts in tax matters in general, there are some key differences among who does what.

CPAs are full-time accountants who are very familiar with the tax code. They often work with businesses or those involved in long-term tax planning.
Enrolled agents (EAs) can help prepare your tax return, advise you on tax matters and even represent you before the IRS for a tax audit. The IRS issues the EA credential to those who have met the requirements.
Tax consultants or advisers usually have the same expertise on tax matters as CPAs. You can rely on them for both tax compliance and planning, especially in more complex situations.

However, while taxation is only one area of expertise for a CPA (financial planning, financial statements preparation, etc., being others), tax consultants are laser-focused on taxation.

So, which professional should you choose?

If you are looking only for tax preparation in situations that are a tad too complex for tax software, an EA may be all that you need.

However, if you are a business owner or you need long-term tax planning (especially relating to retirement and estate planning), investing the extra bucks in tax consultants or CPAs may be appropriate.

Finally, choosing between a tax consultant and a CPA boils down to the scope of services you want. If you are a business in need of more than just tax planning, a CPA might be in a better position to help.

In sum, while tax-preparation software has revolutionized the world of taxation by providing taxpayers with a fast, cost-effective and simple way to file their tax returns, some complex financial situations still require the personal touch of a tax professional.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

]]> https://www.kiplinger.com/taxes/tax-software-vs-a-tax-professional-which-to-choose qkNWwL9XNg5c8YHCUwPj2Y Sat, 30 Nov 2024 10:30:00 +0000 <![CDATA[ 2025 Standard Deduction Changes Under New Trump Tax Bill ]]> In light of the recent GOP tax bill being signed into law by President Trump, many may wonder: What is the new standard deduction?

The reconciliation bill, dubbed the "One Big Beautiful Bill" (OBBB), includes a bunch of tax cuts and provisions that will impact U.S. taxpayers for years to come.

One of these provisions has to do with the standard deduction you'll use for tax returns you'll file in early 2026. While the IRS increased the standard deduction last fall, the new amounts for 2025 have been increased again under the OBBB.

This is in addition to the usual annual adjustment for inflation, which means the newly raised standard deduction will also increase each year.

Plus, the OBBB has added a new temporary bonus deduction for those 65 and older. Interested? Read on.

In the news: The 2026 Standard Deduction is Here.

What is the new standard deduction amount for 2025?

The standard deduction amounts have increased under the "One Big Beautiful Bill" (OBBB) between $1,150 and $2,300 from prior-year numbers.

Below are the 2025 amounts:

Married Filing Joint and Surviving Spouses	$31,500	Increase of $2,300 from the prior tax year
Single and Married Filing Separately	$15,750	Increase of $1,150 from the prior tax year
Heads of Household	$23,625	Increase of $1,725 from the prior tax year

It's important to note that the above chart reflects the IRS's change to the standard deduction in the fall, plus the OBBB increase.

So, for example, while the IRS initially increased the 2025 single filer deduction from $14,600 to $15,000 as part of its normal inflation adjustment, the OBBB has now further increased that amount to $15,750.

2025 standard deduction over age 65

As Kiplinger has reported, there's an existing extra standard deduction for taxpayers 65 and older and those who are blind. For 2025 that additional amount is $1,600 ($2,000 if unmarried and not a surviving spouse).

Those eligible can add the extra standard deduction to the regular amount for their filing status. So, a single taxpayer 65 or older (or who is blind) can claim a total standard deduction of $17,750 on their 2025 federal tax return.

But the OBBB introduces a new bonus standard deduction of $6,000 for those age 65 and older. This may be added to the additional standard deduction for 2025; however, the "bonus" amount is temporary, and phases out for incomes above certain thresholds.

For more information on how the additional deduction works, see: The Extra Standard Deduction for People 65 or Older.

What about dependents?

Your standard deduction amount may differ if you can be claimed as a dependent on another taxpayer’s federal tax return.

The 2025 standard deduction for dependents is limited to either $1,350 or the sum of $450 and the dependent’s earned income, whichever is greater.

Note: The standard deduction for dependents cannot exceed the regular standard deduction for your filing status, even if your earned income is higher than the basic standard deduction amount.

The OBBB standard deduction changes vs. the TCJA

It’s important to keep in mind that the TCJA, also known as the “Trump tax cuts” almost doubled the standard deduction about seven years ago. Before the TCJA, the 2018 amounts for single filers and married filing joint couples were $6,500 and $12,000, respectively.

After the TCJA was enacted, the base standard deduction amounts jumped to $13,000 (single filers) and $24,000 (married filing jointly). As mentioned, the standard deduction is adjusted for inflation each year, and the OBBB increases those amounts further.

The new "Trump tax bill," as the OBBB is also called, raises each 2025 standard deduction amount from anywhere between $750 to $1,500. The bill also introduced a $6,000 temporary bonus deduction for qualifying adults over 65 ($12,000 if both spouses qualify).

This brings the highest possible standard deduction amount to $46,700 for married filing joint couples who are both over 65 and qualify for the bonus deduction.

For more information on how to calculate your total standard deduction, see: The Extra Deduction for Those Over 65 Changes Again.

What about OBBB 2025 tax brackets?

For 2025 (returns you'll usually file in early 2026), the top tax rate of 37% applies to single filers with incomes exceeding $626,350, up from $609,350 in the prior tax year.

While the OBBB did not raise tax bracket limits, it made the existing thresholds permanent.

This upward revision of income thresholds across all brackets means some taxpayers may find themselves in a lower tax bracket for the same income level compared to the previous year.

For more information see Kiplinger's report 2025 Income Tax Brackets Are Set: What to Know Now.

]]> https://www.kiplinger.com/taxes/the-new-standard-deduction-is-here Adoo9C5DYWzfPmo3XLU7uC Tue, 22 Oct 2024 14:40:20 +0000 <![CDATA[ The TCJA: Key Facts on the 2017 'Trump Tax Cuts' and What's Extended for 2025 ]]> The Tax Cuts and Jobs Act (TCJA) became effective more than seven years ago as a major Trump administration tax code overhaul.

Before the recently so-called "One Big Beautiful Bill" (OBBB), the TCJA was the biggest change to tax law and policy in recent decades. (That's why the TCJA is also known as the "Trump tax cuts.")

Extending the expiring TCJA provisions in the OBBB affects millions of taxpayers across the U.S. since its provisions cover everything from changes to the standard deduction and the child tax credit to income tax rates and even the availability and amounts of other popular tax credits and deductions.

While many key TCJA provisions were extended in the OBBB, some were not. For instance, certain individual Alternative Minimum Tax (AMT) phaseout limits reverted to 2018 levels.

We’ll cover what the TCJA is, several provisions that remain, and how it all might impact your household.

TCJA Explained

What is the TCJA?

The TCJA was a sweeping tax overhaul that reduced tax rates, changed processes, and restructured individual and corporate tax frameworks.

As mentioned, the law, enacted in 2017, is also known as the "Trump tax cuts" because it was a signature piece of legislation in Trump's first term as president.

Several significant tax changes are in the TCJA, but a major one was a temporary reduction in individual federal income tax rates.

Tax Rates

TCJA income tax changes

Almost every U.S. taxpayer was affected in some way by the TCJA. Below are a few highlights from the tax rates and the bracket changes tied to them. We’ll use the data to illustrate examples of the 2017 law’s impact.

Source: Tax Policy Center. The tax bracket income thresholds here compare 2018 prior and post-TCJA amounts to show the immediate impact of the TCJA on tax brackets.

Federal income tax brackets are adjusted annually for inflation, so these comparisons don't reflect current federal income tax brackets for the 2025 tax year.

2017 (Before the TCJA)
Single Filer	Married, Filing Jointly	Rate
$38,700 to $93,700	$77,400 to $156,150	25%
$424,950 to $426,700	$424,950 to $480,050	35%
$426,700+	$480,050+	39.6%

2018 (With the TCJA)
Single Filer	Married, Filing Jointly	Rate
$38,700 to $82,500	$77,400 to $165,000	22%
$200,000 to $500,000	$400,000 to $600,000	35%
$500,000+	$600,000+	37%

As shown above, a single filer with income above $38,700 before the TCJA was enacted would have been subject to a 25% federal tax rate. The year following the TCJA's enactment, that same income level was instead subject to a 22% tax.

Another example from above is a married, filing jointly couple with income above $480,050 before the TCJA was enacted would have been subject to a 39.6% marginal federal tax rate. The year after the TCJA was signed into law, those earnings were instead subject to a 35% tax.

Note: Remember that the above examples merely illustrate the immediate impact of the change in tax rates from 2017 to 2018. Since federal tax brackets are adjusted yearly for inflation, the income tax brackets for 2025 are not reflected in that chart. For more information, see 2025 Federal Tax Brackets and Income Tax Rates.

Most tax rates were reduced under TCJA. However, the lowest tax rate of 10% was not. Taxpayers in the lowest bracket before and after the TCJA could have been subject to a 10% tax.

Households earning $450,000 or more received about 45% of benefits from the TCJA. As you can see from the above examples, under the TCJA, those with higher incomes generally saved more on taxes than taxpayers with lower incomes.

Note: In the newly enacted OBBB, the post-TCJA federal income tax bracket schedule and lower rates were made permanent.

Child Tax Credit

TCJA child credit changes

The TCJA also cut personal exemptions and expanded the federal child tax credit (CTC). That meant families could no longer take the personal and dependent exemption, which was $4,050 (indexed for inflation).

And under the newly signed OBBB law, the elimination of the personal and dependent exemption is permanent.

Before the TCJA, 292.7 million people claimed personal and dependent exemptions. Total taxpayer savings were in the billions, so individuals could potentially see a reduction in savings with permanent termination.

However, a higher CTC amount, which used to be $1,000, pre-TCJA, has become permanent under the OBBB.

The new CTC amount under the OBBB is $2,200 per child.
The tax law also indexes the credit amount for inflation yearly, starting in 2026.
The qualifying child’s age for this credit remains at 17 and under (pre-TCJA allowed a credit for children 16 and under).

As Kiplinger previously reported, data show that poverty levels can decrease when families benefit from an expanded CTC. But it hasn’t ended there.

The OBBB also maintains the increased income phase-out thresholds, the nonrefundable, non-child dependent credit, and leaves the refundable part of the child tax credit at $1,700.

For more information, check out Kiplinger's report, Three Major Changes Coming to Parents Under the Trump Megabill.

Note: The TCJA also changed the child tax credit requirements regarding Social Security numbers (SSN). Before, a qualifying child didn’t have to have an SSN. After, children without eligible SSNs couldn’t qualify for the full credit. Under the OBBB, a child's and his or her parents' SSNs are required to claim the credit.

Standard Deduction

TCJA doubled standard deduction

The TCJA almost doubled the baseline federal standard deduction.

When the TCJA was enacted, the standard deduction jumped from $6,500 to $12,000 (single filer). For married, filing jointly filers, the standard deduction increased from $13,000 to $24,000. The standard deduction is indexed annually for inflation.

Some bipartisan organizations suggest that the larger standard deduction offered by the TCJA leads to a progressive tax rate (a rate that increases as taxable income increases). This would mainly benefit middle-class and low-income households.

According to the Center for Economic and Policy Research (CEPR), studies have shown that more people with $200,000 or less in income took the standard deduction when the TCJA was first enacted. However, it should also be noted that data show most people took the standard deduction before the TCJA.

Under the recently signed OBBB, the raised standard deduction amounts are made permanent and further increased with an extra year of inflation adjustment.

For tax years 2025, the bill increases the standard deduction by the following amounts:

Single filers get an extra $750
Married, filing jointly couples receive an extra $1,500
Head-of-household filers get an additional $1,125

For information about the current standard deduction, see How Does the Standard Deduction Work?

SALT Cap

New SALT Cap Limit under TCJA and OBBB Changes

The TCJA also limited the amount of state and local tax (SALT) you could deduct. The SALT deduction includes property tax and other taxpayer liabilities already taken out for state and local services.

Pre-TCJA, the deduction was limitless; after the law was enacted, you could only deduct up to $10,000 of your state and local taxes. This mainly affected those with high-worth homes or state and local taxes in high-cost areas, such as New York, New Jersey, or California.

For example, homeowners could no longer itemize the full amount they pay in state, local, and property taxes if they pay more than $10,000. This meant those taxpayers saw fewer benefits.

However, the OBBB includes a provision temporarily raising the SALT cap to $40,000.

The cap will increase by 1% annually from 2026 through 2029.
Starting in 2030, the SALT cap will expire and revert to the $10,000 TCJA limit.
Those with modified adjusted gross income (MAGI) above $500,000 or more are subject to a phaseout ($250,000 if married filing separately).

There was much debate before the OBBB's temporary raise on the SALT cap was made final.

Rep. Nick Lalota (R-N.Y.), an outspoken critic of the SALT cap, told Politico that the tax bill was "dead effectively on the floor" under the original $10,000 the GOP proposed. Other Republicans representing high-tax districts have argued that a later proposed limit of $30,000 was still too low.

This might hint at future negotiations down the road when the $40,000 SALT cap expires in 2030.

For more information, see Kiplinger's report: SALT Deduction 2025: Three Things to Know Now.

Did itemized deductions go away under the TCJA?

The TCJA affected other miscellaneous itemized deductions in the following ways:

It limited deductible medical expenses and deductible home-equity loan interest. The medical expense limit was later made permanent. The OBBB also made the limit on home-equity loan interest permanent, unless the loan is for buying, building, or substantially improving the home securing the loan.
Increased the charitable contribution deduction rate from 50% to 60%. The OBBB made this provision permanent.
Repealed a “Pease” limitation, which reduced itemized deductions based on taxable income above certain thresholds. The OBBB repeals the Pease limitation and replaces it with a new limit on itemized deductions, which applies mostly to taxpayers in the highest income tax bracket.

The TCJA also eliminated the deduction for unreimbursed employee expenses and tax prep fees, for alimony, hobby expenses, and moving expenses (unless you're military), and the deduction for casualty and theft losses, except for certain losses in federally declared disaster areas.

Those "miscellaneous itemized deductions" were permanently removed under the "One Big Beautiful Bill." However, the increased standard deduction in the OBBB might result in a larger tax refund for some taxpayers next year.

For more information, check out Kiplinger's report, Five Ways Trump's 2025 Tax Bill Could Boost (or Shrink) Your Tax Refund.

*Many TCJA or "Trump tax cuts" were extended under the new OBBB, or "One Big Beautiful Bill" tax law.* (Image credit: Getty Images)

Alternative Minimum Tax

How the TCJA affected AMT (Alternative Minimum Tax)

The Alternative Minimum Tax (AMT) places a floor on the amount that higher-income taxpayers must pay, regardless of credits or deductions taken on their taxes.

The AMT’s income level and phase-out were raised under TCJA. This meant fewer higher-income people qualified for AMT (which for 2025 applies to taxpayers earning above $239,100). If a taxpayer did qualify, they generally paid less in taxes.

For example, the Tax Policy Center estimated that the number of taxpayers who would have paid AMT the year TCJA was enacted fell by about 5 million. This was big news for people who were subject to what some call a "parallel tax system," which provided the government with about $34 billion in revenue the year before TCJA.

Under the OBBB, certain AMT increased thresholds were made permanent.

For instance, the current exemption amounts have been extended, meaning AMT won't kick in until you meet the post-TCJA limits of $88,100 (single filers) or $137,000 (married, filing jointly, couples).

However, the higher phaseout limits have reverted to pre-TCJA levels. This effectively lowers the phaseouts to $1,000,000 for married filing joint filers and $500,000 for single filers. The rate at which the exemption is phased out has also been increased from 25% to 50% as income increases.

Estate Tax

Estate tax exemption extension

Another benefit for wealthier taxpayers under the TCJA is the doubling of the federal estate tax exemption.

In 2017, instead of paying taxes on estates above $5.6 million, higher-income individuals were not taxed until $11.2 million. The threshold is inflation-adjusted annually, with the current exemption level at $13.99 million.

The recently signed OBBB makes the higher exemption for the estate tax permanent. Not only that, but the law also indexes the estate exemption for inflation and raises the 2026 amounts to $15 million for single filers and $30 million for married couples.

For more information, see Kiplinger's report Big GOP Tax Bill Could Change Your Estate Planning for 2025.

Corporate Tax

Trump corporate tax rate

The TCJA changed taxes for businesses, too. For example, the TCJA cut the corporate income tax (CIT) from 35% to 21%. This was a permanent change.

Though the effect of lower corporate tax rates is debated in economic circles, the Tax Foundation reports that the burden of the CIT falls on consumers. Consequently, a lower CIT might entice companies to raise wages and lower prices for buyers.

Other TCJA changes made for businesses included:

Created a 20% deduction on qualified business income for some business owners (pass-through entities). The OBBB made this deduction permanent.
Limited deduction for meals and entertainment expenses (the latter are generally not deductible). The TCJA made this change permanent.
Largely eliminated tax deductibility of net operating losses (NOL) for businesses. (The TCJA limited the NOL deduction to 80% of taxable income and eliminated most carrybacks.) This provision is permanent.
Limited business interest expenses. (The OBBB makes a more restrictive calculation of adjusted taxable income (ATI) permanent.)
Allowed 100% expensing on some business property for specific tax years. (This provision was set to phase out gradually after 2022.) The OBBB allows taxpayers to immediately expense 100% of qualified short-lived property that was placed in service on or after January 20, 2025.

That last point, on expensing business property, concerns depreciation. Normally, business assets are depreciated over their useful life (typically five, 10, or 15 years). Before the TCJA, tax law generally allowed some equipment to be partially expensed, but it was only 40% of qualifying assets.

The OBBB extends the TCJA provision allowing businesses to fully and immediately expense their qualifying short-lived assets placed in service after January 19 and before January 1, 2030. (Other types of property may be subject to a different duration of tax benefits.)

Accelerated depreciation creates a greater tax difference between reportable income (what the stockholders see) and taxable income (what the IRS sees). But this difference is temporary. In later years, when the asset has been fully expensed for tax purposes, but not for reportable income purposes, the business will pay more tax on that asset.

That is why accelerated depreciation might be called a "deferred tax liability." Businesses pay less in taxes now for greater tax liability in the future.

Effectively, immediate expensing allows companies to invest more in the short term. This could create more jobs, boost productivity, and raise wages.

TCJA vs. OBBB

Bottom line: Trump tax bill extends TCJA provisions

Many TCJA cuts became permanent. However, doing so came with a price tag.

The OBBB is estimated to cost about $4.5 trillion over ten years, according to Tax Notes. This significant federal deficit impact could impact your wallet through higher borrowing costs and potential future tax increases, or in other ways.

You might want to get a head start on your 2026 tax planning. Consult with a tax planner to look at your financial situation to see whether any recent tax changes apply to you.

]]> https://www.kiplinger.com/taxes/what-is-the-tcja 7cBwrTyav6uA85HcrUS3Wo Fri, 20 Sep 2024 14:44:00 +0000 <![CDATA[ Do You Fear an IRS Audit? You Shouldn't if You Do Your Homework ]]> Audit. The word strikes fear in many people. They dread the scrutiny, penalties and other unfortunate outcomes when the IRS questions the accuracy or the veracity of their tax return.

The IRS recently announced its plans to significantly ramp up tax audits on the wealthiest taxpayers, large corporations and large, complex partnerships for tax year 2026. Audit rates will increase by more than 50% for those with total positive income of more than $10 million. That news is sure to trigger anxiety in some high-net-worth individuals.

But if you’re in that bracket, or any tax bracket for that matter, let me set your anxieties at ease. An IRS audit is more of an exercise that seeks documentation; it’s not necessarily an accusatory event.

You learned this in grade school

I like to think of an IRS audit as something that is similar to what goes on in classrooms. Remember when you had to take math tests in elementary school? Maybe you had to answer a quiz with 10 multiplication problems. You did them all in your head and turned in your exam.

The teacher looked at your answers, which were all correct. But she noticed you didn’t show your work. She couldn’t tell by merely checking your answers that you knew how to arrive at the solutions.

So she handed the exam back to you and said, “Can you show me how you solved these problems? Can I see the process you used to get these answers?”

When you get audited, the IRS wants to know how you got the answers you did.

Taxpayers should be able to explain and justify their tax positions and investments to the IRS. Proper documentation is crucial, and I advise clients to prioritize it. I tell them to make a note of what they do and when they do it. This way, they have their homework in place and ready to show the IRS if it’s needed. Start a file or folder that includes all the forms and documents that explain your financial actions.

The documentation should answer these questions:

What did you do?
How did you do it?
Why did you do it?
What documents do you have that support what you did?

Let’s say you’re a real estate professional. You need to have 750 hours a year of aggregated time in real estate activities to qualify as a real estate professional in the eyes of the IRS. Suppose the IRS decides to audit your return from five years ago. They ask for documentation to show that you spent 750 hours on real estate-related tasks during the year in question.

Do you have documentation that shows this? Maybe you spent an average of 40 hours a week at an office as a broker. You might have had regular training meetings with your staff. Your calendar may have been full of appointments. All those activities could serve as the evidence you need.

The approach for business owners is slightly different. These individuals are inherently risk-takers. Everything related to their business carries risk. They hope that by making purchases, investing in a workforce, targeting new markets or expanding their geographic reach, they’ll receive a return. Their goal is to generate revenue that exceeds the costs involved.

Translating this to tax planning, then, I ask, “Why would a business owner be any different when they’re looking at an advanced planning strategy?” They aim to take a calculated risk and say, “Can I document this position that gives me the ability to make an argument to the IRS on why this position works? If I were to get audited, do I have enough documentation to support it?”

Red flags that could trigger an audit

Most of the causes behind an audit stem from an error or omission. In some cases, not all the 1099s or K-1s get turned in. Illegal practices, such as fabricating documents, taking deductions that aren’t allowed or making up different types of expenses that didn’t occur, can lead to trouble.

Here are some situations that could draw the IRS’ attention:

Certain transactions. The IRS has identified the transactions on this list as potentially abusive. They are the same or substantially similar to those that the IRS has determined to be tax-avoidance transactions.

Dirty Dozen. The Dirty Dozen list, published annually by the IRS, highlights common tax scams and abusive transactions.

Active vs passive losses. Many taxpayers incorrectly use passive losses to offset active income (like wages). The IRS considers a passive business or trade activity one in which you don’t materially participate — i.e., you’re not involved in the operation on a regular or substantial basis. Popular passive activities include rental real estate, equipment leasing, limited partnerships and limited liability companies (LLCs). Passive losses can be written off only against passive gains.

Partnerships. The IRS is focused on partnerships that don’t pay corporate income taxes. Tiered partnerships, or those that own another one, can provide a way of hiding income.

Keep your transactions and actions well-documented so that you’re prepared if you get audited. In that event, you’ll be ready to show your homework. If you don’t want to have to represent yourself, there are attorneys and CPAs who specialize in tax-controversy work.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

]]> https://www.kiplinger.com/taxes/do-you-fear-an-irs-audit-show-your-work Q32XjKNb4nzSERWGPUqSze Sun, 09 Jun 2024 09:45:58 +0000 <![CDATA[ Why Your Tax Refund Could Be Higher This Year ]]> The latest IRS data show that the average federal tax refund is approximately $3,182. That’s more than $140 (5.1%) higher than it was at this time last year. But that doesn’t mean everyone will get a bigger tax refund from the IRS this year. Here are some reasons your refund could be more — or less — than last year.

2024 tax refund

IRS inflation-adjusted amounts could partially account for higher refunds in 2024. For example, 2023 standard deduction amounts increased by more than 6%, and federal income tax brackets also increased, so taxpayers who received only small raises (or none at all) may see a big difference in their 2023 tax liability when they file.

Families with lower incomes could see a significant increase in refund amounts too, even if they don’t benefit from the higher standard deduction. The maximum earned income tax credit (EITC) amount increased by nearly $500 for the 2023 tax year. And because the credit is 100% refundable, eligible taxpayers could receive the entire amount (up to $7,430) back as a tax refund.

What about the child tax credit? If the new child tax credit (CTC) becomes law this year, some families could receive even more money back as a tax refund.

However, the bipartisan tax bill, which includes an expansion to the CTC, is currently stalled in the Senate. So, there is no guarantee that the bill will become law before the end of the 2024 filing season — if at all.

What could cause a lower tax refund? There are several reasons your federal tax refund could be less this year.

If your dependent child turned 17 in 2023, they won’t qualify for the CTC.
Other major events, such as getting a divorce or an adult dependent moving out of the home, can decrease your refund amount.
If you (or a spouse if filing jointly) had a significant increase in income, you could be disqualified from claiming certain credits.
Underpaying when you made estimated tax payments for 2023 will increase your tax liability when you file.

There are many more reasons you could see your tax refund decrease (or your tax bill increase) in 2024. So, you may see a difference in your refund this year, even if none of the above events apply.

IRS refund schedule

While several “IRS refund schedules” are available online, the dates on those schedules are estimates. Some tax returns take longer to process than others, and several things, including incomplete returns and refunds that need adjusting, can cause processing delays.

However, the IRS issues refunds for most e-filed returns within three weeks. (Processing can take up to eight weeks for paper returns). E-filing and choosing to receive your refund via direct deposit remain the best options for receiving your refund sooner. You can begin checking the status of your tax return with ‘Where’s My Refund’ within 24 hours of IRS acceptance.

Where's my refund

To access the "Where's My Refund" tool, you need to enter your Social Security number or individual taxpayer identification number (TIN), the filing status used on your federal income tax return, and the exact whole dollar refund amount shown on your return. You can use either spouse's Social Security number if you filed a joint return.

'Where's My Refund' is only updated once per day — usually at night — so there's no need to check your status more often than that.

For more information see: Where's My Refund? How to Track Your Tax Refund Status.

]]> https://www.kiplinger.com/taxes/why-your-tax-refund-could-be-higher-this-year ivq8hZjKYtLb7fWT2fFBUg Sat, 23 Mar 2024 14:01:00 +0000 <![CDATA[ How Much Richer Could You Be Without a Big Tax Refund? ]]> Many people rejoice each year when they receive their tax refund, but high refund amounts could mean that you overpaid your taxes throughout the year. And if that’s the case, you’ve essentially lent the government money, completely interest-free.

While no one wants a high-income tax bill, owing the IRS just a little could put more money in your pocket. Here’s how much richer you could be if you kept your money throughout the year instead of receiving it back as a tax refund.

IRS tax refund

According to the most recent IRS data, the average tax refund is $3,182 this month. That is a good chunk of change and is likely due, at least in part, to refunds that include the child tax credit (CTC).

Middle-class families who include other credits (including the CTC) on step 3 of their W-4 will likely have less federal income tax withheld from their paychecks. Of course, this could result in a lower tax refund when it’s time to file, but that is not necessarily a bad thing. With some adjustments to withholdings, some taxpayers could have pocketed just over $265 per month instead of receiving $3,182 all at once.

[Note: Projected earnings amounts are approximate and do not account for inflation.]

Saving for the future

If you had stashed away that $265 each month instead of waiting until tax time for your refund, you could have hundreds more in the bank. (That's assuming you deposited the money into a high-yield savings account with a 5.5% interest rate.) And even though savings rates are expected to fall, receiving a big tax refund in 2024 could cost you money next year as well.

	Deposit $265 per month	Deposit $3,182 per year	Difference
End of Year 1 (5.5%)	$3,261	$3,182	$79
End of Year 2 (4.6%)	$6,662	$6,514	$148
End of Year 3 (2.5%)	$10,047	$9,861	$186

Invest extra cash

If pocketing an additional $186 over three years isn’t enough to convince you that bigger tax refunds aren’t always better, perhaps pocketing an additional $4,637.69 will. Here is how much more money you could pocket over the years if you invest $265 each month rather than $3,182 per year, assuming a conservative 6% annual rate of return.

	Invest $265 monthly	Invest $3,182 annually	Difference
Year 5	$18,413.73	$17,937.23	$486.50
Year 10	$43,055.46	$41,941.29	$1,114.17
Year 15	$76,031.65	$74,064.14	$1,967.51
Year 20	$120,161.24	$117,051.75	$3,109.49
Year 25	$179,216.57	$174,578.88	$4,637.69

Income tax savings

Providing the government with an interest-free loan is not ideal, but it is worse to give away your hard-earned money. Missing out on often overlooked tax credits and deductions, such as the mortgage interest tax deduction and deduction for student loan interest, can result in the IRS keeping more of your money.

And don’t forget about ways to reduce your taxable income throughout the year. For example, record-high 2024 HSA contribution limits mean eligible taxpayers could reduce their taxable income by up to $8,300 this year. And IRA and 401(k) contribution limits are higher for 2024 than they were last year, too.

Just make sure you don’t exceed contribution limits for tax-advantaged or tax-deferred accounts. If you do, you could lose money instead of saving it. And if you do adjust your tax withholdings to receive a smaller tax refund next year, make sure you can pay the IRS (if you have a tax bill) on time because there are hefty penalties for paying late.

Because every tax situation is different, it’s a good idea to consult with a tax professional when determining how to keep more of your money year-round and during tax filing season.

]]> https://www.kiplinger.com/taxes/how-much-money-a-big-tax-refund-could-cost-you r2XF4impekDuzJfkcUGbik Wed, 13 Mar 2024 14:01:00 +0000 <![CDATA[ Six Biggest Mistakes Made on Retirees’ Tax Returns ]]> The only thing worse than the monotonous task of preparing your tax return, or preparing your CPA to prepare your tax return, is doing it again on an amended return. We work with retirees to help maximize income, minimize taxes and plan their estate. Below are the six most common mistakes we see retirees make when seeking to minimize their lifetime tax burden.

Meet John and Linda. They are a newly retired fictional couple. We will use their story to illustrate, and help you prevent, some of the following mistakes.

1. Itemizing deductions vs taking the standard deduction.

One of the first things I notice when building out John and Linda’s financial plan is that there is still a mortgage balance. This is not an issue because they refinanced into a 15-year, 3% loan in 2021.

However, they assume that because they have a mortgage, they should itemize deductions. While that was often the case before tax laws changed in 2018, it is no longer. They have been taking the standard deduction for the last few years, which should have a downstream effect on several of the decisions they make.

John and Linda give to their church. They think that there is a tax benefit to this giving. Because they take the standard deduction, there is not. They could instead give appreciated stock and thus avoid capital gains taxes. More on that later.

Linda had a rough 2023, from a medical perspective. She spent an inordinate amount of time calculating the total cost because she believes it will be a deduction. But all you can deduct are the medical costs that exceed 7.5% of your AGI. To determine your itemized deductions total, add up medical costs, mortgage, state and local taxes and charitable donations. Then itemize only if that amount is greater than the standard deduction, which is above $30,000 for couples over 65, in 2023. (For more on this, see the article The Extra Standard Deduction for People Age 65 and Older.)

2. Improperly reporting qualified charitable distributions (QCDs).

Once John and Linda learn that they aren’t deriving any tax benefits for their charitable giving, they ask about a strategy their friend told them about: giving from their retirement accounts.

Qualified charitable distributions (QCDs) have been around for a while but have surged in popularity as fewer and fewer people itemize their deductions. Unfortunately, neither John nor Linda is 70½, the minimum age to make a QCD. Neither cracks a smile when I tell them to “be thankful for your youth.”

The biggest mistake I see among those who are eligible and who properly make the distribution is that they don’t actually report it on their return. I blame this on the custodians. On a Form 1099, custodians do not report who the money goes to — just that it has gone out.

Example: You give $30,000 from your retirement account to The Michael J. Fox Foundation. You take out an additional $10,000 to meet your required minimum distribution (RMD). Your 1099 will report a $40,000 distribution. There is no differentiation between recipients.

You have to report the gross distribution ($40,000) on line 4(a) and the net on line 4(b), of Form 1040. In between those, the letters “QCD” should be written. If you made a QCD and don’t see that reflected on your return, reach out to your preparer to make sure it was reported.

We rely on financial planning to see how much our clients can afford to give. We rely on tax planning software to see whether QCDs are the best way to give. You can access a free version of our planning software here.

3. Getting surprised by taxes via phantom gains or inefficient portfolios.

When I met with John and Linda in 2023, I was reviewing their 2022 return, which had a very large capital gain. Whenever I see this in a down year in the market, I ask what they sold. They told me they didn’t sell anything. Upon further review, we found that one of the mutual funds in their joint account had recognized significant capital gains.

Tax treatment within mutual funds passes capital gains, on a pro-rated basis, through to the owner of the fund. So, if the fund manager decides they no longer like Nvidia (NVDA), that gain passes along to you. Making money is still a good thing, and paying taxes is part of that. However, this makes tax planning very unpredictable. So we prefer to hold ETFs and individual stocks in taxable accounts. With these vehicles, you pay taxes when you sell, not when a fund manager does.

4. Selling stock with no basis.

We have recommended that John and Linda make their charitable contributions using stocks that have had significant gains. In looking at their statements, there are a few options. What really sticks out to me, though, are the five holdings that have no basis reported.

Custodians were not required to track basis on securities until 2011. So, many of the investments from before this period show up as “0” basis on a statement. If you sell them, the entire amount is taxed as a gain. People make this mistake all the time. It could be because they don’t realize or don’t want to take the time to make the calculation. If you’re in the latter boat, you may want to donate these shares if you were going to give that amount anyway. Odds are, if you’ve held them for 15-plus years, there is a significant gain.

5. Paying more than necessary for Medicare.

John filed for Medicare this year. Linda filed last year. Their premiums for 2024 are based on income in 2022, when both were working. They should consider filing an SSA-44, the life-changing event form. This will allow them to project current income and pay premiums based on their current income, not their income while they were both working.

As you may have inferred from the above paragraph, Medicare Parts B and D premiums fluctuate based on income. Like our tax rates, there are income thresholds above which your premium goes up. Often, I see people going slightly above these threshold amounts without realizing it. If we catch this before the return is filed, we will look for ways to bring down their gross income. (For more on this, see my article Four Things to Know if Medicare’s IRMAA Kicks In.)

6. Not taking advantage of lower tax years.

John and Linda were jazzed about the tax return their accountant projected. Neither worked the full year, so they overpaid based on what they had earned previously. Their taxes are likely to remain low until they tap Social Security and their retirement accounts.

We refer to the years between retirement and withdrawals as “tax valleys.” Tax peaks are during your peak earnings years, and valleys are just the opposite. Take advantage of those valleys by evaluating whether you can convert retirement funds, take distributions or sell capital gains at a lower rate than you would be able to in the future.

Often when I’m reading a “mistakes to avoid” article, it’s just to ensure I didn’t make those mistakes. This one is a bit different. While you may have fallen victim to a few of these, in some cases it means you can file an amended return and get money back. At the very least, you can fix the mistake in time for future years.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

]]> https://www.kiplinger.com/retirement/biggest-mistakes-on-retirees-tax-returns DoDAXfY46E2t7WXQQvnuvf Sun, 10 Mar 2024 09:30:02 +0000 <![CDATA[ What to Know About Medical Expenses and Your Tax Deductions: The Tax Letter ]]> Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…

As you’re filling out your 2023 Form 1040 you may ask whether you should itemize on Schedule A or take the standard deduction. Most filers take the standard deduction because it’s higher than their total itemizations. But not all.

Take people with big medical bills. Itemizers can claim medical expenses not reimbursed by insurance, for themselves, their spouse and dependents. The cost must be incurred primarily to alleviate or prevent a physical or mental disability or illness. But there is a floor. Medical expenses are deductible only to the extent the total exceeds 7.5% of your adjusted gross income (AGI). For example, if you itemize, your AGI is $100,000 and your total medical expenses are $9,000, you can deduct only $1,500 of medical expenses on Schedule A ($9,000 - $7,500).

The list of eligible medical expenses for tax deductions is broader than most people think. It includes:

The basics: Such as out-of-pocket payments to doctors, dentists, optometrists and other medical professionals; mental health services; hospital stays; annual physicals; health insurance and Medicare premiums; prescription drugs; insulin; glasses and contact lenses; hearing aids; and dental work, such as braces and root canals.
In vitro fertilization: Amounts paid for IVF qualify as medical expenses.
Medical driving: The 2023 standard mileage rate is 22¢ per mile. It's 21¢ per mile in 2024.
Treatment for drug use or alcoholism: This cost is considered a medical expense.
Health and wellness costs: Among other health and wellness costs that qualify as deductible medicals are smoking cessation programs, nutritional counseling for a doctor-diagnosed disease, weight-loss programs and certain special food to help with the treatment of obesity, hypertension, heart disease or other physical illnesses diagnosed by a physician.
Long-term care costs: If you, your spouse or your dependent requires long-term care you may be able to deduct the unreimbursed costs as medical expenses. Long-term-care expenses include the costs of assisted living, in-home care and nursing home services. The long-term care must be medically necessary for one who is chronically ill. The costs of meals and lodging at an assisted living facility or a nursing home count as medical expenses for people mainly there for medical care. Premiums you pay for a long-term-care policy are deductible medicals, too. But the deduction is capped based on age. The older you are, the greater the write-off.
Certain home improvements to adapt to a disability or illness: For instance, ramps, wide doorways or entrances, railings and wheelchair lifts.
The cost of a service dog: Veterinary costs for a service dog to assist the visually impaired and others with physical disabilities are eligible for medical expense deductions. The same is true for the cost of buying and training the dog, plus feeding and grooming. An emotional support animal counts if needed primarily for the owner’s medical care to alleviate a mental disability or illness.
COVID-19 personal protective equipment: Masks, hand sanitizers and other supplies bought for the primary purpose of preventing the spread of COVID-19.
The cost of a legal abortion: The procedure must be performed in a state where abortion is legal. Transportation costs are deductible. Hotel expenses of up to $50 a night can also be deducted if the abortion is provided by a doctor in a licensed hospital or a medical care facility. You can take up to an additional $50 a night for a traveling companion’s lodging.
Genetic testing through DNA ancestry registries: If you use a DNA ancestry for genetic health testing, such as 23andMe, the portion of the DNA collection kit's cost that pertains to genetic testing may be treated as a deductible medical expense.

Among the costs that do not qualify as deductible medical expenses:

Most food, weight loss supplements or low-calorie beverages.
Weight-reduction programs or cosmetic surgery procedures to improve your appearance.
Gym membership fees.
Teeth whitening and hair transplants.
An elevator installed in your home (it adds value to your house).
Over-the-counter medications that are bought without a prescription.
Amounts paid for marijuana and other substances that aren't legal under federal law. It doesn't matter whether they are legal under state law.
Illegal operations or treatments.
Amounts paid to or for a gestational surrogate, including costs to identify and retain the surrogate and the person's medical expenses.

For more details on these and other qualifying and nonqualifying medical expenses, see IRS Publication 502, Medical and Dental Expenses.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.

]]> https://www.kiplinger.com/taxes/tax-deductions/what-to-know-about-medical-expenses-and-your-tax-deductions WuXpvsJ3vCG6mHctXPN5Mm Fri, 16 Feb 2024 21:23:03 +0000 <![CDATA[ Taylor Swift's 'Eras Tour' and a New Tax Rule? What To Know ]]> If you're a Swiftie or an NFL fan, you might not care so much that Travis Kelce of the Kansas City Chiefs and Taylor are dating. But all the excitement and talk about Taylor Swift has also raised questions about what Eras Tour tickets might have to do with your taxes.

So, to sort out some of the confusion, here’s what you need to know about how reselling concert tickets (not just those for Swift’s tour) might impact your tax bill.

Ticketmaster, StubHub tickets and your taxes

It's not uncommon to come across Eras Tour, Beyonce Renaissance Tour, and other tickets being resold on platforms like StubHub and Ticketmaster, particularly during times of high demand. Assuming, for instance, Swift's tour tickets originally sell for around $449, ticket resellers can profit substantially from selling coveted seats for $1,300 or more. That’s where tax could have come in if the IRS hadn't jumped in to change things.

Ticket resellers may have been subject to new IRS reporting requirements if, as in that example, they resold ticket(s) online and profited over $600. Form 1099-K reporting rules apply if you sell goods or services (not just concert tickets) online and receive payment through third-party payment networks like Stripe, PayPal, Venmo, and others.

That is the new “$600 rule.” For the 2022 tax year, the IRS delayed the implementation of the rule. That delay was supposed to give payment networks more time to prepare to send millions more 1099-K forms and online sellers more time to understand the new requirement. And just recently, the agency has decided to delay the $600 rule again until 2024.

So, for now, unless you have over $20,000 in payments for goods or services through online marketplaces or third-party payment processors in 2023, you don't have to worry about the $600 rule.

Online sales 1099-K reporting

Many businesses are subject to 1099-K reporting requirements. A few examples include popular platforms like Etsy, Depop, eBay, Poshmark, etc. (But this is far from an all-inclusive list.) If you need clarity on whether you will receive a 1099-K, most of these sites have information on their websites that can help.

However, personal transactions (e.g., personal payments to friends and family) on payment networks, including Venmo, PayPal, Cash App, etc., aren't considered "payments for goods and services." The 1099-K third-party payment network reporting rule doesn't apply to payments made that were gifts or other personal money payments to family and friends.

For now, the $600 rule won't apply for the 2023 tax year (i.e., federal income tax returns that are normally filed in April 2024). That means if you received payment (for goods or services) over $600 through online platforms this year, you shouldn't have to worry about receiving a 1099-K form by January 31, 2024, to use when you file your 2023 federal income tax return.

For 2024, the IRS is planning to phase in a $5,000 reporting threshold. To learn more, see 1099K Tax Reporting: What You Need To Know.

Will you have to pay taxes on your ticket sales?

Receiving a 1099-K doesn’t necessarily mean you will have to pay taxes on your ticket sales. For example, on its website, Ticketmaster tells sellers that the 1099-K “just provides the total gross transactional amount processed by Ticketmaster during that calendar year.” As always, your tax liability depends on several factors, including taxable income, tax deductions, and credits.

However, whether you receive a 1099-K or not, it is important to report any taxable income on your federal income tax return as required by the IRS. (This typically includes profits from reselling concert tickets.)

If you are worried about the impact of your online selling on your tax liability, consult a trustworthy tax professional.

]]> https://www.kiplinger.com/taxes/reselling-tickets-irs-reporting-rule XMn2tJkETg5XbDfEiH5neY Sun, 01 Oct 2023 17:01:00 +0000 <![CDATA[ How Long to Keep Tax Returns and Records? Kiplinger Tax Letter ]]> Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…

The 2024 tax filing season is in full swing. The IRS began accepting 2023 Forms 1040 and other federal tax returns on January 29. As you're getting ready to file your 2023 return, or perhaps even just thinking about filing, you may be wondering how long you need to keep your old tax returns and related records. We get asked this question a lot by people looking for a cutoff date to toss paperwork relating to taxes that they have been saving for years. The answer depends on the type of document and the kinds of transactions you engage in.

Tax returns and Records - General Rule
As a general rule, you should keep your tax returns and supporting documents for at least three years from the due date of your return. That’s generally how long the IRS has to question items on your return and to bill you for any additional tax. It’s also generally the timeframe to file an amended return to seek a refund. There are situations when the IRS can audit even older returns. The IRS can go back up to six years if your return omits more than 25% of income. If fraud is proven, there is no limit. Also, you may have to keep your state tax returns for longer than three years, depending on your state's rules.

Tax Returns and Records You Should Keep for Longer
Don’t automatically throw out all of your tax returns and records after three years. Look over old documents to see if you might need any parts of them in the future. Here are some common examples of records and returns that you should keep longer than three years.

Real Estate

Hold on to records that help establish the adjusted basis of real estate
Save your settlement sheet whenever you buy real property, including your home
Don’t throw away receipts or invoices for improvements made to the property that add to its value, prolong its useful life, or adapt it to new uses
If you have multiple real estate properties, it’s best to have separate folders for each
Retain all files until at least three years after you dispose of the property

Taxpayers who keep good records will find it easier to calculate the adjusted basis of their real estate investments, which you'll need when you sell the property, compared with people who don’t maintain records.

Securities
The same rules that apply to real estate apply to securities transactions. You should hold on to all records until at least three years after you dispose of the securities. Be sure to keep your purchase documents for taxable mutual funds, stocks and the like. You'll need to include the purchase date and cost on your return in the year you sell the assets. Among other records to maintain:

Those showing stock splits, dividend reinvestments and nontaxable distributions
If you invest in bonds or Treasury bills or notes, track when these securities mature

IRAs and 401(k)s
If you’ve made nondeductible pay-ins to traditional IRAs or post-tax pay-ins to 401(k)s:

Save records until three years after the accounts are depleted
File Form 8606 with your return for the year you make a nondeductible contribution to a traditional IRA. If you don’t, those contributions will be treated the same as deductible pay-ins when withdrawn
Retain copies of Form 8606 and your 1040s for each year that such pay-ins are made
Hold on to Form 5498 or similar statements reflecting the amount of IRA payouts

Inheritances and Gifts
If you inherit property or receive property as a gift that you might eventually sell, heed this advice:

For inheritances, you’ll need to know the date-of-death value.
For gifts, you’ll need to know the donor’s cost.
So, keep documentation of these figures until three years after you sell the asset

Businesses
Businesses should hang on to payroll tax records for a minimum of four years after the due date for filing Form 941 for the fourth quarter of a particular year. Among the information to be retained:

Wage amounts
Payment dates
Employee data (such as names, employment dates and Social Security numbers)
Periods for which workers were paid while absent because of sickness or injury
Copies of all W-4 forms and payroll returns, and amounts and dates of tax deposits
Records of tips earned by workers and fringe benefits provided to employees

Copies of worker health coverage forms should be kept at least three years after the deadline for filing these documents. These are the 1094 and 1095 forms that many employers are required to file to report employee health insurance data.

Also, records on costs of business assets, depreciation, etc., should be retained for decades.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.

]]> https://www.kiplinger.com/taxes/tax-returns/how-long-to-keep-tax-returns-kiplinger-tax-letter 5gkw2cNvBFEfbLUj6XsY6A Fri, 22 Sep 2023 12:23:39 +0000 <![CDATA[ Are You Mistakenly Dead to the IRS? ]]> The IRS incorrectly locked thousands of taxpayer accounts because the agency thought the taxpayers had died. A recent report from the Treasury Inspector General for Tax Administration (TIGTA) found that over 90,000 accounts were "deceased locked” last year despite the taxpayers being alive.

Typically, the IRS locks accounts of taxpayers who have passed away to prevent fraudulent use of the deceased person’s information. When your account is locked by the IRS because you have been marked deceased, you can't file tax returns or receive tax refunds.

The IRS confirmed that many of the "taxpayer accounts were locked in error due to both human and computer programming issues when identifying the appropriate taxpayer accounts to be locked,” the report states.

IRS mistakenly ‘deceased locked’ taxpayer accounts

The TIGTA looked at taxpayer account information from January 1, 2022, and found that the IRS locked close to 78,000 taxpayers' accounts due to mistakenly being deemed deceased by the agency.

According to the report, “In these instances, the Social Security Administration’s (SSA) data didn't indicate that the taxpayer was deceased, i.e., there was no date of death present.”

TIGTA also found that through October of 2022, the IRS continued to decease lock accounts for taxpayers who weren’t dead. From January to October of last year, data showed the agency erroneously locked an additional 14,193 taxpayer accounts.

At the beginning of 2023, the IRS worked to reconcile some of its records with information from the SSA. According to the TIGTA, about seventy percent of accounts reconciled in that process were improperly issued an IRS CP01H notice.

What is a CPO1H Notice?

A CP01H notice is a letter issued by the IRS when the agency receives a tax return that contains a Social Security number (SSN) for a locked account.
The IRS usually locks accounts because the taxpayer identification number (TIN) on the tax return belongs to someone who the IRS believes died before the tax year of the return. Sometimes, the account is locked by the IRS due to identity theft.
But as the TIGTA report found, thousands of taxpayers received CP01H notices in error.

To help the IRS resolve the problem, the TIGTA made several recommendations. (Those mainly involved reviewing affected taxpayer accounts and taking action to remove erroneous locks.) However, another TIGTA recommendation was that the IRS update its CP01H notice to state that taxpayers can work with the agency to resolve the mistaken deceased locks.

According to the report, the IRS argued that the CP01H letter already directs taxpayers to resolve account lock issues with the SSA. However, TIGTA believes that the IRS should “clarify the notice so taxpayers are aware they can work directly with the IRS to correct the erroneous deceased account locks.”

What to do if the IRS thinks you’re deceased

If you receive an incorrect CP01H notice, the IRS says you should contact the Social Security Administration to resolve the situation. After the SSA corrects the information, the IRS says you can file your return by following the instructions on the notice. That process involves providing the following information.

A copy of the CP01H notice
A written request to unlock the account
A photocopy of your passport, driver’s license, Social Security card, or other valid U.S. federal or state government-issued identification
Your federal tax return with original signatures

The IRS also suggests you double-check that the information provided on your tax return is correct — mainly, your Social Security number.

]]> https://www.kiplinger.com/taxes/irs-incorrectly-decease-locked-taxpayer-accounts qRVGHgfkjpQbpDeeY2ZdPB Sun, 13 Aug 2023 14:00:00 +0000 <![CDATA[ Who’s Named First on Your Income Tax Return? ]]> As many people across the U.S. prepare to file joint tax returns in this 2025 tax season, some are understandably concerned about issues like maximizing refunds and how to pay the IRS if they owe. But beyond those practical considerations, could one simple act like listing one name before another on a federal income tax return hold deeper meaning?

A study suggests the answer could be yes — that tax return name order may hold some clues about social dynamics and beliefs.

The study, conducted by researchers at the University of Michigan, using data from the U.S. Treasury Department, found that nearly 90% of married heterosexual couples who filed joint federal income tax returns listed the man's name before the woman's name. The tendency to list the man’s name first on the tax return was linked to factors like political and gender attitudes, risk tolerance, and fear of tax noncompliance.

However, the study additionally revealed that the number of joint federal income tax returns filed with the man’s name listed first on Form 1040 has declined by more than 9% over the last two decades.

Does it matter whose name is first on a tax return?

The person listed first on your joint federal income tax return is sometimes called the “primary taxpayer.” But it’s important to note that your tax liability remains the same whether you list your name or your partner's name first on your federal income tax return when you are married and filing jointly.

And the order of spouse names on your joint tax return doesn’t mean one spouse has more or less income or will have to pay more or less tax than the other.

However, when you file taxes jointly, both spouses must sign and date the return. Also, the IRS says you and your spouse are generally responsible for any tax, interest, and penalties due on the joint return. So, is this study relevant?

Income tax returns: Who’s on first?

The study authors say data findings on tax return name order are informative for two main reasons.

Data show that the decision of married couples filing jointly to list the man's name first on the tax return isn’t a random one, and
Listing the man’s name first on the return can reflect social norms, attitudes, and mindsets.

(Researchers based those and other conclusions on a sampling of data from IRS records containing information from individual income tax returns filed from 1996 to 2020.)

The researchers make clear that the Treasury Department has not “revealed the gender distribution of the name order on joint income tax returns.” Despite this, the study discovered that:

From the 2020 tax year, the man’s name was listed first on jointly filed returns 88.1% of the time. In 1996, that number was 97.3% for the man’s name being listed first.
Listing the man’s name first on a tax return correlated with several varied factors, including being highly religious (61% chance), politically conservative (65% chance), Christian (70% chance), and against abortion (73% chance). According to the researchers, those findings were based on state data cross-referenced with filers' addresses.
Joint tax returns with the man’s name listed first reportedly correlated with a greater propensity toward financial risk. (Examples provided in the research include holding stocks over bonds, engaging in tax evasion, etc., which researchers say they found from matching returns with random IRS audits.)

The researchers note that opinions and conventions regarding who should be listed first on a tax return could be changing. That's partly because younger filers were generally more likely to list the woman’s name first on their jointly filed federal income tax returns.

(According to study data, about 25% of new joint filers in 2020 listed the woman’s name first on the return.)

IRS audits and tax noncompliance?

As it turns out, however, most people maintain the same order of their spouse's name on their federal income tax returns. (According to the study, nearly 99% of filers chose the same name order for their federal tax returns in consecutive years.)

The researchers point out that Instructions for Form 1040 have suggested that the first person listed be the one who completed the tax return. Over the past 20 years, this may have historically resulted in the man’s name being listed first in a joint filing scenario — for any number of reasons.

Also, the IRS encourages taxpayers to enter their names and Social Security numbers in the same order as on their return from the previous tax year. The agency has suggested that changing the order from one year to the next can potentially cause processing delays.

So, who’s listed first on a federal income tax return may or may not be a choice correlated with social norms, attitudes, and perspectives. But for some taxpayers, it’s also possible that the order of spouses' names on tax returns persists because of Form 1040 instructions and longstanding fears of IRS audits and tax noncompliance.

More From Kiplnger

]]> https://www.kiplinger.com/taxes/whos-named-first-on-your-income-tax-return ZLoZg4NyArvR7itPqNrhsU Wed, 12 Jul 2023 15:20:00 +0000 <![CDATA[ Filing a Deceased Person's Final Income Tax Return ]]> Benjamin Franklin coined the saying, “In this world, nothing is certain but death and taxes.” But what about when death and taxes coincide, such as when someone dies during the year and has a tax filing obligation?

When someone is deceased, the decedent's personal representative is generally required to file any final tax returns for the deceased person. That includes federal income tax returns that the decedent would have been required to file for the year of his or her death. A personal representative can be an executor, administrator, or anyone else who oversees the decedent’s property.

Read further for more information on how to file a final federal income tax return for a deceased person.

Filing a final Form 1040 or 1040-SR for a deceased spouse

If your spouse died during the year, you are considered married for the entire year for federal income tax purposes, provided you didn’t remarry that year. So, for example, if your spouse died this year and you don’t remarry before Dec. 31, 2024, you can file a joint 2024 return this year. The return would show your spouse’s income before death and would show your income for the entire year.

You would mark “married filing jointly” for your filing status and include your spouse’s name and your name and address as normal in the name and address fields of Form 1040 or 1040-SR.
If filing a paper return, write the word “deceased,” along with the decedent’s name, and date of death, at the top of the 1040 or 1040-SR.
If you are using tax preparation software, the software will do this automatically for you once you mark that the spouse is deceased and enter the date of your spouse's death.

If there is a court-appointed personal representative, that representative must sign the return with the surviving spouse. If there is no court-appointed representative, the surviving spouse will sign, and write “filing as surviving spouse” in the decedent’s signature box.

If you are filing a joint return that shows a refund due, there is nothing you need to do to receive the refund, other than filing the tax return.

If you remarried before the end of last year, 2024, you file a joint return with your new spouse, and your deceased spouse’s filing status will be married filing separately.

Here's a tip. The qualifying widow or widower filing status lets surviving spouses with dependents use the income tax brackets and standard deductions for joint filers for two years after a spouse’s death.

For example, if your spouse died last year and you have two minor children, you can file a joint 2024 return. Then for your 2025 and 2026 returns, you can file as a qualifying widow or widower, provided you are still unmarried at the end of 2025 and 2026 and claim dependent children for these years.

Filing a final Form 1040 or 1040-SR for an unmarried decedent

The decedent’s final federal income tax return would report his or her income and expenses before death. If filing a paper return for the decedent, write the word “deceased” and the decedent’s name and date of death at the top of the 1040 or 1040-SR. If you’re using tax preparation software, the software will do this automatically for you once you mark that the filer is deceased and enter the date of death.

You would also mark the decedent’s filing status as single or head-of-household, depending on the situation. You write the decedent’s name on the name line of the 1040 or 1040-SR and the personal representative’s name and address in the remaining name and address field.

If there is a court-appointed or court-certified personal representative, that representative should sign the return. If not, and there is no surviving spouse, then whoever is in charge of the decedent’s property signs the return as the personal representative.

If a refund is due to the decedent, you may have to complete and attach Form 1310 to the final 1040 or 1040-SR. This rule does not apply to surviving spouses who file a joint return with the decedent. Nor does it apply to court-appointed or court-certified personal representatives, who are instead required to attach to the return a copy of the court document showing the appointment. However, all other filers requesting the decedent’s tax refund must attach Form 1310.

Note: The IRS has an interactive tax assistant on its website to help you file a deceased person’s federal income tax return. The online tool (i.e., "How do I file a deceased person's tax return) asks several questions, including the marital status of the decedent, whether the decedent is owed a refund, and whether a court-appointed representative or a personal representative is designated by the will.

Failing to file a decedent's final return: What happens if you don't file a deceased person's taxes?

The consequences for not filing a decedent's final federal income tax return depend on whether the decedent owes money to the IRS or is due a refund for the year.

If the decedent is required to file a return for the year and owes money with the final return, then the IRS will eventually send a notice to the decedent's last-known address about the requirement to file a return.
If the taxes aren't paid, then the IRS could eventually go after the executor, or maybe even the decedent's heirs to the extent the heirs received the decedent's property upon death, for the unpaid taxes.
If the decedent is owed a refund, and no final income tax return is ever filed, then the decedent's heirs will not get the refund payment.

]]> https://www.kiplinger.com/taxes/filing-a-deceased-persons-tax-return WHduhqfWQeZuDZqymB27rZ Wed, 01 Mar 2023 14:20:41 +0000 <![CDATA[ When Can You File Taxes in 2023? ]]> We are just starting 2023, but some people already want to know when you can file taxes this year. That's understandable, because generally, the sooner you file your federal income tax return, the sooner you will receive your tax refund--if you're due one.

So, when can you file taxes this year? Here's information you need to know.

When You Can File 2022 Taxes

This year, the IRS started accepting 2022 tax returns at 9:00 a.m. ET on January 23, 2023. That's one day earlier than last year.

When Are Taxes Due in 2023?

If you wanted to file your return as soon as possible and made $73,000 or less in 2022, IRS Free File opened on January 13.

It should also be noted that participating Free File providers began accepting completed returns starting on January 13 and held them until January 23, when they could be filed electronically with the IRS. Other tax preparation software companies and tax professionals may also accept or prepare tax returns before January 23 and hold them until the IRS begins accepting returns.

If you prefer to wait to file your taxes, you have until April 18, 2023, to file your 2022 federal income tax return or request a tax filing extension.

Normally the due date is April 15, but since that day falls on a weekend this year and the next business day is a holiday in Washington, D.C. (Emancipation Day), the deadline is pushed to April 18.

Anyone requesting an extension will have until October 16, 2023, to file their 2022 federal income tax return (although payment of any tax owed is still due on the original April 18 deadline).

Who Must File a Tax Return?

Not everyone is required to file a tax return. If your income is under a certain amount (see table below), you aren't required to file a tax return because you will not owe any tax.

Federal Tax Return Filing Requirements (2022 Tax Year)
Filing Status and Age at End of 2022	Income Required to File 2022 Return
Single; Under 65	$12,950
Single; 65 or Older	$14,700
Married Filing Jointly; Both Spouses Under 65	$25,900
Married Filing Jointly; One Spouse 65 or Older	$27,300
Married Filing Jointly; Both Spouses 65 or Older	$28,700
Married Filing Separately; Any Age	$5
Head of Household; Under 65	$19,400
Head of Household; 65 or Older	$21,150
Qualifying Widow(er); Under 65	$25,900
Qualifying Widow(er); 65 or Older	$27,300

What Tax Bracket Are You In?

However, even if your income is below the applicable threshold, you still may want to file a 2022 tax return anyway. For example, you will need to file a return to claim certain tax credits, such as the:

Earned income credit;
Additional child tax credit;
American Opportunity credit;
Credit for federal tax on fuels;
Premium tax credit; and
Credits for sick and family leave.

When Will Tax Refunds Arrive?

If you have a federal tax refund coming, you could get your money back in as little as three weeks.

In the past, the IRS has issued over 90% of refunds in less than 21 days. If you want to speed up the refund process, e-file your 2022 tax return and select the direct deposit payment method. That is the fastest way.

Paper returns and checks slow things down considerably.

However, don't expect your refund before mid-February if you claim the earned income tax credit or the additional child tax credit.

By law, refunds for returns claiming these credits must be delayed. This applies to the entire refund, not just the portion associated with the credits. According to the IRS, its "Where's My Refund" tool should provide an updated status for your refund by February 18 if you claim one of these credits.

The IRS also expects most refunds that are held up because the earned income tax credit or additional child tax credit was claimed to be available in bank accounts or on debit cards by February 28 if you chose direct deposit and there are no other issues with your return.

How Much Is the Standard Deduction?

]]> https://www.kiplinger.com/taxes/when-can-you-file-taxes 8vXmKU2SKpqbSE7oZR3LyS Thu, 12 Jan 2023 22:12:05 +0000 <![CDATA[ PODCAST: Decoding ESG Investing with Ellen Kennedy ]]>

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Links mentioned in this episode:

Transcript

David Muhlbaum: Environmental, social and governance investing is hot these days. So much so that we at Kiplinger now have our own editor on the beat. Ellen Kennedy will share her insights about the intersection of investing and activism. Also, how to spend that tax refund wisely, coming up on this episode of Your Money’s Worth.

David Muhlbaum: Welcome to Your Money’s Worth. I’m kiplinger.com’s senior editor, David Muhlbaum, joined by my co-host, Kiplinger senior editor, Sandy Block. How are you doing, Sandy?

Sandy Block: I’m good. Finishing up my taxes right now. Did you file yours yet, David?

David Muhlbaum: Me?

Sandy Block: You said you were going to get them done this year before the deadline.

David Muhlbaum: I think it’s going to be close. I’ve roughed out a version of them. I imagine I’m going to pay what’s owed and get the extension. So at least I won’t be paying penalties for late payment. There may be domestic penalties, but I’d rather not get into that. On the bright side, I did file both of my kids’ tax returns and we, that meaning me and my kids, had a little discussion about how to claim exemption from withholding in the future, so at least someone got a little education. Actually also, I used IRS Free File so I guess I got some education too.

Sandy Block: So tax teachable moments for you and your kids. We certainly pushed IRS Free File here enough, so what did you think? What’s your review?

David Muhlbaum: You’re asking me to review software? You’re the one who reviews tax software. Well, first of all, as you know well, IRS Free File is an expression, it’s a phrase, it’s a marketing term that we and others use to get people to those filing software options that are actually free, so long as you meet the income and other requirements. IRS Free File isn’t a piece of software itself. It’s like a program. So there are many and, of those, I chose TaxSlayer. And I guess I’d say the one thing I noticed that was different from when I’ve used, shall we say, full-pay versions of TurboTax and others in the past, was that the Free File version of TaxSlayer did not offer me the ability to log into brokerage accounts and things like that to get information directly imported electronically. And that meant I had to copy and paste, sometimes even look and retype and, as we know, that’s a way to make mistakes and is tedious.

Sandy Block: Yeah, and actually TaxSlayer has gotten pretty good reviews from us, but I suspect you have to upgrade the premium to get that service, which tells us that you get what you pay for. TurboTax and H&R Block basically dropped out of Free File so the most popular tax software versions aren’t even available there anymore. So on the one hand, you get to file for free. On the other hand, you may not get all the bells and whistles you’re used to if you pay.

David Muhlbaum: Duly noted, and we should probably move on because, well, when this episode drops, it will be after that filing deadline and the only people still mucking around in software will be clowns like me who missed it. But we’re still in the tax season in a way, because now we’re in potentially the happy side of tax season, refund time.

Sandy Block: Well, refund checks or more hopefully and likely, direct deposit. And we certainly understand that this isn’t anything other than getting your own money back because you’ve given an interest-free loan to the government, but people still love their refunds. And a fat refund is probably a sign that you should consider adjusting your withholding, which you do with a W-4 if you’re an employee, but maybe that’s another-

David Muhlbaum: Yes! That’s what I went over with my kids.

Sandy Block: That’s right. Don’t give the government all your money. All right, it’s too late to do that for 2021 so let’s just talk for a minute about what to do with that fat refund. And as we’ve mentioned before, refunds are up in part because of the various stimulus programs like the enhanced child credit. While generally the goal of those was to get money out quickly, depending on how some people access them, some people didn’t really get to claim their full credit until they filed their taxes, which means a bigger refund for them.

David Muhlbaum: Okay, so I’m sure we’ve got some good solid Kiplinger eat your broccoli ideas about what you should do with that refund.

Sandy Block: We sure do, and I guess the takeaway is make your refund work for you. So I think the number one thing would be, if you’ve got any high-interest credit card debt, you want to pay that down. Interest rates are going up. The fed has pretty much put on billboards, “We are raising interest rates.” That’s going to raise the amount you��re paying on a balance on your credit card. Pay off your balance. You get a 15% return or more, you can’t get that anywhere else, so that’s number one. Build up your emergency fund is another one, and you may want to invest it because many brokerage firms will now let you open an account for less than $500 and some have no minimums at all.

David Muhlbaum: A brokerage account, or you could invest directly with Uncle Sam. You could turn that money right back around and go get you... What is the bond-

Sandy Block: The I bond.

David Muhlbaum: The I bond that’s paying 7.12%.

Sandy Block: And it’s going to go up-

David Muhlbaum: For now, for now.

Sandy Block: It’s going to go up above 9%.

David Muhlbaum: Okay, I’m going to get myself one of these. I’m going to do this as a reader service or a listener service. I’m just going to go get myself one and I’ll report back on the process.

Sandy Block: Yeah, we’ve got to talk about this.

David Muhlbaum: Yeah, okay. There are other ways that you can put that refund to use and Sandy’s delineated many more of them in... What’s it called, Sandy, the slideshow?

Sandy Block: This is a Kiplinger special. It is Seven Money-Smart Ways to Spend your Refund.

David Muhlbaum: That’s right. Do not blow it at the racetrack. Coming up next, we’ll be joined by Ellen Kennedy, Kiplinger’s editor for environmental, social and governance investing. She’ll help us decode ESG. Stick around.

Decoding ESG Investing with Ellen Kennedy

David Muhlbaum: Welcome back to Your Money’s Worth. Joining us for our main segment today is Ellen Kennedy, an associate editor for Kiplinger with a long history in the ESG space, as the jargon goes. She was an ESG manager and analyst at Calvert Investments for 15 years covering environment, climate, consumer staples, and she served on the sustainability councils of several Fortune 100 and Fortune 500 companies. She’s filed shareholder proposals on supply chain and issues like that. She served on ESG boards and councils. Real hands-on stuff. And now she’s writing for us here at Kiplinger with articles that do a great job unpacking all these acronyms we find in environmental, social and governance investing. ESG is just one of them and I think you’ll find her articles interesting, whether you’re grappling with what is this ESG stuff about really? Or maybe you’re already deep into the topic and you’d appreciate her interview with Amy Domini of Domini Impact Investments, who is a true pioneer in ESG. So welcome, Ellen.

Ellen Kennedy: Thanks for having me.

David Muhlbaum: And a welcome back also to Kyle Woodley, senior investing editor for kiplinger.com who helped bring Ellen to Kiplinger. He’ll be co-hosting with me today. Sandy Block is going to give ESG a pass.

Kyle Woodley: Hello, hello.

David Muhlbaum: So to move from who Ellen is to what she knows, I’m going to start with a definitional question. The term we’ve headlined this podcast with is ESG, environmental, social and governance investing. But let’s wade a little bit into history. When you started in this field, Ellen, it was called social investing, socially responsible investing. Can you take us back a bit please?

Kyle Woodley: Wait, did he just ask you to define the history of ESG in 30 seconds? Good luck with that.

David Muhlbaum: No, no. You’ve got a whole minute. You’ve got a whole minute.

Ellen Kennedy: Okay. Well, back in the 1980s, religious groups and human rights activists started to realize that capital markets, the stock market, are a powerful tool to bring about change. So a handful of firms, like Amy Domini’s that you just mentioned, dedicated to socially responsible investing or SRI, they set the table for a way investors could avoid industries they found distasteful or unsustainable like tobacco. And they also tried to work with these activists to pressure corporations to change. So SRI investors were asking the question, how can we use investing to maximize positive impact in the world?

David Muhlbaum: So investors, they were part of the fight against big tobacco?

Ellen Kennedy: That’s right, David. And as SRI investors became more and more successful, the mainstream investors sat up and took notice. They realized that some sustainability issues really could affect a company’s bottom line or what we call material, and so environmental, social and governance or ESG investing was born in the mid 2000s. They asked the question, how can we harness sustainable opportunity or risk to improve performance?

David Muhlbaum:

They being investors?

Ellen Kennedy: Yes, the ESG investors. Yes, so nowadays we have this huge mosaic of many, many sustainable investment approaches. ESG has two levers it can pull. If you imagine a box with two up and down vertical levers in front of you, the first one is deciding how much you want to invest to avoid risk versus seize opportunity. So all the way at the top of that lever, your ESG fund will avoid investing in the dirtiest companies. And if you pull that lever chunk like in an old voting booth, it will focus on a theme like renewable energy or investing in industry leaders.

The second lever is how much the fund will try and influence a company through engagement or advocacy. So on one extreme, a fund could do nothing at all to encourage the companies that it holds to be more sustainable. And on the other hand, if you pull that lever all the way, it could meet with corporate leadership or even file shareholder proposals. There are so many combinations of these two continuums, so the mantra is ESG is not a monolith.

David Muhlbaum: Well, thank you. The history is important here, because ESG is not something that came out of nowhere. There was John Wesley, the Methodist minister, he was telling his people in the late 18th century, don’t invest in liquor, don’t invest in gambling, that sort of thing. So I think there’s also a religious component to the history.

Ellen Kennedy: It goes back to the Bible!

David Muhlbaum: We might just have been calling it differently, but language matters. So now that we’ve said, ‘Here’s what it is,’ I guess my first question would be what do you think is the biggest misperception about ESG investing?

Ellen Kennedy: Definitely that you have to sacrifice returns for gains. And most studies have shown, however, that you will do as well as or better than traditional investment approaches. Last year, there was this huge, ginormous — That’s a technical term — study looking at over a thousand other studies on the stock market performance of companies with high ESG scores. It found that a majority, 58% of the time, companies that embraced ESG beat the performance of non-ESG companies. ESG laggards beat the stock performance of ESG-embracing corporations only 8% of the time and the remaining studies showed mixed results. So again, that score was ESG 58%, non-ESG 8%.

Some other really interesting findings that came out of that study were that ESG is more likely to outperform over longer time horizons, and ESG can provide a hedge against economic or social crises. And I’d say we are facing several of those major crises these days.

David Muhlbaum: No doubt. We live in interesting times. So beyond tracking performance trends on the macro scale, Ellen, you also write about new wrinkles in ESG investing, and one that caught my eye were these mutual funds or exchange traded funds that link your investment to a charity. Let’s say you want to support an organization like the National Wildlife Federation, well, you can invest in a fund with their name on it. But here’s my question, it’s not so simple you say, or rather, these funds are not all cut from the same cloth. We don’t have time to rank them all. That’s what your article is for. But what should someone who’s trying to do good and get a good return with one of these linked funds be looking for?

Ellen Kennedy: There are a growing number of funds that donate a portion of their fees to a specific charity, and in some cases they even construct the portfolio to match the goals of the fund. So in a way, you can have your cake and eat it too. For example, the Simplify Healthcare ETF whose ticker is PINK (PINK) is actively managed by Michael Taylor. He’s a really fascinating guy. He’s a virologist who also has deep experience in biotech and also is a highly regarded hedge fund manager. Simplify is donating all of its net profits from managing the fund, or a minimum of $100,000 per year, to the Susan G. Komen Foundation for breast cancer research. The fund is in the top quartile for its category year to date according to Morningstar, so it’s really interesting to look at this.

David Muhlbaum: So to break this down, in this case, in PINK, is the fund invested in companies that are trying to solve breast cancer?

Ellen Kennedy: So remember those two levers I spoke about earlier, this actually doesn’t use an ESG screen per se. It just invests in really solid biotech healthcare stocks. It doesn’t focus on breast cancer or even on women’s health. It just uses Michael Taylor’s knowledge of that sector, which one could argue is a beneficial sector for social good and so that’s the ESG investing slant, but they don’t call themselves an ESG fund per se. And then it has this minimum $100,000 donation as well.

David Muhlbaum: Got it. So he, as a fund manager, is basically taking some of his earnings from being a fund manager and apportioning it to the Susan G. Komen Foundation?

Ellen Kennedy: Yes.

David Muhlbaum: And your returns are what you get from his fund?

Ellen Kennedy: Yes.

David Muhlbaum: Okay, got it. But there are some other funds that where the fund itself is choosing investments based on the charity with which it’s affiliated?

Ellen Kennedy: Sure. So there are a number of funds that try to combine an ESG screen that would favor what a nonprofit is trying to accomplish in the world with a donation as well. So one example that’s really interesting is the Impact Shares NAACP Minority Empowerment ETF. The ticker on that one is NACP.

David Muhlbaum: So like the charity minus one A. Right.

Ellen Kennedy: Minus one A, yes. So they actually have worked with the NAACP to design the fund. The only screen really, as I recall, is for racial equity and they then hired somebody from the NAACP who has a very deep experience in what’s called DEI or diversity, equity and inclusion to work with impact shares to talk with companies and to say, “Hey, we really want you to be in this fund. And it’s a real sign of your commitment to NAACP values to be in this fund, but you’re not quite there yet. Here’s the changes that you need to make.” So they’re really reaching out to companies and actively trying to change their policies and programs to align with those goals.

David Muhlbaum: And backing it up by saying, “Do this and we will buy your shares.”

Ellen Kennedy: Exactly, yes. So these are very attractive funds but before you invest, there’s a few things that you have to look out for as you can imagine. It would be very easy for these kind of funds to just be a marketing ploy. So you have to ask yourself is this fund designed to bring a positive impact to the cause it supports? And the example that I just gave of NACP is an example where they are trying to do that. You can also ask yourself is the company that manages the fund dedicated to sustainability? Does it actively partner with a nonprofit group it benefits to bring about change like I just mentioned? And also does the fund vote shareholder proxies or file shareholder proposals to help the nonprofit’s cause? And most importantly, make sure you’re not investing in these funds just because they donate to the charity you like. That’s just not a good way to focus your donations or your investments.

David Muhlbaum: Well, they make the donation to take the tax deduction as opposed to you. It seems a little odd, yes.

Ellen Kennedy: Exactly. And we are limited now in the amount of tax deductions we can take so this might be a way for people to have more of an impact in terms of their donations.

David Muhlbaum: Oh, that’s a good point.

Ellen Kennedy: But still, this is an investment and you need to treat it as such. You should make absolutely sure that the fund is a solid investment that fits with your own personal portfolio and your investment goals.

David Muhlbaum: Got it. Okay, we’ve talked about PINK, the ticker, and we’ve talked about green because the first word in ESG is environmental so I use that as a proxy for the color. But there’s a new color on the block too and that’s blue. So we had a piece in Kiplinger’s personal finance magazine recently about the blue economy and so, Ellen, what’s the blue economy?

Ellen Kennedy: I see what you did there with those colors. That was very clever.

David Muhlbaum: Thank you.

Ellen Kennedy: So the blue economy refers to all of the dollars spent to improve the economic health and livelihood of oceans and coastal zone ecosystems. So think about everything related to oceans which cover 70% of the world’s surface. They’re huge, but also that section of the earth where the oceans come up to the shore and we interact with them there. So we often just forget about oceans. They’re really critical to our survival and also for healthy economies. We’ve been dumping plastic and toxics in the oceans. We’ve been overfishing and removing coastal plants that help buffer the effects of hurricanes. I’ve experienced that personally because my husband is from New Orleans and the loss of so much of coastal zones in those areas that had been planted or had wild habitat there acted as a buffer to hurricanes. But when those were taken out, Hurricane Katrina, of course was able to exact a real toll on that area.

David Muhlbaum: So blue is not water, but ocean. That’s one of the key distinctions, because there are water funds out there, right?

Ellen Kennedy: That’s right, there’s a ton of water funds out there. I actually used to manage the sustainability side of one of them, but they’re often filled with utilities and water infrastructure companies and they don’t focus as much on the conservation solutions. One interesting company we’ve profiled recently is called Danimer Scientific (DNMR). The ticker is D as in dog, N, Nancy, M-R. It is developing a kind of plastic that is 100% biodegradable and compostable. It’s a small company that IPO’d in 2020 and is still proving that it can turn a profit and scale up, but it has already scored valuable customers like PepsiCo and Walmart.

David Muhlbaum:

Okay, so Danimer Scientific doesn’t handle water or oceans, but because their product is aimed at helping the oceans, that’s how they got on the list. So this screening and thinking, it also governs a much longer list that we have at Kiplinger, the Kiplinger ESG 20. Now, we rolled this out in 2021 and it’s 15 stocks and five funds that do well on meeting environmental, social and corporate governance challenges. Good corporate citizens. So Ellen and Kyle, I was hoping you guys could call out one or two from that list, which we’ll link to, but you know there are 20, so Ellen?

Ellen Kennedy: One of the stocks that I like from the ESG 20 may surprise you, it’s called Clorox.

David Muhlbaum: No, I never heard of that.

Ellen Kennedy: The ticker is C-L-X and most of us think, ‘Oh, gross. It’s bleach. It’s environmentally terrible. Why would Clorox be in the ESG 20?’ Well, first of all, aside from the environmental issues, it’s a really good pick on governance. They’ve done a good job of diversifying their board of directors. 42% of its members are women and four members are people of color. And the board is also independent, which is a great metric for understanding how a company has tried to shape its board in a way that will benefit investors and shareholders. I used to cover the household products and personal care products industries. And I remember the bad old days when Clorox was really a laggard in this area, but they did a lot of work to clean up their act and to get more involved in green chemistry. For example, if you go on a website called the Skin Deep database of the Environmental Working Group-

David Muhlbaum: Skin Deep?

Ellen Kennedy: Yeah, that’s right. Skin Deep. They provide ratings on the toxicity of thousands of different products. And so, for instance, you can find products made by Clorox that score very well because they are, for instance, bleach-free hand sanitizers. They also acquired Burt’s Bees which you may think of as a green company. And overall they’ve really worked to think about the life cycle of those products and ensure that they are just much more environmentally responsible than they used to be from cradle to grave.

David Muhlbaum: Yeah, that’s interesting. Kyle, I think we ought to look to you for a fund.

Kyle Woodley: Yeah, so if you just prefer to buy a bundle of ESG-friendly stocks and let it ride, one ESG 20 option is the Putnam Sustainable Future ETF. That’s ticker P-F-U-T, and this is an actively managed ETF whose companies either make products or provide solutions to sustainability challenges. Top holdings include science and tech from Danaher, that’s ticker D-H-R. There’s Chipotle Mexican Grill, ticker C-M-G, and that’s long been a pioneer in sustainable food sourcing. And it even holds MSCI, ticker M-S-C-I of course, which is the top global provider of ESG indexes, so there you go.

David Muhlbaum: That’s very inside, that they-

Kyle Woodley: There’s a little meta there, isn’t there?

David Muhlbaum: We’ve mentioned Amy Domini’s name a couple of times so far, and we’ve done so in part because you, Ellen, got to interview her recently. So tell us a bit more about who she is, what she’s done.

Ellen Kennedy: So I’m an Amy Domini fan girl, as I think a lot of people who came out of the SRI industry are. She’s someone I’ve admired for years. She pioneered SRI investing way back in the 1980s by founding Domini Impact Investments which is still growing strong. And she did all this as a woman in a field that was very male-dominated back then. What I appreciate most about her is her clarity. She helped develop the concept of triple P investing or investing for people, planet and profit. And she recommends avoiding companies that spell trouble in those three areas. Very simple, invest in triple P, and she’s always looking out for the next sustainability opportunity around the corner. She’s especially bullish these days on healthcare and transportation innovations, so check out my interview with her.

David Muhlbaum: We’ve gone in a number of directions with ESG. There are many more we can go to. We’ve got to keep an eye on the clock, but one of the things that just lurks in the back of my head that I want to ask Ellen before we go is, there’s a phenomenon where writing about/discussing ESG investing generates negative feedback. Is that a fair enough term for it? What is it about ESG that frankly gets some people so riled?

Ellen Kennedy: Well, I think first of all, as I said, ESG is not a monolith. It’s many things, but overall I think there’s a lot of misunderstanding about how ESG has become professionalized. And as we know, it could use more standardization but it’s getting there. And so people often read into ESG, I think, political opinions. It’s to try and find those metrics that will deliver the best return for shareholders and that’s really all there is to it. It just so happens that a lot of the metrics that were ignored by shareholders for many years are these things that lead us to a more sustainable world.

Ellen Kennedy: I actually often think of ESG, I know Kyle is also a nerd, I think of it like a Tardis, like a time machine from Dr. Who, a big red telephone box that you can get into and you can set your course for the future. And if you look at the major trends going on, a lot of them happened to be sustainability trends, climate change, water issues that we’ve talked about, equity issues we’ve also talked about, along with those other thing that investors have considered for many years, like population growth or geopolitical risk. So I really think that when people dig into the way ESG is conducted, they’ll see that it really just makes business sense and that is why so many people are turning to it now and why it’s so popular.

Kyle Woodley: Well, being a fellow nerd, I’m going to have to point out, the Tardis is blue. It is not a big red box. It is a big blue box. And sorry, ladies, I am not available. Sorry.

Ellen Kennedy: I am mortified. I thought it was red. Thank you so much. I stand corrected.

David Muhlbaum: Okay. Well, we’re sure if that’s all we have to worry about, we’re in great shape. Thank you so much for joining us today, Ellen. We really appreciate your insights and all you’ve brought to ESG coverage for Kiplinger. Thanks again.

Ellen Kennedy: Thank you. My pleasure.

David Muhlbaum: That will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple podcasts or wherever you get your content. When you do, please give us a rating and a review. And if you’ve already subscribed, thanks. Please go back and add a rating or review if you haven’t already. To see the links we’ve mentioned in our show, along with other great Kiplinger content on the topics we’ve discussed, go to kiplinger.com/podcast. The episodes, transcripts and links are all in there by date. And if you’re still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram, or by emailing us directly at podcast@kiplinger.com. Thanks for listening.

]]> https://www.kiplinger.com/investing/esg/604557/podcast-decoding-esg-investing-with-ellen-kennedy 97hYEdVM39M389dgUZRkX6 Tue, 19 Apr 2022 13:29:02 +0000 <![CDATA[ 9 Tax Deadlines for April 18 ]]> Time is running out if you haven't filed your 2022 federal income tax return yet. This year's tax filing deadline is April 18 for most people. (The tax deadline is extended for some residents in states impacted by severe weather and storms). But filing your federal tax return isn't the only thing you should be thinking about for April 18, because there are a few more tax deadlines that fall on that day.

If you are self-employed, saving for retirement or college, have a health savings account, or employ a nanny, you may want to take action by the tax deadline. There are other reasons why you might have a tax-related deadline today. And, overlooking a tax deadline could cost you money, either in additional taxes, penalties, or interest. So, here are 9 tax deadlines for Tax Day, April 18, that you don't want to miss. Check them out to see if any apply to you.

2023 Tax Calendar: Important Tax Due Dates and Deadlines

Of course, the biggest due date on the tax calendar each year is the one for your federal personal income tax return. Like most of the tax deadlines on this list, it usually falls on April 15 but is April 18 this year because of a local holiday in Washington, D.C. and because April 15 falls on a weekend.

This year, you generally must file your return for the 2022 tax year (i.e., for the income you received from January 1 to December 31, 2022). Use Form 1040 and the related schedules to report your 2022 income, adjustments, and credits. The IRS recommends filing your return electronically, as opposed to using a paper form and mailing it in, because the return will be processed much faster. If you are getting a tax refund, you will also get your money much faster if you e-file your return. Opting for direct deposit over a paper check will speed up your refund as well.

Stricter EV Tax Credit Rules Begin April 18

If you can't file your income tax return on time, you can get an extension until October 16. However, to get the extension, you must request it by the end of the day on April 18. To make the request, either file Form 4868 or make an electronic tax payment.

Just remember that the extension to file your return doesn't extend the time to pay your tax. You still have to estimate the amount of tax you'll owe and pay your tax bill by midnight April 18. If you don't act in time, the IRS will charge you interest on the unpaid balance and hit you with late payment penalties.

For more information, including extension details for Americans living abroad and people serving in a combat zone, see How to Get More Time to File Your Tax Return.

Pros and Cons of Getting a Tax Extension

Although we only have to file an income tax return once each year, the IRS expects you to pay your taxes throughout the year as you earn income. If you are working for a business, those tax payments are withheld from your paycheck and sent to the IRS by your employer. But if you are self-employed or have income from other sources that aren't subject to withholding, then it is up to you to make quarterly estimated tax payments during the year.

The first estimated tax payment for 2023 is due April 18 for most people. This payment is for the estimated amount of taxes owed for income received from January 1 to March 31, 2023. Use Form 1040-ES to calculate and pay your estimated taxes. If at least two-thirds of your gross income is from farming or fishing, you can make just one estimated tax payment for the 2023 tax year by January 17, 2024. If you don't pay enough tax during the year, either through estimated payments or withholding, the IRS could hit you with a stiff penalty.

When Are 2023 Estimated Tax Payments Due?

If you want to put more money in an IRA and have it count towards your 2022 contributions, you have until the end of the day on April 18 to make that move (If you're in a state impacted by disaster or storms, the IRS may have extended that deadline). That's because most people have until your tax return filing deadline for the year to fund an IRA for that year. But remember that there are limits to the amount you can contribute to an IRA each year. For 2022, you can put away up to $6,000 in an IRA – $7,000 if you're age 50 or older.

If you haven't already maxed out your 2022 IRA contributions, doing so before the April 18 tax deadline can be a smart move. First, contributions to a traditional IRA are often tax deductible, while withdrawals from a Roth IRA are tax-free. So, whether you contribute to a traditional or a Roth IRA, you can cut your tax bill now or in the future.

People with low or moderate income who contribute to an IRA might also qualify for the Saver's Credit, which can be worth as much as $1,000 ($2,000 for joint filers).

If you contribute to an IRA for 2022 by the tax filing deadline, you can claim the IRA deduction and/or the Saver's Credit on your 2022 tax return. That means you can get the tax benefits immediately, instead of waiting until next year if you were to contribute the same amount after Tax Day.

Also note that the tax return filing deadline is also the last day to withdraw any excess 2022 contributions to your IRAs (if you didn't request a filing extension). So, if you put in more than the $6,000 limit ($7,000 if you're 50 or older), take it out now to avoid stiff penalties.

Traditional IRA Contribution Limits for 2022

Self-employed people saving for retirement have until the end of the day on April 18 to put money away in a Solo 401(k) plan or Simplified Employee Pension (SEP) IRA for 2022. If they request a tax return filing extension, the deadline shifts to October 16.

For the 2022 tax year, a self-employed person can contribute up to $61,000 to a Solo 401(k) – $67,500 if they are age 50 or older. (Those amounts go up to $66,000 and $74,500, respectively, for 2023.) These amounts are relatively high because you can make contributions as both an employee and an employer, although the April 18 deadline only applies to the "employer contributions."

The SEP IRA contribution limit for 2022 is $61,000 ($66,000 for 2023). Only the employer can contribute to a SEP IRA, and whatever percentage of compensation employers set aside in the plan for themselves is the same percentage of pay they must contribute for each eligible employee.

Contributions to both Solo 401(k)s and SEP IRAs are deductible – at least to a point. Contributions made to a Solo 401(k) as an employer are deductible business expenses. However, the deduction can't be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan. If you're self-employed, you must reduce this limit for contributions you make for your own account.

For a SEP IRA, the most you can deduct on a 2022 tax return for contributions to your or your employee's account is the lesser of: (1) your contributions, or (2) 25% of the compensation (limited to $305,000 per participant) paid to the participants during the year from the business that has the plan, not to exceed $61,000 per participant. (In 2023, these amounts increase to $330,000 and $61,000, respectively.) If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for the contributions.

What to Know About the Home Office Tax Deduction

If you have a health savings account (HSA) or Archer medical savings account (MSA) as part of your health insurance plan, Tax Day (April 18) is the last day you can contribute to the account for 2022 (People in states where the IRS extended the tax deadline due to storms, have more time).

For 2022, you can contribute up to $3,650 to an HSA if you have self-only coverage or up to $7,300 for family coverage. (For 2023 figures and other 2022 limits, see HSA Contribution Limits and Other Requirements.) For an Archer MSA, you or your employer can contribute up to 75% of the annual deductible of your high deductible health plan (65% if you have a self-only plan), although you can't contribute more than you earned for the year from the employer through whom you have your HDHP.

Plus, you may qualify for a deduction on your 2022 tax return for contributions to your HSA or Archer MSA (complete Form 8889 for the HSA deduction and Form 8853 for the Archer MSA deduction). If you can claim one of these deductions, think about putting more money into the account for 2022 before the tax deadline expires if you haven't already reached the contribution limit. That's especially true if you plan to make a contribution soon anyway. That way, you'll get that extra deduction for 2022 and save more cap space for 2023 contributions.

Most-Overlooked Tax Deductions, Credits and Exemptions

People saving for retirement or medical expenses have until the end of today to contribute to 2022 accounts – but what about people saving for college? If you're using a Coverdell Education Saving Account (ESA) to save away money for college, then you also have until the end of Tax Day, April 18, to put more money away in the account for 2022.

With a Coverdell ESA, you can't contribute more than $2,000 for any particular child. Plus, if your modified AGI is between $95,000 and $110,000 (between $190,000 and $220,000 for joint filers), the $2,000 limit for each child is gradually reduced to zero.

There's no deduction for contributions to a Coverdell ESA. However, money deposited in a Coverdell ESA grows tax free, and there's no tax on distributions used for qualified college expenses. So, the earlier you get money into the account, the more time it has to grow before the child is off to college.

Child Tax Credit FAQs for Your 2022 Tax Return

If you employ a nanny, babysitter, maid, gardener or other household worker, but you aren't filing a federal income tax return (Form 1040), you must file Schedule H and pay 2022 employment taxes for your household workers by the end of Tax Day (April 18). If you do file a tax return, include Schedule H with the return and report the tax owed on Schedule 2 (Form 1040), Line 9.

Both you and the employee may owe social security and Medicare taxes. You're responsible for payment of the employee's share of the taxes as well as your own. You can either withhold your worker's share from the employee's wages or pay it out of your own pocket.

Your share is 7.65% of the employee's wages (6.2% for Social Security tax and 1.45% for Medicare tax). Your employee owes the same amount. The limit on wages subject to social security tax was $147,000 for 2022, but there's no limit on wages subject to the Medicare tax. Household employees also owe a 0.9% additional Medicare tax on wages exceeding $200,000 for the year. The additional tax is only imposed on the employee, but you have to withhold it from their wages and pay it to the IRS.

You also might have more to worry about than just federal taxes. Unless you live in a state with no income tax, you probably have to file a state income tax return on April 18, too. (You might have a local tax return due as well).

In most states, the deadline for file a state income tax return is the same as the federal due date. But there are a few states that have a different due date. Also, due to severe weather and natural disasters, some states have extended tax deadlines.

For state tax deadlines, including those for extension requests, estimated payments, and returns for other types of taxes, check with the state tax agency where you live.

State-by-State Guide to Taxes on Middle-Class Families

]]> https://www.kiplinger.com/taxes/tax-deadline/602732/tax-deadlines-for-april-18 rraZ8soZktnsHhjvCTG9Kz Sat, 09 Apr 2022 15:40:44 +0000 <![CDATA[ PODCAST: National Taxpayer Advocate Erin M. Collins Wants to Help ]]>

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Transcript

David Muhlbaum: Did you know there’s someone at the IRS whose sole purpose is to help taxpayers deal with the agency? If that sounds like an oxymoron, that’s just because you haven’t met Erin Collins, the current taxpayer advocate. She’ll join us to explain what her office does, how it can help you, and why the IRS is struggling to get refunds out. Also, Amazon is raising prices; what can you do? All coming up on this episode of Your Money’s Worth.

David Muhlbaum: Welcome to Your Money’s Worth. I’m kiplinger.com senior editor David Muhlbaum, joined by my co-host, senior editor Sandy Block. How are you doing, Sandy?

Sandy Block: I’m doing great. Welcome back from whatever wilderness you were in the last few days.

David Muhlbaum: I was in Utah, experiencing the rising cost of rental cars. So yeah, that’s an inflation story, you know. Everyone’s got an inflation story these days. Have you seen the price of milk, gas? Oh my God, whatever. But now we have a price increase for the way we live now, and that is to say by ordering things online.

Sandy Block: You mean Amazon?

David Muhlbaum: Yeah, exactly. That’s a shorthand. I mean, the price of Amazon Prime is going up from $119 to $139. So that’s a 17% increase if you’re paying annually. And that covers a lot of people. I don’t know that it’s more people then who buy milk or gas, but it’s 150 million or so here in the United States. That’s a lot of people who are going to be affected.

Sandy Block: Right. And I mean, I know the headline definitely caught my attention because 17% sounds pretty steep. But since we brought inflation into this, we need to be careful about our statistics. That’s not a year-over-year increase like we talk about with the price of milk or gas, which seem to go up every month or whatever. The last Amazon Prime increase was quite a while ago.

David Muhlbaum: Yeah. Yeah. It was 2018. So our editor Bob Niedt, he knows Amazon backward and forward. And in fact, he forecast this increase a few weeks ago. So, Amazon has operated on a four-year cycle for price increases. And the last one was from $99 to $119. Now, you know on a percentage basis, that was a bigger jump.

Sandy Block: Right. We’ve got our calculators out, but let’s move on from crunching numbers. What are those 150-plus million people supposed to do other than just roll their eyes and suck it up?

David Muhlbaum: Yeah. I imagine most people are going to shrug and pay it. Probably in part because they’re going to get auto renewed at the new rate. And well, there you go.

Sandy Block: Right. And that’s I think what a lot of these subscription services really count on, is inertia. You’re not even paying the bill. You’ve got it on your credit card. It goes on, and they’re just hoping that you’ll just move on, but if you really don’t want to give up free shipping, maybe one way to live with this increase is to go deeper into the Amazon ecosystem and make sure that you’re actually getting what you’re paying for, because there’s a whole lot more to Amazon Prime, as I plan to discover for myself, than just free shipping. There’s videos, there’s music, there’s movies, there’s all kinds of stuff

David Muhlbaum: Yeah. So forth indeed. I mean, that’s just the thing that Bob has written about in his piece on best Amazon Prime Benefits to Use, beyond the entertainment. You mentioned there’s also this try before you buy, which lets you pick up to six items of clothing, shoes, accessories. You can see if they fit or well, look good, and then bring it back for free or send it back for free. And he also gets into how to manage a Prime membership to get the most out of it. Like, you can share benefits with something called Amazon Household. So maybe you don’t need as many accounts, that sort of thing.

Sandy Block: Right. And one of the things that I discovered even before this price increase, I don’t go to Whole Foods all the time, but I did happen to go into one this week. And I used my prime membership. And I saved a couple bucks on some overpriced fish. So that’s the kind of thing you need to be thinking about. But the other alternative is, you could quit. What wasn’t around last time there was an increase was Walmart Plus. They’ll give you free next day or two-day delivery, prescriptions and gasoline discounts, some other perks for $84 a year. So maybe they’ll pick up some disgruntled Amazon people who aren’t into inertia.

David Muhlbaum: Yeah. Well, until they raise their price, maybe? I doubt it. That would not make much sense. But you know who is also likely to raise their membership fee this summer? Costco. That’s another one of Bob’s forecasts.

Sandy Block: Oh no. Well, I don’t go to Costco anymore because I always spent too much when I did; we go to BJ’s. But you are a dedicated Costco customer, aren’t you?

David Muhlbaum: Yeah. Truth. My dogs have been on Nature’s Domain salmon meal and sweet potato dog food for well, as long as I’ve had dogs. So I don’t think they’re going to let me switch.

Sandy Block: Well, maybe your dogs won’t let you switch to Old Roy, but I think these increases in subscription prices present a good opportunity for everyone to review their subscriptions, make sure you’re actually using all of the ones that you signed up for. If there are cheaper alternatives or maybe you can get more out of the subscriptions that you already have, because they really do count on you not doing that when they raise these prices.

David Muhlbaum: Be a conscious shopper. Yes, thank you for the actionable personal finance advice, Sandy.

Sandy Block: That’s what we’re here for.

David Muhlbaum: That’s right. Anyway, coming up on our main segment, we will talk to Erin Collins, the national taxpayer advocate about what her office does, what it can do for you as a taxpayer and how this filing season is shaping up. Stick around.

Meet the National Taxpayer Advocate, Erin Collins

David Muhlbaum: Welcome back to Your Money’s Worth. For our main segment today, we’re joined by Erin Collins, the national taxpayer advocate. Now that’s a pretty cool title, don’t you think? So here’s the history. A law called the Taxpayer Bill of Rights created this job almost 30 years ago. And the advocate has a staff of about 1,600 and a mission to be a voice for taxpayers, as well as report to Congress on what kind of job the IRS is doing. So that’s kind of a policy-wonk description of the taxpayer advocate’s place in the Washington ecosystem. But they have a very real, very tangible role in helping individual taxpayers all over the country. And we definitely want to get into what they can and can’t do for you. So, welcome Erin.

Erin Collins: Thank you so much for having me today.

Sandy Block: I want to thank Erin not for just coming today, but for being a great source for us since she took the job a while back. And you’ve given us a lot of insights on what’s happening in the IRS and what people can expect when people are filing their taxes, which frankly isn’t really good. That’s important to our audience because they come to us for a lot of information about filing their taxes and I think that’s been even more critical in the past couple of years when people have gotten lots of stimulus checks, child tax credits, and other sorts of new wrinkles in the tax system. The other thing we want to talk about is if people need help with their taxes. They have to be careful about who they go to because basically anybody can call themselves a tax preparer in the current system. So, on that note, Erin, can you explain a bit more about how your office, the Taxpayer Advocate Service operates? I think people might find it a little confusing that while it’s technically part of the IRS and funded with taxpayers’ dollars, it’s actually meant to advocate for taxpayers.

Erin Collins: Yeah. We have a unique role that we play in tax administration with respect to assisting taxpayers. So we wear multiple hats. As you indicated, the position was created over 20 years ago. And what we do is we represent individual taxpayers with their unique problems that they have with the IRS. But we also look at what we call systemic issues. Those are issues that impact multiple taxpayers, where we can provide administrative recommendations to the IRS for change as well as proposed legislative recommendations to Congress to change the law on behalf of taxpayers. But I think most people that work with our local TAS offices, they’re working with our case advocates to fix a particular problem.

And I think what a lot of people don’t focus on is what our authority is. We advocate, hence in our name, Taxpayer Advocate Service. So we do not have the delegated authority to actually implement the correction or the change. And that was specifically created so we could be an independent organization. We can give it a fresh or fair new look from what the IRS has previously done. And then we work with our colleagues or our counterparts in the IRS and recommend the correction or the fix.

David Muhlbaum: But there’s not a real equivalent at other federal agencies, is there? I mean, you know some have ombudsmen and that sort of thing, but this is so much more involved and aimed at private citizens, businesses too.

Erin Collins: Yeah. So again, we do. It’s a unique role. I think most people are familiar with what I would call the classic ombudsman. And those are individuals that conduct investigations, make recommendations. We do wear that hat, but we also have the ability to advocate specifically for taxpayers, both systemically across the board for all taxpayers, but again, we can help individuals with a particular challenger problem they’re having with the IRS.

David Muhlbaum: Okay. Let’s dig in a little bit to what that particular problem might be. Which ones you can solve, which ones are not your purview. And I noticed on the website, you have this really cool thing, the TAS Qualifier Tool. And we’ll put a link into that, which is basically, it literally tells you, it answers the question that I’m asking you now: "Does your problem fit?" But since not everyone’s going to go there right away, could you give us some sense of what problems are in your purview and what problems are not.

Erin Collins: Sure. So we have what we call two buckets. One is for financial hardship, and the second bucket is our systemic, when you have an issue with the IRS system. So the first bucket for example, take a situation where collections is knocking at the door and a taxpayer is having issues making ends meets. They can’t pay the rent or they’re having trouble. And what we can do is assist and work with our collection folks to possibly suspend the collection activity, or even possibly get an offer in compromise or installment agreement.

Erin Collins: So we can work with the taxpayer with that specific problem. The other challenge taxpayers are facing right now, and it’s been a very difficult two years for the taxpayers with respect to the filing season is when the system isn’t working as it’s intended. It’s broken. Unfortunately, the filing season with all the additional backlogs, and the challenges, and the delayed of the processing of those claims, we’ve created millions of taxpayers that in essence fit in that second bucket. And as you alluded to, we have typically 1,600, 1,700 employees. We can’t help 2, 3, 4, 5 million taxpayers at a time. So we try and limit what we can do to get the most result. And where’s the best use of our resources? So as you said, if you go into the tool, you’ll see it gives you options as to whether or not your case qualifies to work with us and contact a local taxpayer advocate.

Sandy Block: So I think Erin, from what I understand about what you all do, tthe axpayer advocate office is not there if you have a question about whether you should itemize or not, or whether you’re eligible for the child tax credit, the IRS has a lot of websites for that. But as you alluded to, and this is something we want to dig into, you’re probably not going to have a lot luck calling the IRS for help. Can you talk to us a little bit about what taxpayers can expect during the upcoming tax season? Because last season was pretty awful in terms of customer service. Hardly anybody could get through to the IRS. A lot of refunds were delayed. What should we expect this year?

Erin Collins: Yeah. If we’re talking about the filing season, I do have concerns that the IRS has, as we call it, they’ve dug themselves into a hole from the last two filing seasons. And they still have not dug out of that hole. So it’s going to potentially impact the smooth or quick processing of the current filing season. So we do have concerns. And as you alluded to, Sandy, although we are IRS employees, we’re not really main IRS. So the typical questions and problems, that’s really more in the purview of IRS. Although we do a lot of outreach and lot of education, that’s really not our main role. So again, when the system isn’t working, that’s really where taxpayers should reach out to us. But yes, they should make the effort to try and work with the IRS. But as you pointed out, the level of service on the phone this past year, it was about one in 10 calls were answered, which is just unacceptable.

Erin Collins: So taxpayers are being forced to try and self-help. irs.gov has a lot of useful information, but unfortunately, it’s sometimes difficult to find. And if you’re trying to get specific information on your delays, on your refund, the tool the IRS has, Where’s My Refund, doesn’t answer the question if you have a delay.

Sandy Block: And Erin, following up on that, I know from personal experience that Where’s My Refund does not work very well, but given this situation that the IRS has a huge backlog of returns from last year, from 2020 that they haven’t even processed, what is the most effective way that a taxpayer can avoid a delay or a problem during this tax filing season?

Erin Collins: Yeah. I think, although we realize that there is a percentage of our population for whom filing electronically is not an option, but for those who have the ability, make every effort to file electronically. Paper returns, those are where they have the most delays. Paper is not a friend to the IRS. So number one, you want to file electronically. Number two, if you can request a direct deposit, so provide your bank information. And number three, triple check for errors. Last year, part of the delay that was caused for all taxpayers was individuals that put inconsistent information on the return from IRS records. So for example, you use your last pay stub to put your income, not your W2. And your pay stub may include two or three days from the month of January. So that information may not match the IRS’s records. If you received a stimulus check or the six monthly payments that you receive for the advanced child tax credit, that should match IRS records.

If it doesn’t, it will be pulled out of the system and manually processed. So last year again, we had at least 13 million returns that had to be manually processed, which caused a 35 million backlog at the end of the filing season. So we do not want to have a repeat of that backlog going forward. So if taxpayers can really try and make sure that the correct information is on the return and they file electronically, they should not have a delay and it should be processed within that 21 days that the IRS projects that you’ll get your refund.

Sandy Block: I want to dig a little bit deeper Erin, as to why there was such a backlog last year, you mentioned the stimulus checks. And I also think that the pandemic’s effect on the IRS itself had a role in that. Maybe you could talk a little bit about why some people still haven’t gotten their 2020 refunds yet.

Erin Collins: Yeah. It actually started at the onset of the pandemic. The IRS shut down, basically all the facilities across the country. And think of the volume that the IRS receives. And in essence, it’s over 200 million tax returns every year. So what happened was when the pandemic first started, they got in a hole, and it’s been two years now and they still are not out of the hole. They still have a backlog month after month after month. So if we don’t get through the backlog, we’re never going to get ahead. So this year, absolutely the IRS has to not only be timely with respect to the current filing season, but we’ve got to get that backlog resolved and get the payments to the taxpayers who are still waiting for those refunds from last year.

David Muhlbaum: That gives me an idea for a modest proposal. So, if you don’t pay your taxes or behind you pay, not only, but interest on the amount that’s outstanding. What if the IRS were to pay you interest for a refund they haven’t processed, assuming it’s not your fault?

Erin Collins: You are great on tax administration because golly gee, you can get interest if the checks are delayed.

David Muhlbaum: Oh, this exists?

Erin Collins: So thank you for that recommendation. But yeah. But unfortunately that doesn’t make people happy. The interest rate’s incredibly low. And so, yes, maybe you’ll get an extra $5, but people want the money now. A lot of these returns that were filed or were filed before, possibly April of last year and they still have not received their payment. And again, that’s just unacceptable.

David Muhlbaum: Well, as Sandy knows my own personal tax situation is such that I’ve never been in a position to receive such a reward. I am a little curious though, is the interest rate the same as you pay for owing?

Erin Collins: Now you’ve stumped me. I want to say the answer is yeah.

Sandy Block: I don’t think it is.

Erin Collins: I think when you have... There are exceptions, like if the size of the company. There’s all sorts of different criteria, but they’re close, but again, neither one is anything to write home about.

David Muhlbaum: Right. Right. Got it. Okay. Well, we certainly appreciate your guidance about filing electronically and that’s what more and more people do each year. But there’s a subset who are going to want help filing whether it’s electronically or on paper. That is to say they don’t have a tax problem. Well, not at least yet. They just want someone to do their taxes for them. So assuming someone doesn’t meet the guidelines of... And Sandy, these are the two programs you wrote about the Volunteer Income Tax Assistance Program or the Tax Counseling for Elderly Program. We’ll put some links in to explain what those are about. How do you recommend people go about finding a tax preparer? Like, do you all have guidance on that?

Erin Collins: Yes. And it’s also on irs.gov, but real quick, going back to the VITA and what we call the TCE, that is limited with respect to your income. And I believe it’s $56,000 a year ...

David Muhlbaum: Or your age.

Erin Collins: Right. So if you’re above that amount, unfortunately, you don’t qualify for that. But IRS has on their website, I think it’s https://www.irs.gov/chooseataxpro. And then actually, it’s a very useful tool. It helps you select a qualified or federal tax preparer. So it includes a list of licensed or certified, or folks with credentials. So for example attorney, CPA, enrolled agents, and it also includes a directory of those individuals that take annual CPE and also get certified. And it’s listed by name, city, and the criteria.

Erin Collins: So it’s a great directory and it’s a great tool if you’re looking to find a particular person. But you really should choose that preparer carefully. We read about the scams, the IRS is very well aware. So you know, ask a friend, ask somebody you trust, get referrals, check out their credentials. Some people go into the Better Business Bureau, see if there’s complaints. And then taxpayers also have the ability to what I call self-help. There are a number of companies out there that do tax preparation software which will walk you through as you’re preparing the returns. So there are options for taxpayers out there to get help with respect to preparing their returns.

Sandy Block: And to follow up on that, Erin, you and I have talked about this just when you refer to scams. I know you’ve advocated for some kind of minimum competency requirements for tax preparers. But right now, basically David or I could put a sign on our door and charge people to prepare tax returns, which would not be a good idea, but we could do that. Is that not the case, Erin, is that why you have to be extra careful?

Erin Collins: Yeah. I think, again, there are some good intentioned folks out there that are helping their neighbors or families or loved ones, but they may, no offense, not be familiar with the tax laws. I’m more concerned about those who are unscrupulous, people who are taking advantage of taxpayers. And unfortunately there are many of those individuals out there. There’s something that’s referred to as a PTIN. I think it’s your professional tax identification number is what it stands for. If your return preparer doesn’t have a PTIN that would be a red flag to you because the taxpayer or the preparation folks have to put that on the return, at the bottom of the return if you sign it and also your return preparer signs it. So if the person doesn’t want to sign it, there’s probably a reason and you might want to get up and walk away.

Sandy Block: So Erin, one thing that I’ve reported on through the years. And if anybody stays up late, who watches late night TV will see ads saying, "We can reduce your IRS debt. We can make your IRS tax bill go away." And I think what they’re referring to is a legitimate program called offer in compromise. But, it’s a lot harder to get that than some of these commercials imply. And a lot of these companies, as I understand it, just basically charge you a fee and then never get the offer. Could you talk a little bit about that?

Erin Collins: Yeah. Again, if you are going to use someone to assist you in the offer in compromise program, you want to make sure that they are on the up and up, so to speak. You don’t want people who can over promise pennies on the dollar and under deliver, and then charge you on top of it. So again, these are companies, there are a lot of legitimate folks out there. A lot of firms that do offer in compromise and assist taxpayers. And then there’s the others that we would prefer you not go to. So IRS tries to identify if there’s potential problems. In fact, I know we are currently as an organization or agency looking at that issue across the board so that we can make sure we get useful information out to taxpayers. But yes, you can do it yourself. You can do it with the assistance of TAS or you can get a professional to help you. But be wary of those who make very large promises and have a price tag attached to it.

Sandy Block: I think anytime you hear pennies on the dollar it’s probably a big red flag, right?

Erin Collins: Yeah. And you know I hate to say it, there are some taxpayers who may end up pennies on the dollar based on their financial situation, but it’s not a standard you can apply across the board.

Sandy Block: Right.

Erin Collins: So again, be careful, the old saying, "If it’s too good it to be true, it probably is."

David Muhlbaum: So Erin, this question of trust, who can you trust to help you with your taxes? Do you or your advocates ever, or your staff ever find essentially pushback, because at the end of the day, you’re an IRS employee? And as we discussed, there is this independence built into your office, but, you might have to do some convincing of people, right?

Erin Collins: Well, yes, that’s hence the term advocacy, but I don’t believe we’re advocating for positions that we do not believe are correct. So if a taxpayer comes to us and wants to argue that the moon is purple, we would probably not recommend we take that position with the IRS because A) we think it’s wrong and B) it would not be successful. So we work with the taxpayer to get the best possible facts and position when we work with the IRS. So in essence, I would like to think of us as trusted, sort of, advisors or trusted advocates because really that is what we’re doing for the taxpayers. We’re working with the IRS and pushing what we think is the correct position.

David Muhlbaum: Excellent. Maybe you could put another T in the acronym, you could be "Trusted Taxpayer Advocate Service" because we’re all about acronyms here. On that acronymic, Washington note, I’m curious if since you sometimes deal with things that are systemic problems with the IRS, rather not the problem of the individual taxpayer but a group of taxpayers, do you find yourself being pulled into the policy debates of how taxation should be implemented? That is, when it ends up in congressional testimony, how we all argue about that here.

Erin Collins: Well, it depends how you define that, but we push for administrative change. I lead the policy up to the Hill and Treasury, but I guess we push for policy in the sense of, we want fair treatment of taxpayer and we want the system to be fair and fairly implemented. So in that sense, if that’s a policy, yes, we do push for that. If it’s whether or not the tax rate should be 20% versus 30%, we normally stay out of that debate.

Sandy Block: But on that note, Erin, I know you don’t get involved in what tax rate should be and that sort of thing. But you do advocate for the IRS in terms of funding. You and your predecessor Nina Olson have argued for many years that the IRS is underfunded. Nobody wins votes by saying they want to give money to the IRS, but why is that important? And why is the IRS so underfunded?

Erin Collins: Yeah. I think the challenge is, and I look at not necessarily the IRS, but the impact to taxpayers. So what is the impact of underfunding the IRS with respect to service, with respect to fairly administering the tax laws. And that has been a real challenge for a number of years because the budget that Congress has every year has gone down about 20% over the last 10 years. Unfortunately, that means so have the IRS employees. I mean, you can’t have more employees without more budget. And the challenge is IRS has picked up additional work. So over the years and especially over the last two years, Congress has entrusted the IRS to do three rounds of the stimulus payments. They’ve done the monthly advance child tax credit payments, as well as a number of business benefits that they’ve done.

So they’re overtaxing, so to speak, the IRS’s abilities to process just not only the normal filing season, but all the additional work, with fewer employees and fewer budgets. So unfortunately service and taxpayers are paying the price. And when you think about, if you want to step back and look at the politics of this, the IRS brings in and I think the numbers about and 95% of the entire nation’s budget. So the monies that go through IRS and Treasury is what funds everything else that Congress does. So when you think about how important the IRS is, without a functioning IRS, it’s going to impact the function of our country of what we can do.

Sandy Block: Erin, that’s a great way to wrap up this conversation, and we really want to thank you for coming on to our podcast and for all the things that you do. Thanks again.

Erin Collins: Thank you so much.

David Muhlbaum: Thank you, Erin.

David Muhlbaum: That will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and a review. And if you’ve already subscribed, thanks. Please go back and add a rating and review. If you haven’t already to see the links we’ve mentioned in our show, along with other great Kiplinger content on the topics we’ve discussed, go to kiplinger.com/podcast. The episodes transcripts and links are all in there by date. And if you’re still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram, or by emailing us directly at podcast@kiplinger.com. Thanks for listening.

]]> https://www.kiplinger.com/taxes/604186/podcast-national-taxpayer-advocate-erin-m-collins-wants-to-help wX6GrNBeGuVA1AjxmcZr1x Thu, 10 Feb 2022 16:13:16 +0000 <![CDATA[ How to Cut Your 2021 Tax Bill ]]> When the Tax Cuts and Jobs Act was signed into law in 2017, proponents said it would make filing taxes easier for millions of Americans. It hasn’t worked out that way.

2021 Tax Returns: What's New on the 1040 Form This Year

While the tax overhaul nearly doubled the standard deduction, sharply reducing the number of taxpayers who need to itemize deductions, taxes have become even more fraught for millions of taxpayers. In part, that’s because lawmakers have tweaked the tax code to provide credits and deductions for non-itemizers. Those tax breaks could lower your tax bill but also require more work when it comes time to file.

In addition, as Congress scrambled to prevent the COVID-19 pandemic from torpedoing the economy, it funneled billions in economic stimulus payments through the IRS in the form of tax credits. When you file your 2021 tax return, you may need to reconcile those credits to claim funds you should have received or, in a few cases, pay some of that money back.

We’ll walk you through the tax-filing minefield. We’ll alert you to tax breaks you may overlook, and help you decide whether you should do your own taxes or pay a professional. And we’ll look at whether IRS customer service, which was so bad during last year’s tax filing season that only 10% of taxpayers got through to an IRS representative, will improve for this year’s filing season.

As has always been the case, our first piece of advice is to start early. By now, you should have received all of the documents you need to file, such as your W-2 and 1099 forms from your financial service providers. Filing early means you’ll get your refund more quickly; if you owe money, it’s better to learn that now than on April 18 (this year’s federal tax filing deadline for most taxpayers). It’s also a lot easier to find a qualified tax preparer in February or March than it is in April. And filing early will protect you from outlaws who use stolen personal information to file bogus tax returns so they can claim fraudulent refunds.

Strategies for Non-Itemizers

In the past, non-itemizers who were charitably inclined had to hope that they’d be rewarded in the afterlife, because they didn’t get any tax breaks in this one. But in response to the pandemic, which placed higher demands on many charitable organizations, Congress created a new tax break for philanthropic non-itemizers. For 2021, taxpayers who claim the standard deduction can deduct up to $300 of cash donations to charity. The $300 amount is per person, so if you’re married, you can deduct a total of $600 on your 2021 tax return.

What Are the Federal Income Tax Brackets?

The deduction is limited to cash contributions; contributions of clothing and household goods to your local Goodwill aren’t eligible. Donations to donor-advised funds aren’t eligible, either. Keep a record of your contribution with your tax documents. For donations of less than $250, you need a bank record, such as a canceled check or credit card statement. For donations of $250 or more, you should obtain a written acknowledgement from the charity that shows the date of the contribution and the amount and states whether you received any goods or services in exchange for your donation.

The kids are alright. Raising a family is expensive, and luckily, most child-friendly tax breaks are available to taxpayers who claim the standard deduction.

Let’s start with the most generous: the expanded child tax credit. For the 2021 tax year, parents can claim $3,600 for each child younger than 6 and $3,000 for each child between 6 and 17. As your income rises, the tax credit is reduced in two stages. First, the credit is reduced to $2,000 per child if your 2021 income exceeds $150,000 on a joint return, or $75,000 for singles. The credit is reduced below $2,000 as income rises above $400,000 on joint returns and above $200,000 on single and head-of-household returns. The amount varies depending on income. There’s no limit to how many eligible kids you may claim on a return.

The IRS sent advance payments for the credit to families from July to December 2021. Unless you opted out, the amount you received in advance will be subtracted from your total child tax credit when you claim it on your 2021 return. You’ll need to reconcile the credit when you file your tax return. (For complete coverage, see Child Tax Credit FAQs for Your 2021 Tax Return.)

Will You Have to Pay Back Your Child Tax Credit Payments?

You may also qualify for a tax credit designed to reduce the cost of child care. For the 2021 tax year, if your children are younger than 13, you’re eligible for a 20% to 50% credit for up to $8,000 in child care expenses for one child or $16,000 for two or more.

You are eligible for the full credit if your adjusted gross income for 2021 doesn’t exceed $125,000. The percentage is gradually reduced from 50% to 20% for people with an AGI between $125,001 and $183,000. It stays at 20% for families with an AGI from $183,001 to $400,000, but then it’s gradually reduced again from 20% to 0% for taxpayers with an AGI between $400,001 and $438,000. Anyone making over $438,000 isn’t eligible for this credit. (See Your Child Care Tax Credit May Be Bigger on Your 2021 Tax Return for more information.)

If you adopted a child last year, make sure you take advantage of a tax credit to help cover expenses related to the adoption. For 2021, the adoption credit can be taken on up to $14,440 of qualified expenses per child. For example, if you had $5,000 in qualifying expenses, you can’t claim the full $14,440 credit, unless you adopted a child with special needs. In that case, you can claim the full credit even if your expenses were less than that. The credit phases out for families with 2021 AGI over $216,660; those with AGI over $256,660 are ineligible.

To qualify, the child you adopted must have been 17 years old or younger—or any age if physically or mentally incapable of caring for himself or herself.

Defraying the cost of education. The cost of college has risen at a faster pace than inflation for years, so if you’re paying for higher education, make sure to take advantage of college-related tax breaks.

2022 Tax Calendar: Important Tax Due Dates and Deadlines

If you’re a parent with a child in college, your best bet is the American Opportunity Credit, which is available for up to $2,500 of college tuition and related expenses (but not room and board) paid during the year. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). Single taxpayers with MAGI greater than $90,000 and married couples with MAGI above $180,000 are ineligible for the credit. The credit covers all four years of college. (Keep in mind that a credit is a dollar-for-dollar reduction in your tax bill, making it more valuable than a tax deduction.)

If you went back to school—whether to improve your employment prospects or just because you had a hankering to learn—you may qualify for the Lifetime Learning Credit. The credit is calculated as 20% of up to $10,000 of qualified expenses, so you can get back as much as $2,000 for 2021.

The income limits for the Lifetime Learning Credit are $90,000 if single and $180,000 if married. You can’t claim both this credit and the American Opportunity Credit for the same student in the same year.

Strategies for Itemizers

You may benefit by itemizing if you have a large mortgage, spent a lot on medical bills last year or were extremely generous.

Why This Tax Filing Season Could Be Ugly

Your home is your castle, and it may be deductible. For home loans acquired after December 15, 2017, you can deduct interest on a mortgage—or mortgages—of up to $750,000. (For loans taken out before that date, you can deduct interest on mortgage debt of up to $1 million.) You can also deduct property taxes, although if you live in a high-tax state, you may not be able to deduct the entire amount. The maximum that you can deduct for combined state and local property tax is $10,000 (or $5,000 if married filing separately).

Defray your medical expenses. The COVID-19 pandemic has left some families with large medical bills, not all of them covered by insurance. If you itemize, you can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. If your AGI was $50,000, for example, you would only be allowed to deduct the unreimbursed medical expenses that exceeded $3,750. The list of eligible expenses is long, ranging from the costs of long-term care to prescription drugs. COVID-19 at-home tests and personal protective equipment, such as masks, hand sanitizer and sanitizing wipes, are deductible medical expenses if they’re used primarily for preventing the spread of COVID-19. Costs for dental and vision care that aren’t covered by your insurance are also deductible.

Charitable giving. It’s too late to make charitable contributions for 2021, but if you itemize, make sure you claim credit for all of the donations you made last year.

If you made large charitable contributions last year—perhaps as part of your estate plans—you’ll be able to deduct donations worth up to 100% of your adjusted gross income. (In the past, the maximum deduction for cash contributions was 60% of AGI, but Congress expanded the tax break to encourage charitable giving during the pandemic.)

If you cleaned out your attic and closets last year, keep in mind that you can deduct the fair market value of donations of clothes, books and other noncash items. Some tax software will help you estimate the value of donated items.

Tax Breaks for Disaster Victims

Although April 18 is the deadline for most taxpayers (who don’t request an extension), victims of the tornadoes that devastated parts of Kentucky, Arkansas, Illinois and Tennessee, as well as victims of Colorado wildfires, have until May 16 to file individual and business tax returns and pay any taxes owed. Taxpayers in the affected areas have until May 16 to contribute to their 2021 IRAs, too.

Most-Overlooked Tax Deductions, Credits and Exemptions

Tornado and wildfire victims will also get more time to make the quarterly estimated tax payments that are due on January 18 and April 18, 2022. If you missed the estimated tax payment for the fourth quarter of 2021 that’s normally due on January 18, you can include it with your 2021 tax return that’s due May 16.

If you live in the affected areas, you don’t need to contact the IRS to get this relief. However, if you receive a late-filing or late-payment penalty notice from the IRS, call the number on the notice to have the penalty abated.

The IRS says it will work with taxpayers who live outside the affected areas but had tax records in the disaster zones. This includes workers assisting the disaster-relief activities who are affiliated with a recognized government or philanthropic organization.

Deducting your losses. The 2017 Tax Cuts and Jobs Act limited the deduction for unreimbursed casualty losses, but it’s still available if the losses occurred in a federally declared disaster area—which means victims of tornadoes, wildfires, hurricanes and other disasters may still be able to claim a portion of their losses.

You must itemize to claim this deduction. But even if you ordinarily claim the standard deduction, your losses, combined with other deductible expenses, could push you over the standard-deduction threshold. You must subtract reimbursement from your insurance provider and funds from government assistance when you calculate your loss, along with any reimbursements you expect to receive.

Once you’ve determined that you have enough deductions to get over the threshold to itemize, you must reduce the amount of your unreimbursed losses by $100. After you’ve done that, you can only deduct unreimbursed losses that exceed 10% of your adjusted gross income. If, for example, your adjusted gross income last year was $150,000 and your total net loss was $83,000, you would first reduce it to $82,900, then knock off $15,000, leaving you with a net deduction of $67,900.

To compute and report casualty losses, fill out IRS Form 4684 (tax software will walk you through this process). You must enter the FEMA disaster declaration number on that form.

"Tax Preparers Near Me"? There's a Better Way to Find a Tax Professional

Taxpayers who are eligible for the casualty loss deduction have the option to claim the loss in the year it occurred—2021 in the case of the December tornadoes—or for the previous year. That allows you to choose the year that will give you the biggest tax break. If you decide to claim it for 2020, you can amend your 2020 return by filing Form 1040X. You must file your amended prior-year return no later than six months after the due date for filing your current-year return (without extensions) for the year in which the loss took place. That means for tornado losses in 2021, you would need to file an amended 2020 return by October 17, 2022.

If your losses were caused by another weather-related event in 2021, don’t assume you’re ineligible for this deduction just because your local disaster didn’t make the national news. You can get a complete list of disaster declarations by state on the Federal Emergency Management Agency's website.

Taxes on Your Investments

Free trading apps such as Robinhood have made it easier than ever to take a flier on hot stocks, turning thousands of novice investors into day traders. But if you managed to make money trading GameStop or other hot tickets, your day of reckoning is April 18. Unless you did your trading in a tax-deferred account, such as your IRA, you’ll be required to share some of your booty with the IRS.

Capital gains on stocks, exchange-traded funds, mutual funds and other assets held for one year or less are taxed at your ordinary income tax rate, which currently ranges from 10% to 37%. If you bailed out at a loss, the tax code limits the amount of relief you can obtain. First, you must use your losses to offset any capital gains of the same type—short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. (After that, net losses of either type can be deducted against the other type of gain.) If you go through those steps and still have losses, you can deduct up to $3,000 against other income, such as your salary. Losses that exceed that amount can be carried over to future years, so keep good records.

The tax code is more forgiving for investors who sell stocks or other assets held for more than a year. Tax rates on long-term capital gains range from 0% to 20%, depending on your income. If you are single and your 2021 taxable income was less than $40,400 (or $80,800 if you’re married and file jointly), you won’t have to pay any taxes on gains from the sale of assets held for more than a year.

To avoid paying more than you owe, make sure you have the correct cost basis for any investment you sold in 2021. The cost basis is the price you paid for your shares, plus any reinvested dividends, capital gains distributions, sales commissions or transaction fees. The higher your basis, the lower the amount of gain that will be taxed. Financial services firms are required by law to track the cost basis of shares in mutual funds or stocks purchased in 2011 or later and provide that basis to investors when the securities are sold. For securities purchased before 2011, you may need to do some detective work, but it’s worth the effort—without a cost basis, the IRS will tax you on the entire proceeds of the sale.

How Is Cryptocurrency Taxed? Here's What You Need to Know

Don’t forget that gains on bitcoin—along with other cryptocurrencies—are subject to the same short- and long-term capital gains rates that apply to stocks, mutual funds and other assets, says Lisa Lewis, a certified public accountant and editor at TurboTax. Even if you used your cryptocurrency to buy something, you’ll owe taxes on the difference between what you paid for the currency and its value when you used it to make a purchase.

Some cryptocurrency platforms are sending investors statements that provide a record of their transactions, Lewis says. But even if you didn’t get a statement, you’re responsible for paying taxes on your crypto gains. The IRS has taken pains to remind taxpayers that cryptocurrency profits are taxable, adding a line to Form 1040 asking whether you’ve bought or sold cryptocurrency.

Taxes on Home Sales

Skyrocketing housing prices could force some taxpayers to do something they haven’t done for nearly 25 years: Pay taxes on profits from the sale of their home.

Since 1997, taxpayers who sell a primary residence they’ve lived in for at least two out of the past five years can exclude up to $500,000 in profits from taxes if they’re a married couple filing jointly, or $250,000 for a single homeowner.

IRS Audit Red Flags

The threshold wasn’t adjusted for inflation, but the vast majority of homeowners have qualified for the exclusion. Now, though, homeowners in some parts of the U.S. where home prices have soared are netting more than the excluded amount. When that happens, the excess gain must be reported on Schedule D with other capital gains. Long-term capital gains are usually taxed at 15% to 20%, depending on your income. In addition, the increase in your adjusted gross income could have other tax consequences, such as a 3.8% surtax on net investment income, which kicks in if you have modified adjusted gross income over $200,000, or $250,000 if you’re married and file jointly. If you’re older, the increase in your AGI could trigger a high-income surtax on Medicare Part B premiums.

There are, however, steps you can take that will lower or even eliminate taxes on your home-sale gains. Your tax bill will be based on your net gain—the amount you sold your home for minus its adjusted basis, which is the amount you paid plus the cost of any home improvements. The higher your basis, the lower your tax bill. “So many people remodeled their homes during the pandemic, and that adds to the basis of the property,” says John Schultz, a certified public accountant in Ontario, Calif.

Ideally, you should have records documenting the cost of your improvements. If you don’t, the contractor that did the work may be able to provide invoices, Schultz says. Building permits may also help you document your expenses. If you can’t track down receipts for every expense, the IRS will usually accept a reasonable estimate, Schultz says.

Allowable improvements that will add to your basis include a new roof, kitchen upgrade, an addition or anything else that would improve the resale value of your home, says Annette Nellen, a CPA and professor at San Jose State University. However, you can’t include routine repair and maintenance costs when calculating your basis. For a complete rundown on allowable expenses, see IRS Publication 523.

Some homeowners mistakenly believe that they can avoid capital gains taxes by reinvesting the proceeds from the sale of their home in another home. Although that was a legitimate strategy before 1997, it’s no longer the case, unless you’re selling real estate purchased for business purposes, Schultz says.

The housing market could slow in 2022 but shows no signs of stalling, so if you’re considering selling your home, start pulling together records of home improvements.

Advice for the Self-Employed

In what’s been dubbed the Great Resignation, millions of Americans quit their 9-to-5 jobs in 2021. If you decided to work for yourself (or pursued a side gig to generate extra income), your taxes are likely to be more complicated. Self-employed taxpayers must pay income taxes on their profits as well as 15.3% in Medicare and Social Security taxes. (When you work for someone else, your employer picks up 50% of that amount.) However, you can deduct half of that amount on your tax return.

Most-Overlooked Tax Deductions and Credits for the Self-Employed

And that’s just one of a host of potential deductions that could lower taxes on your income. In addition to expenses associated with running your business, you can deduct the cost of health insurance premiums for yourself and your family. Self-employed individuals who are eligible for Medicare can deduct the cost of Medicare Part B and Part D premiums, as well as the cost of supplemental Medicare (medigap) policies or a Medicare Advantage plan. If after leaving your job you signed up for COBRA, which allows you to stay on your employer’s health insurance for up to 18 months, those premiums are deductible, too.

Most remote workers aren’t eligible to deduct the costs of their home offices. Once you start working for yourself, though, you’re eligible to claim this money-saving deduction. If you use part of your home or apartment regularly and exclusively for your business, you can deduct part of your utility bills and insurance costs.

In the past, many work-at-home taxpayers skipped this tax break because of fears it would trigger an audit. Others were put off by the recordkeeping needed to support the deduction. In recent years, though, the IRS has come up with a simplified method that allows taxpayers to deduct $5 for every square foot that qualifies for the deduction. For example, if you have a 300-square-foot home office (the maximum size allowed for this method), you can deduct $1,500.

If you went into business for yourself because you were laid off last year, keep in mind that unemployment benefits are taxable on your federal tax return, and many states tax unemployment benefits, too. In response to the pandemic, Congress waived taxes on a portion of unemployment benefits in 2020 but didn’t extend the exclusion into 2021. You should receive a Form 1099-G, “Certain Government Payments,” showing the amount of your benefits. Report them as “additional income” on Schedule 1 of your federal tax return.

Tax Advice for Retirees

Millions of older workers left their jobs last year for a variety of reasons: big gains in their stock portfolios, rising home values and concerns about the pandemic. If you are part of the Gray Resignation, make sure you take advantage of all the tax breaks available to you.

How is Retirement Income Taxed?

In 2021, taxpayers 65 and older can claim a standard deduction of $14,250 (compared with $12,550 for younger taxpayers). If you’re married and both spouses are 65 or older, your total standard deduction for 2021 is $27,800.

For that reason, most retirees are better off taking the standard deduction than itemizing. However, if you still have a mortgage and had high medical bills in 2021, you may want to run the numbers to see if you’ll get a lower tax bill by itemizing.

Retirees who are 70½ or older can donate up to $100,000 a year from their IRAs to charity via a qualified charitable distribution. After you reach age 72, the QCD counts toward your required minimum distribution. A QCD isn’t deductible, but it will reduce your adjusted gross income.

If you made a QCD last year, make sure you won’t be taxed on the distribution. You—or your tax preparer—must report it under “tax withdrawals” on the line for IRA distributions. On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution. Enter “QCD” next to this line. Tax software will walk you through this process.

Taxes in Retirement: How All 50 States Tax Retirees

]]> https://www.kiplinger.com/taxes/tax-filing/604122/how-to-cut-your-2021-tax-bill iGJ12e6NNpTAkkT5bJsSbm Sat, 29 Jan 2022 11:15:06 +0000 <![CDATA[ 2021 Tax Returns: What's New on the 1040 Form This Year ]]> Time is running out if you haven't already filed your 2021 federal tax return. For most people, the tax return filing deadline is April 18 this year (residents of Maine and Massachusetts get one extra day). So, for all you tax procrastinators out there, it's time to get moving. One of the first things you should do is collect and organize your tax records. If you're going to file your own 1040, you should also check out tax software options. If you need more time to file your return, request a tax filing extension (although you'll still have to pay any tax you expect to owe). And, no matter when you fill out your 2021 tax return, you first want to familiarize yourself with the tax law changes that may impact it.

Many (but not all) of the new items on the 2021 1040 form come from the American Rescue Plan Act, which was enacted last March. This Covid-relief bill made changes to the child tax credit, child and dependent care credit, earned income tax credit, and more. Other changes stem from the expiration of earlier Covid-related provisions that expired at the end of 2020. There are a few modifications to some of the main 1040 schedules, too. And, of course, there are the normal inflation-based adjustments that occur every year.

There are many reasons why you should know and understanding these changes up front. First and foremost, it very well may result in a larger tax refund or a smaller tax bill. You're also likely to get through your return faster if you're already aware of any new twists and turns. If someone else prepares your 1040, it will be easier to catch any errors when you review the return. But since "Tax Day" is right around the corner, you don't have much time left to get up-to-speed on what's new and changed for your 2021 tax return. So take a look at our list below and study up now so you know what to look for before tackling your 1040.

"Tax Day" is the day that federal personal income tax returns are due. It was delayed the past two years because of COVID-19. In 2020, Tax Day was pushed back to July 15, and last year it was moved to May 17. This year, however, the tax return filing deadline is moved back to its normal spot on the calendar…well, sort of.

Federal income tax returns are normally due on April 15. But this year most 2021 tax returns aren't due until April 18. That's because of a holiday in the District of Columbia. If you live in Maine or Massachusetts, your federal return isn't due until April 19, thanks to a local holiday in those states. Victims of certain recent natural disaster can wait even longer to file their return.

There are some subtle, but important, changes to the 1040 form itself for 2021 tax returns. Generally, they're needed to account for changes to the tax laws that are discussed below. For instance, the line on page 1 of the 1040 used for reporting the $300 deduction for charitable cash contributions was moved down on the form so that the deduction no longer impacts your federal adjusted gross income (AGI). This is important because your federal AGI is used to calculate several other tax breaks and obligations. It's also used by many states as the starting point for determining your state income tax liability.

Lines 19 and 28 on page 2 of the 1040 form were also adjusted to account for the fact that the child tax credit is fully refundable for the 2021 tax year. Line 27 was also modified and expanded (including a new check box) to satisfy changes to the earned income tax credit. (See more about changes to the child tax credit and earned income credit below.)

The idea of having a postcard-size tax form has been totally abandoned, too. We see this in the expansion of Schedules 1, 2, and 3 that go with the 1040 form. For 2020 returns, each of these schedules fit on one page. Now, for 2021 tax returns, they're each two pages long. The extra length is due to various additions to income, "above-the-line" deductions, extra taxes, and less common credits now getting their own line on these forms instead of being lump together as an "other" item to include.

Approximately 90% of all taxpayers claim the standard deduction instead of itemized deductions. Fortunately, the standard deduction amounts you'll use on your 2021 tax return are larger than last year, thanks to the annual adjustment for inflation. For the 1040 form you'll complete this year, married couples filing a joint return can claim a $25,100 standard deduction. That's a $300 increase over the 2020 tax year amount. For each spouse 65 years of age or older, you can tack on an additional $1,350 ($1,300 for 2020).

Single filers can claim a $12,550 standard deduction on their 2021 tax return ($12,400 for 2020). That jumps to $14,250 if you're at least 65 years old ($14,050 for 2020).

For head-of-household filers, the standard deduction for 2021 tax returns is $18,800 ($18,650 for 2020), plus an additional $1,700 if they're at least 65 years old.

Regardless of their filing status, blind people can add an additional $1,350 to their 2021 standard deduction ($1,700 if they're unmarried and not a surviving spouse).

The tax rates you'll see on your 2021 tax return are the same as they were last year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, the income ranges that apply to each tax rate bracket have changed. Use the tables below to find the appropriate tax bracket for your 2021 return. It's based on your filing status and taxable income (Line 15 of your 1040 form).

Remember, though, that the tax rate associated with the bracket you fall into doesn't apply to all your income. It only applies to the amount of your taxable income that's within the bracket's range. So, for example, if you're single with $50,000 of taxable income in 2021, only the last $9,475 of your taxable income is taxed at the 22% rate ($50,000 - $40,525 = $9,475). The rest is taxed at either the 10% or 12% rate.

2021 Tax Brackets for Single Filers and Married Couples Filing Jointly

Tax Rate	Taxable Income (Single)	Taxable Income (Married Filing Jointly)
10%	Up to $9,950	Up to $19,900
12%	$9,951 to $40,525	$19,901 to $81,050
22%	$40,526 to $86,375	$81,051 to $172,750
24%	$86,376 to $164,925	$172,751 to $329,850
32%	$164,926 to $209,425	$329,851 to $418,850
35%	$209,426 to $523,600	$418,851 to $628,300
37%	Over $523,600	Over $628,300

2021 Tax Brackets for Married Couples Filing Separately and Head-of-Household Filers

Tax Rate	Taxable Income (Married Filing Separately)	Taxable Income (Head of Household)
10%	Up to $9,950	Up to $14,200
12%	$9,951 to $40,525	$14,201 to $54,200
22%	$40,526 to $86,375	$54,201 to $86,350
24%	$86,376 to $164,925	$86,351 to $164,900
32%	$164,926 to $209,425	$164,901 to $209,400
35%	$209,426 to $314,150	$209,401 to $523,600
37%	Over $314,150	Over $523,600

What Are the Income Tax Brackets for 2022 vs. 2023?

If you hold on to a capital asset (e.g., stocks, bonds, real estate, art, etc.) for at least one year, any gains from the sale of the asset are taxed at a lower capital gains rate – either 0%, 15%, or 20%. The same rates apply to qualified dividends. Which rate applies to you depends on your taxable income.

For your 2021 federal income tax return, the 0% rate applies if you're single with taxable income up to $40,400 ($40,000 for 2020), a head-of-household filer with taxable income up to $54,100 ($53,600 for 2020), or a married couple filing a joint return with up to $80,800 of taxable income ($80,000 for 2020).

The 20% rate kicks in at $445,851 of taxable income for single filers ($441,451 for 2020), $473,751 for head-of-household filers ($469,051 for 2020), and $501,601 for joint filers ($496,601 for 2020).

If your taxable income falls between the 0% and 20% thresholds for your filing status, then the 15% rate applies.

As mentioned above, the $300 deduction for cash contributions to charity no longer affects your federal AGI. There's also another important change to this deduction for 2021 tax year returns – married couples can now deduct up to $600. For 2020 returns, married couples who filed jointly could only deduct $300. However, one deduction is allowed per person now, which means each spouse can deduct up to $300 on a joint 2021 return.

Note that this deduction is only available if you claim the standard deduction. It also expired at the end of 2021, so you won't be able to claim it on your 2022 return.

Several significant upgrades to the 2021 earned income tax credit (EITC) were made by the American Rescue Plan Act. The biggest changes will allow more childless workers to claim the EITC on their 2021 tax return. For one thing, the minimum age for claiming the credit without a qualifying child is lowered from 25 to 19 (except for certain full-time students). Workers over the age of 65 can claim the credit on their 2021 return, too. The maximum credit available for workers without a qualifying child also jumps from $543 to $1,502. Expanded eligibility rules for former foster youth and homeless youth were put in place for the 2021 tax year as well.

While the modified rules listed above for childless workers only apply for the 2021 tax year, the American Rescue Plan Act made a few other changes to the EITC that are permanent. For example, the $3,650 limit on a worker's investment income is bumped up to $10,000, and the cap will be adjusted for inflation each year going forward. In addition, certain married couples who are separated can now claim the credit on separate tax returns. And certain workers who can't satisfy the EITC identification requirements for their children can now qualify for the credit as a childless worker.

Finally, as with the 2020 EITC, you can use your 2019 earned income to calculate your 2021 EITC if it's more than your 2021 earned income. Since this can increase or decrease your EITC, calculate the credit using both your 2019 and 2021 earned income to see which method will save you the most money.

To calculate your EITC, complete the worksheets associated with Lines 27a, 27b, and 27c of Form 1040 in the instructions for Form 1040. If you have a qualifying child, also complete Schedule EIC and attach it to your 1040 form.

As with the earned income tax credit, the American Rescue Plan Act made major improvements to the child tax credit for the 2021 tax year. For instance, the credit amount for 2021 tax returns was increased from $2,000-per-child to $3,000-per-child six to 17 years of age and to $3,600-per-child five years old and younger. However, the extra $1,000 or $1,600 is phased out for single filers with a federal AGI above $75,000, head-of-household filers with a federal AGI above $112,500, and joint filers with a federal AGI above $150,000. The credit is further reduced under pre-existing rules for single and head-of-household filers with a federal AGI above $200,000 and married couples filing jointly with a federal AGI above $400,000.

Any child tax credit claimed on your 2021 return is also fully refundable for most parents, even if you don't have any earned income (normally, the credit is only partially refundable – up to $1,400-per-child – and you must have at least $2,500 of earned income). Children who are 17 years old also qualify for the 2021 credit (child normally must be 16 or younger to qualify). Finally, unless you opted-out of the payments, families received 50% of their estimated 2021 child tax credit amount in advance through monthly payments sent between July 15 and December 15 last year.

To calculate the child tax credit allowed on your 2021 tax return, you must subtract the monthly payments you received last year from the total credit that you're otherwise entitled to claim for the 2021 tax year. (The IRS will send you a Letter 6419 showing the amount paid to you in monthly payments.) If the total child tax credit amount is more than your combined monthly payments, you can claim the excess amount as a credit on your return. However, if the total credit amount is less than your payments, you might have to pay back the extra child credit payments.

Use Schedule 8812 to reconcile the advance payments you received last year with the actual child tax credit you're entitled to claim on your 1040 form, and to see if you need to pay back any payments (they will be paid back in the form of an additional tax calculated Part III of the schedule).

For more information about claiming the 2021 credit, see Child Tax Credit FAQs for Your 2021 Tax Return.

Parents benefiting from the child tax credit enhancements may be able to cut their 2021 tax bill even further because of big changes to the child and dependent care credit made by the American Rescue Plan Act. For example, the maximum credit is increased from 35% to 50% of eligible expenses for the 2021 tax year. Plus, the credit percentage won't be reduced for families making less than $125,000 a year (instead of $15,000 per year), and all taxpayers earning less than $438,000 can claim at least a partial credit on their 2021 return.

The 2021 credit applies to more child or dependent care expenses, too. The credit percentage is applied to as much as $8,000 of eligible expenses for one child/disabled person and up to $16,000 of expenses for two or more (the amounts are usually $3,000 and $6,000, respectively). That means the total credit amount can be as high as $4,000 if you have just one child/disabled person and $8,000 if you have more ($1,050 and $2,100, respectively, for 2020).

The child and dependent care credit for the 2021 tax year is also fully refundable for most people (it's usually a nonrefundable credit). Form 2441 is used to calculate the credit.

See Your Child Care Tax Credit May Be Bigger on Your 2021 Tax Return for details.

The American Rescue Plan Act improved the premium tax credit for 2021 and 2022 to lower premiums for people who buy health insurance through an Obamacare exchange (e.g., HealthCare.gov) on their own. The credit amount was increased for eligible taxpayers by reducing the percentage of annual income that households are required to contribute toward their health insurance premium. The law also allowed the credit to be claimed by people with an income above 400% of the federal poverty line.

For certain people who purchase health insurance through an exchange, an estimated premium tax credit amount is paid in advance to the insurance company. If advance payments are made on your behalf, you must reconcile the credit and the advance payments when you file your tax return. If the advance payments are greater than the actual allowable credit, the difference (subject to certain repayment caps) usually must be paid back. However, the American Rescue Plan Act eliminated the repayment requirement – but only for the 2020 tax year. As a result, excess advance payments made in 2021 will have to be repaid when you file your 2021 tax return.

Use Form 8962 to calculate your premium tax credit and reconcile it with any advance payments. Also make sure you submit Form 8962 with the rest of your 2021 tax return.

The nonrefundable credit for expenses related to the adoption of a child is a little larger for the 2021 tax year. For 1040 forms filed this year, the credit can be worth up to $14,440 ($14,300 for 2020). Plus, the full credit is available for a special-needs adoption, even if it costs less.

The credit begins to phase out if your modified AGI is over $216,660 and it's eliminated altogether if your modified AGI reaches $256,660 ($214,520 and $254,520, respectively, for 2020). To claim the credit, complete Form 8839 and report the credit amount on Line 6c of Schedule 3. Also submit Form 8839 with the rest of your 2021 tax return.

The income tax exclusion for company-paid adoption aid was also increased from $14,300 to $14,440 for the 2021 tax year.

The alternative minimum tax (AMT) was originally designed to hit only wealthier Americans. However, the AMT exemption amount wasn't always adjusted annual for inflation – but it is now. For the 2021 tax year, the AMT exemption jumped from $113,400 to $114,600 for married couples filing a joint return and from $72,900 to $73,600 for single and head-of-household filers.

The phase-out ranges for the AMT exemption are adjusted for inflation each year, too. For 2021 tax returns, the exemption is gradually reduced and can ultimately be eliminated if alternative minimum taxable income (AMTI) on a joint return is between $1,047,200 and $1,505,600 ($1,036,800 and $1,490,400 for 2020). For single and head-of-household filers, the 2021 phase-out range is $523,600 to $818,000 of AMTI ($518,400 to $810,000 for 2020). The 2021 range for married people filing a separate return is $523,600 to $752,800 ($518,400 to $745,200 for 2020).

In addition, the 28% AMT tax rate doesn't kick on 2021 tax returns until you hit $199,900 of AMTI. That's an increase over the 2020 threshold, which was AMTI of $197,900 or more.

Use Form 6251 to calculate your AMT and file the form with your 2021 Form 1040.

Say goodbye to the tuition and fees deduction, which was worth up to $4,000 per year. It was repealed starting with the 2021 tax year.

On the bright side, the phase-out thresholds for the lifetime learning credit were increased. They're now the same as the phase-out amounts for the American Opportunity credit. So, beginning with 2021 tax returns, the lifetime learning credit is gradually reduced to zero for joint filers with a modified AGI from $160,000 to $180,000 ($118,000 to $138,000 for 2020) and single filers with a modified AGI between $80,000 to $90,000 ($59,000 and $69,000 for 2020). If you're claiming either the lifetime learning credit or the American Opportunity credit, you must first complete Form 8863 and then attach it to your 1040 form.

The phase-out ranges are also higher in 2021 for the exclusion of interest on Series EE and I savings bonds redeemed to help pay for tuition and fees for college, graduate school, or vocational school. For 2021 tax returns, the exclusion starts to phase out for joint filers with a modified AGI exceeding $124,800 and for other people with a modified AGI of $83,200 or more ($123,550 and $82,350, respectively, for 2020). The exclusion is totally phased-out for joint filers with a modified AGI of $154,800 or more and for other taxpayers with a modified AGI of at least $98,200 ($153,550 and $97,350, respectively, for 2020). You must compete Form 8815 to claim the exclusion and then report the exclusion amount on Line 3 of Schedule B.

The recovery rebate credit is back, but with one important change. As you may recall, this credit made its first appearance on the 2020 Form 1040 and was available for people who didn't receive a first or second stimulus check, or who didn't receive the full stimulus check amount they were entitled to.

For 2021 tax returns, the credit is for people who didn't receive a third stimulus check (or didn't receive the full amount). Those payments were for up to $1,400, plus an additional $1,400 for each dependent in your family. Similar to the monthly child tax credit payments the IRS sent last year, your third stimulus check was an advance payment of the recovery rebate credit. As a result, when you file your 2021 return, you must reduce the recovery rebate credit you're entitled to claim by the amount of your third stimulus check. (The IRS will send you a Letter 6475 showing the amount of your third stimulus check.) For most people, your third stimulus check payment will equal the 2021 recovery rebate credit allowed. If that's the case for you, the credit will be reduced to zero. But if your third stimulus check was less than the credit, your recovery rebate credit will equal the difference. And what if your third stimulus check was more than your 2021 recovery rebate credit? You get to keep the difference!

Use our Third Stimulus Check Calculator to see you how large your third stimulus check should have been.

Two tax breaks that encourage saving for retirement were tweaked for the 2021 tax year. In both cases, the changes are the result of annual adjustments for inflation.

The first retirement-related change for 2021 tax returns is to the deduction for contributions to a traditional IRA. If either you or your spouse was covered by an employer retirement plan, your IRA deduction may be reduced (potentially to zero), depending on your filing status and income. The income levels that trigger a reduction for 2021 returns have been adjusted. For married couples filing a joint return, the deduction is gradually phased out if you're modified AGI is between $105,000 and $125,000 (between $104,000 and $124,000 for 2020 returns). For single and head-of-household filers, the phase-out range is from $66,000 to $76,000 ($65,000 to $75,000 for 2020).

If only one spouse is covered by a retirement plan at work, the deduction is reduced if the couple's modified AGI exceeds $198,000, and it's totally eliminated if their modified AGI hits $208,000 ($196,000 and $206,000, respectively, for 2020). (NOTE: If you made any nondeductible contributions to a traditional IRA for 2021, report them on Form 8606.)

The second change is to the "Saver's Credit," which encourages lower- and middle-income people to save for retirement. The credit is allowed for either 10%, 20%, or 50% of the first $2,000 ($4,000 for joint filers) you contribute to retirement accounts, depending on your filing status and income. The lower your income, the higher the percentage you can use to calculate the credit. For 2021 tax returns, single filers, married people filing a separate return, and qualified widow(er)s can claim a 50% credit if their AGI is $19,750 or less ($19,500 for 2020). They can claim a 20% credit if their AGI is from $19,751 to $21,500 ($19,501 to $21,250 for 2020), and the 10% credit is available if their AGI is from $21,501 to $33,000 ($21,251 to $32,500).

For married couples filing a joint return, the 50% credit is available if their AGI doesn't exceed $39,500 ($39,000 for 2020), the 20% credit is available if their AGI is from $39,501 to $43,000 ($39,001 to $42,500 for 2020), and the 10% credit is available if their AGI is from $43,001 to $66,000 ($42,501 to $65,000 for 2020).

The 50% credit can be claimed by head-of-household filers with an AGI of $29,625 or less ($29,250 for 2020), while they can claim the 20% credit with an AGI from $29,626 to $32,250 ($29,251 to $31,875 for 2020) and the 10% credit with an AGI from $32,251 to $49,500 ($31,876 to $48,750 for 2020).

To claim the credit, complete Form 8880 and send it to the IRS with your 1040 form.

401(k) Contribution Limits for 2022

For 2021 tax returns, standard mileage rate for business driving is 56¢ a mile – that's less than the 57.5¢ per mile for 2020. The rate for medical travel and military moves also dropped for the 2021 tax year from 17¢ to 16¢ a mile.

The mileage rate for charitable driving doesn't change from year-to-year. So, it stayed put at 14¢ a mile for 2021 returns.

Self-employed taxpayers can claim some tax breaks that other people can't. And some of those tax breaks are tweaked for 2021 tax returns. For instance, the sick or family leave credits self-employed people could claim on their 2020 tax return if they missed work for Covid-related reasons was extended for 2021 – but not for the full year. For 2021 returns, the credits are only available for qualified absences through September 30, 2021. In addition, the family leave credit can only be claimed for 50 days missed from January 1 to March 31, 2021, but it can be claimed for up to 60 days missed from April 1 to September 30, 2021. Self-employed people should use Form 7202 to calculate the sick and family leave credits they're entitled to claim on their 2021 1040 form.

The income threshold for limits on the 20% deduction for qualified business income were also adjusted for the 2021 tax year. The taxable income threshold is $329,800 for married couples filing a joint return, $164,925 for married people filing a separate return, and $164,900 for all others ($326,600 for joint filers and $163,300 for all others for 2020 returns). Use Form 8995 or Form 8995-A to figure your qualified business income deduction.

Self-employed people who are wining and dining clients can take advantage of another perk for both the 2021 and 2022 tax years. The deduction for business meals at a restaurant is increased from 50% to 100%. This deduction is claimed on Line 24b of Schedule C.

If a self-employed person had a Paycheck Protection Program (PPP) loan forgiven in 2021, the canceled debt is not taxable income and doesn't have to be reported on Form 1040. However, if you have tax-exempt income resulting from the discharge of a PPP loan last year, you must attach a statement to your 2021 tax return that includes certain information related to your PPP loan (see the instructions to Form 1040 for details). You should also write "RP2021-48" at the top of the statement.

Unfortunately, there are also a couple of negative changes that may increase the 2021 tax bill for some self-employed taxpayers. First, none of the self-employment taxes owed for the 2021 tax year can be deferred as they could on 2020 returns. In fact, half of any 2020 tax deferred had to be paid by the end of 2021, while the rest is due by the end of 2022. Second, the cap on deductible business losses is back after being suspended for the 2018 to 2020 tax years. For 2021 tax returns, the inflation-adjusted limit is $262,000 ($524,000 for married couples filing a joint return). Form 461 is used to calculate a self-employed taxpayer's limitation on business losses.

The $10,200 exemption for unemployment compensation in effect for the 2020 tax year is no more. Under the American Rescue Plan Act, which authorized the exemption for families with a federal AGI less than $150,000, the tax break was for one year only.

As a result, any unemployment compensation you received last year will be fully taxed on your 2021 tax return. Report the benefits on Line 7 of Schedule 1.

If you're paying for long-term care insurance, you might be able to deduct a portion of your premiums – and the deduction maximums, which are based on age, are higher for the 2021 tax year. Taxpayers age 71 or older can deduct up to $5,640 per person on their 2021 tax return ($5,430 for 2020). If you're 61 to 70 years old, you can deduct as much as $4,520 of your premiums ($4,350 for 2020). Anyone 51 to 60 years old can write-off up to $1,690 ($1,630 for 2020). For people 41 to 50 years of age, the max is $850 ($810 for 2020). And, finally, the maximum deduction is $450 if you're 40 or younger ($430 for 2020).

Long-term care insurance premiums are only deductible as medical expenses for most people, which means they must itemize deductions on Schedule A to claim the tax break. However, self-employed people can deduct their premiums on Line 17 of Schedule 1 without having to itemize.

Before the 2021 tax year, canceled or forgiven student loan debt was considered taxable income. However, from 2021 to 2025, most canceled student loan debt that was incurred for a post-secondary education is tax-free. Therefore, you shouldn't report qualified student loan debt that was canceled last year on Line 8c of Schedule 1.

The IRS has also told lenders and student loan servicer providers not to file Form 1099-C or submit payee statements for qualified student loan debt that's discharged, canceled, or otherwise forgiven through 2025. So, if you do receive a 1099-C form reporting discharged student loan debt that you believe is not taxable, contact the lender or loan service provider that issued the form and ask them to send a corrected form.

Americans working abroad may be able to exclude all or a portion of their foreign-earned income from taxable income on their U.S. tax return. For 2021 returns, the maximum exclusion amount is $1,100 higher than it was for the 2020 tax year – it jumped from $107,600 to $108,700.

In addition to the foreign earned income exclusion, taxpayers living abroad may also be able to claim an exclusion or deduction for their foreign housing. For the 2021 tax year, the maximum foreign housing exclusion is generally $15,218 ($15,064 for 2020), although it can be higher in certain high-cost areas.

Use Form 2555 to figure both your foreign earned income exclusion and foreign housing exclusion/deduction.

]]> https://www.kiplinger.com/taxes/tax-filing/604100/2021-tax-returns-what-is-new-on-1040-form ihA6TZgyb2LhCGUtGWNQCs Fri, 21 Jan 2022 11:00:05 +0000 <![CDATA[ When Can You File Your Taxes This Year? ]]> The sooner you file your tax return, the sooner you'll receive any refund due. That's why some people like to file their return as early as possible. This year, the IRS will start accepting 2021 tax returns on January 24, 2022. That's much earlier than last year, when you had to wait until mid-February to start filing returns.

2022 Tax Calendar: Important Tax Due Dates and Deadlines

If you're really itching to file your return as soon as possible and made $73,000 or less in 2021, you can use the IRS's Free File program to file your return as early as January 14. Participating providers will accept completed returns starting on that date and hold them until January 24, when they can be filed electronically with the IRS. Other tax preparation software companies and tax professionals may also accept or preparing tax returns before January 24 and hold them until the IRS itself begins accepting returns.

If you're more of a procrastinator when it come to taxes, most people have until April 18, 2022, to file your 2021 federal income tax return or request a filing extension. Normally the due date is April 15, but since that day is a holiday in Washington, D.C. (Emancipation Day), the deadline is pushed back to the next business day, which is April 18. However, if you live in Maine or Massachusetts, you get an extra day to file your federal return – until April 19 – because of the Patriots' Day holiday in those two states. Anyone requesting an extension will have until October 17, 2022, to file their 2021 federal income tax return (although payment of any tax owed is still due on the April 18 or 19 deadline).

Who Must File a Tax Return?

Not everyone is required to file a tax return. If your income is under a certain amount (see table below), you aren't required to file a tax return because you won't owe any tax.

Federal Tax Return Filing Requirements (2021 Tax Year):

Filing Status and Age at End of 2021	Income Required to File 2021 Return
Single; Under 65	$12,550
Single; 65 or Older	$14,250
Married Filing Jointly; Both Spouses Under 65	$25,100
Married Filing Jointly; One Spouse 65 or Older	$26,450
Married Filing Jointly; Both Spouses 65 or Older	$27,800
Married Filing Separately; Any Age	$5
Head of Household; Under 65	$18,800
Head of Household; 65 or Older	$20,500
Qualifying Widow(er); Under 65	$25,100
Qualifying Widow(er); 65 or Older	$26,450

However, even if your income is below the applicable threshold, you still may want to file a 2021 tax return anyway. For example, you will need to file a return to claim a recovery rebate credit if you didn't get a third stimulus check or got less than what you should have received. There also may be other tax credits that are only available if you file a return, such as the:

Earned income credit;
Child tax credit;
American Opportunity credit;
Credit for federal tax on fuels;
Premium tax credit;
Health coverage tax credit;
Credits for sick and family leave; and
Child and dependent care credit.

Will Monthly Child Tax Credit Payments Be Renewed in 2022?

If you receive monthly child tax credit payments last year, you'll have to reconcile those payments with the total credit that you're actually entitled to claim. (Some people may even be required to pay back all or some of the monthly payments if they received too much.)

When Will Tax Refunds Arrive?

If you have a federal tax refund coming, you could get your money back in as little as three weeks. In the past, the IRS has issued over 90% of refunds in less than 21 days. If you want to speed up the refund process, e-file your 2021 tax return and select the direct deposit payment method. That's the fastest way. Paper returns and checks slow things down considerable.

However, don't expect your refund before mid-February if you claim the earned income tax credit or the additional child tax credit. By law, refunds for returns claiming these credits must be delayed. This applies to the entire refund, not just the portion associated with the credits.

23 IRS Audit Red Flags

]]> https://www.kiplinger.com/taxes/tax-filing/604041/when-can-you-file-your-taxes-this-year qDoKYqhzYucF7hkswweDAo Mon, 10 Jan 2022 18:53:01 +0000 <![CDATA[ When Retirees Need to File an Amended Tax Return ]]> You filed your tax return months ago, but then you happen to glance at a copy and notice a mistake. What should you do?

"There's no reason to panic," says Ebony J. Howard, a certified public accountant and financial reviewer for RetireGuide.com, "because the IRS allows corrections to be made on previously submitted tax returns."

In many cases, fixing an old tax return requires filing an amended return. That's fairly easy to do, although there are some time limits and special forms -- usually Form 1040-X -- you'll have to use. Some errors don't need an amended return. Instead, the IRS might correct your return automatically or ask you to do something else, a request that will come in writing.

So, if you discover an error on your tax return, the first question is whether you need to file an amended return, take some other action or do nothing at all. Here are some common situations retirees might encounter.

Taxes in Retirement: How All 50 States Tax Retirees

Scenarios That Require an Amended Return

If you missed a tax deduction or credit that you were entitled to claim, you need to file an amended return to correct the omission. For instance, suppose you itemized deductions on your original return but didn't claim the medical expense deduction because you didn't think you satisfied the 7.5% of adjusted gross income threshold. Later, you realize you do thanks to your Medicare premiums, which qualify as a medical expense. "In this case," Howard says, "it would be wise to complete a 1040-X form, which would increase the total itemized deduction amount," resulting in a refund.

Another reason for filing an amended return is to report omitted income. For example, retirees could receive a Form 1099-R reporting distributions from a retirement plan, Form SSA-1099 showing Social Security benefits, or another form indicating other taxable income after filing their tax return. If that happens, Howard says you'll have to "file a 1040-X return, add the income in so the IRS can accurately calculate the tax that's due or the refund amount, and then explain the reason" for amending the return.

An amended return is also necessary if your filing status on the original return was wrong, an error often triggered by a spouse's death. The surviving spouse can file a joint return for the year the deceased spouse dies, but after that, either the qualifying widow(er) or single filing status must be used. If the surviving spouse continues to file a joint return after the year of death, an amended return is needed to correct the mistake.

Sometimes, a new tax break is retroactively enacted that calls for checking your previous tax returns to see if you can take advantage of it. If so, file an amended return to claim a refund. If you're the victim of a natural disaster, you generally can file an amended return for the previous tax year to claim a casualty loss deduction for the damage from Mother Nature.

No Amended Return Needed

A simple math or clerical error doesn't require an amended return. The IRS will fix the mistake, though the agency might contact you first if it needs more information.

As a general rule, you also won't need to file a Form 1040-X if you forgot to attach a form or schedule to your return. According to Howard, this scenario could happen to retirees who fail to take a required minimum distribution and are hit with the 50% penalty. The IRS can waive the penalty if there's a reason for the error and you're taking reasonable steps to remedy the RMD shortfall. "In that case, the taxpayer would only need to file Form 5329 for the prior year," she says. If no other changes are needed, "filing a Form 1040-X is not necessary."

Keep in Mind the Deadline for an Amended Return

Don't wait too long to file an amended return. The deadline for doing so is generally three years after filing your original return or two years after paying any tax due, whichever is later. But, if you're due a refund, wait until you receive it before filing an amended return. Also, if you owe tax after filing an amended return, pay it quickly to avoid additional interest and penalties. After three weeks, you can check the status of an amended return on IRS.gov or by calling 866-464-2050.

12 Questions Retirees Often Get Wrong About Taxes in Retirement

]]> https://www.kiplinger.com/taxes/tax-returns/603412/when-you-need-to-file-an-amended-tax-return 5qxH1wHQX8EyHp4reLTz3W Mon, 13 Sep 2021 14:23:54 +0000 <![CDATA[ How Long Should You Keep Tax Records? ]]> There's been a lot of talk about federal tax in the news lately. You may have heard about the House GOP bill to abolish the IRS and wondered whether you still need to file taxes or hang on to your tax documents.

Yes, filing taxes is still mandatory. But you may want to hold off on shredding your tax records even after Tax Day.

That is because those forms, receipts, canceled checks, and other documents could be needed later. While the IRS may be undergoing changes, the tax agency generally has three years after the due date of your return (or the date you file it, if later) to kick off an audit — that hasn't changed.

Plus, some documents may be kept even longer. For instance, it might be wise to save W-2 forms until you start receiving Social Security benefits so you can verify your income if there's a problem.

Here's some information on how long you should keep certain common tax records and documents.

1 Year

Tax records to keep for one year

Here is a list of records you should keep for at least one year:

Keep pay stubs at least until you check them against your W-2s (if all the totals match, you can then shred the pay stubs).
Take a similar approach with monthly brokerage statements.
You can generally dispose of these statements if they match up with your year-end statements and 1099s.

3 Years

Why should you keep your filed taxes for three years?

Generally speaking, you should save documents that support any income and tax deductions and credits claimed on your tax return for at least three years after the tax filing deadline. This includes saving:

W-2 forms reporting income.
1099 forms showing income, capital gains, dividends, and interest on investments.
1098 forms if you claimed the mortgage interest deduction.
Canceled checks and receipts for charitable contributions (if you itemize deductions).
Records showing eligible expenses for withdrawals from health savings accounts and 529 college savings plans.
Records showing contributions to a tax-deductible retirement-savings plan, such as a traditional IRA.

If, like most people, you don't itemize deductions on Schedule A, you might not need to save as many documents. For example, if you are not deducting charitable contributions, then you don't need to keep donation receipts or canceled checks for tax purposes.

Investment tax records

When it comes to investments, you will need to save some records for at least three years after you sell.

For instance, you should keep records of contributions to a Roth IRA for three years after the account is emptied. You will need these records to show that you already paid taxes on the contributions and shouldn't be taxed on them again when the money is withdrawn.

You should also:

Keep investing records showing purchases in a taxable account (such as transaction records for stock, bond, mutual fund, and other investment purchases) for up to three years after you sell the investments.
Report the purchase date and price when you file your taxes for the year they're sold to establish your cost basis (original price you paid, plus other costs to acquire the security), which will determine your taxable gains or losses when you sell the investment.

Even if your broker is required to report the cost basis, it is a good idea to keep copies of these records yourself. (If you inherit stocks or funds, keep records of the value on the day the original owner died to help calculate the basis when you sell the investment.)

miniature house on papers with calculator, pen, and keychain — Important home documents should be kept for at least three years to help with your taxes. (Image credit: Getty Images)

Tax records for property

If you inherit property or receive it as a gift, make sure you keep documents and records for at least three years after you dispose of the property.

Income from selling property is considered taxable if sold for more than your basis in the property.

The basis of inherited property is generally the property's fair market value on the date of the descendant's death.
For gifted property, the basis is generally the same as the donor's (usually the fair market value when you received the gift).

Keep home sale and improvement receipts and documents for three years after you've sold the home. Most people don't have to pay capital gains tax on home sale profits.

Single filers with $250,000 or less in gains don't need to pay capital gains tax.
Joint filers with $500,000 or less in gains don't need to pay capital gains tax.
Regardless of the amount, filers must have lived in the residence for two of five years prior to the sale to avoid capital gains tax.

But if you sell the house before then or if your gains are larger, you will need to have your home purchase records. Save receipts for home improvements, too. They can increase your adjusted basis (cost of acquiring the home, plus cost of improvements, less casualty losses), which can help reduce your tax liability. Similar rules may apply to any rental property you own.

Save records for at least three years after selling the property.

6 Years

Why should you keep your taxes for six years?

The IRS has up to six years to initiate an audit if you've neglected to report at least 25% of your income.

For self-employed people, who may receive multiple 1099s, it isn't difficult to overlook reporting some income. To be on the safe side, you should generally keep your 1099s, receipts, and other records of business expenses for at least six years.

If you don't report $5,000 or more of income attributable to foreign financial assets:

The IRS has six years from the date you filed the return to assess tax on that income.
So save any tax records related to such income until the six-year window is closed.

7 Years

Tax records to keep for seven years

Sometimes your stock picks don't turn out so well. Or maybe you loan money to someone who doesn't pay you back. If that's the case, you might be able to write off your worthless securities or bad debts.

But make sure you keep related records and documents for at least seven years. That's how much time you have to claim a bad debt deduction or a loss from worthless securities.

(Note: Loaning money is considered a gift if you knew the person may not pay you back. Gifts are not tax-deductible, so you can't write these off as bad debts.)

10 Years

Tax records to keep for ten years

If you paid taxes to a foreign government, you may be entitled to a credit or deduction on your U.S. tax return.

You’ll typically have up to 10 years to claim the Foreign Tax Credit, so you should save any tax records or documents related to foreign taxes paid for at least 10 years.

Indefinitely

Tax records to keep indefinitely

Some tax (and even non-tax) documents you should keep indefinitely. Here are a few examples:

Copies of the tax return itself.
Birth certificates, marriage licenses, or divorce papers.
Social Security cards.

Keeping these records in a fire and water-safe box can help you recover your tax documents should a natural disaster occur and you are audited by the IRS. Also, you may want to consider digitizing your tax records as a backup so you may access your important papers anytime.

Other Considerations

State tax records

Don't forget to check your state's tax record retention recommendations, too. The tax agency in your state might have more time to audit your state tax return than the IRS has to audit your federal return.

For instance, the California Franchise Tax Board has up to four years to audit state income tax returns, so California residents should save related tax records for at least that long.

What to do if your W-2 or 1099 is lost, incorrect, or accidentally thrown away

You may have realized you accidentally threw your W-2 or 1099, discovered you never received one, or that the information listed is incorrect.

So what do you do?

For starters, obtain another copy of your W-2 or 1099 by contacting the issuer. If you have trouble obtaining one, here are some additional steps you can take:

Contact the IRS for assistance at 800-829-1040. They will ask for your contact information, Social Security number, and dates of employment. The agency will also ask for your employer’s or payer’s contact information.
If you don’t have time to call the IRS before the filing deadline, you can use Form 4852 or Form 1099-R to estimate your wages or earnings.
File your taxes — even if your form is missing or incorrect.

If you receive the missing form after you file, and the amount listed differs from Form 4852 or Form 1099-R, you must file an amended tax return. You can do so by filing Form 1040-X, Amended U.S. Individual Income Tax Return.

Federal tax amendments can be filed by mail or electronically. It’s important to file the amendment as soon as possible to reflect the most accurate tax withholding.

For more information, check out the IRS’ 2025 announcement on missing or incorrect documents.

]]> https://www.kiplinger.com/taxes/602798/how-long-should-you-keep-tax-records hYKtTc8HFTMYxenSZDXPeH Tue, 18 May 2021 09:34:10 +0000 <![CDATA[ Pros and Cons of Filing a Tax Extension ]]> This year, federal income tax returns are due by April 15 for most people. However, if you cannot file your return by the deadline for whatever reason, it's fairly easy to get the due date extended to October 15. All you have to do is request a tax extension by filing a simple IRS form or paying your taxes electronically. Make sure you act before the original tax deadline, though.

Since the process is relatively simple, the question often becomes "Should you get a tax extension?" There are both advantages and disadvantages to requesting an extension and pushing back your tax filing deadline. So, whether you should get an extension comes down to your situation and preferences. What makes sense for you? To help you answer that question, here are a few pros and cons of waiting to file your tax return.

This year, federal income tax returns are due by April 15 for most people. However, if you cannot file your return by the deadline for whatever reason, it's fairly easy to get the due date extended to October 15. All you have to do is request a tax extension by filing a simple IRS form or paying your taxes electronically. Make sure you act before the original tax deadline, though.

If you simply can't file your return by the April 15 deadline, then by all means get a tax extension. You're sick, you can't find your tax records, your computer crashed…whatever the reason, if you can't file you can't file. Don't bang your head against the wall trying to come up with a way to get your return in before the clock runs out. Take the extension!

More time can also mean a more accurate tax return. For example, you (or your tax preparer) will have more time to determine which tax breaks apply to you and which ones don't. Haste makes waste. So, if you are not sure about how to handle something on your tax return, don't rush it — taking the tax extension will buy you more time to figure it out.

Nobody really likes to think about taxes…so why not just get it over with so you can forget about taxes until next year. Pushing your tax return off until October means you'll just have six more months to worry about it. If you don't need more time, don't take it.

Plus, the task of filing your return won't be any easier in October. You'll still have to collect all your tax records, fill out the forms, do the research, etc. Do you really want that hanging over your head any longer?

Let's say you file your tax return today and pay $100 in tax. In August 2026, you discover a mistake on the return that results in a refund to you. In that case, you're out of luck – it's too late to claim the refund. However, if you request a tax extension and wait to file this year's return until October 15, you'll still have time to request a refund when you discover the error in August 2026.

The tax law allows three years from the time a return is filed or two years from the time the tax is paid, whichever is later, to claim a refund related to the return. The later you file, the more time you'll have to file a refund claim later. While this type of scenario is relatively rare, it does happen. And if it happens to you, you'll thank your luck stars that you requested a tax extension if it means you won't lose out on a refund.

If you're expecting a refund this year, think twice about requesting a tax extension. The longer you wait to file your return, the longer you'll wait to get your refund. If you need the money now, then file as soon as possible.

You can also speed up your refund by e-filing your 2024 tax return and opting to have your refund deposited directly into your bank account. The IRS can process electronic returns and refunds much faster than it can handle paper returns and checks.

For more information on factors that can delay your tax refund, read Kiplinger's report: IRS Income Tax Refund Schedule 2025: When Will Your Refund Arrive?

Tax preparers are busiest right before the tax filing deadline, so expect to pay premium prices if you want your return filed right before the due date. However, things slow down for preparers in the fall. That often translates into lower tax preparation fees, which you can take advantage of if you request a tax extension.

In general terms, prices for tax services can vary widely depending on several factors, including the complexity of your return, where you live, and the preparer's experience. That's why it's important to get a quote before settling on a preparer. You might not get an exact price up front, but at least make sure you understand how the price is determined (e.g., a preparer might have a set fee for each form required, charge you by the hour, or start with a minimum fee and tack on additional costs depending on the complexity of your return).

However, walk away if a preparer bases his or her fee on a percentage of your tax refund — you don't want a preparer claiming questionable tax breaks on your return to inflate the fee.

If you request a tax extension, you won't have to pay your taxes until October…right? WRONG!! The extension is only for filing your tax return — not for paying any tax you owe. You still have to estimate the amount of tax you owe (if any) and pay that amount by April 15. If you don't, the IRS will charge you interest on the unpaid balance and probably tack on additional penalties for paying late.

If you can't pay the tax you owe, pay what you can now and check out the various IRS payment options for what's left. You can set up a payment plan, make an "offer in compromise," or request a temporary collection delay. Some people even take out loans to pay the taxes they owe, since loan costs are sometimes lower than the IRS interest and penalties you'll owe for not paying on time.

For more information, see Ways to Pay the IRs if You Owe Taxes

The penalty for failing to file your return on time is 5% of any unpaid taxes for each month (or part of a month) that a tax return is late. However, the penalty won't exceed 25% of your unpaid taxes. If your return is over 60 days late, there's also a minimum penalty for late filing — the lesser of $485 (for tax returns required to be filed in 2025) or 100% of the tax owed. So, if you owe taxes this year that you can't pay right now, requesting a tax extension will at least let you avoid (or lessen) late filing fees since the penalty won't start until after October 15.

But you'll still be hit with other penalties if you don't pay any tax due by the April 15 deadline. The failure-to-pay penalty is 0.5% of the unpaid amount for each month, or part of a month, up to a maximum of 25%. The penalty increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. If you file your return by its due date and request an installment agreement, the penalty goes down to 0.25% for any month in which an installment agreement is in effect. Interest will be charged on the unpaid amount, too.

The tax return filing extension is very limited. It buys you more time to file your return, but it doesn't help with other things. As mentioned earlier, you still have to pay any tax owed by the original due date. It also doesn't delay the payment of estimated taxes, give you more time to contribute to an IRA or health savings account, or extend any of the other April 15 due dates. After April 15, married couples can't file amended separate returns if they previously filed a joint return. A filing extension also doesn't give security traders more time to make a mark-to-market election.

If you do request a tax extension, don't be lulled into thinking that you can sit back and relax for six months. You very well may have other tax obligations to fulfill in the meantime (e.g., making estimated tax payments or reporting tips to your employer). You also still might have to file a state tax return — or at least file a separate extension request with your state (check with the state tax agency where you live for specific rules to follow).

For self-employed people, getting a filing extension can also provide more time to contribute to a retirement savings account. Normally, contributions to a Solo 401(k) plan or Simplified Employee Pension (SEP) IRA for the previous calendar year have to be made by the original tax return filing deadline (April 15 this year). However, if you get an extension to file your return, you also get an extension to contribute money to these types of accounts.

There's another perk that everyone gets — whether you're self-employed or an employee — by claiming a filing extension. If you exceed the 2024 IRA contribution limits, you get six more months to withdraw the excess funds and, thereby, avoid a stiff penalty. If you don't claim a tax extension, you'll have to take out the extra contributions by April 15.

If you're applying for a mortgage or other loan, you'll probably need to submit a tax return. You might need one to apply for certain government benefits, too. If delaying your tax return means you'll have to wait to apply for these or other important things, then maybe it's best just to file your return now.

]]> https://www.kiplinger.com/taxes/tax-deadline/602770/pros-and-cons-of-requesting-a-tax-extension bmzspbMuv5WwUEEzp2w35w Tue, 11 May 2021 09:30:00 +0000 <![CDATA[ IRS Extends Tax Return Filing Deadline to May 17 ]]> The IRS has moved the deadline for filing 2020 federal income tax returns from April 15 to May 17, 2021. This change comes after lawmakers, tax professionals, and others put intense pressure on the IRS to give taxpayers more time to file their 2020 federal income tax returns. It will also give the tax agency, which already has a backlog of unprocessed tax returns, more time to adjust its computer systems and forms to account for tax changes made by the recently enacted American Rescue Plan Act – most notably, the $10,200 exemption for unemployment compensation received in 2020.

Child Tax Credit FAQs for Your 2021 Tax Return

You can also delay payment of federal income taxes for the 2020 tax year to May 17 without penalties and interest, regardless of the amount you owe. This delay applies to people who pay self-employment taxes, too. Penalties, interest, and additions to tax will begin to accrue on any remaining unpaid balances after May 17.

Estimated Tax Payments

The extended due date doesn't apply to estimated tax payments. These payments are still due on April 15. Income taxes must be paid during the year as you receive it – either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by people whose income isn't subject to income tax withholding, including self-employment income, interest, dividends, alimony, or rental income. Most people automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer.

Earlier this year, the IRS announced relief for victims of the February winter storms in Texas, Oklahoma, and Louisiana. Storm victims in these states have until June 15, 2021, to file various tax returns and make tax payments. The general due date extension to May 17 doesn't affect the June deadline allowed in Texas, Oklahoma, and Louisiana.

Extension to October 15

If you need additional time to file after the May 17 deadline, you can request a filing extension until October 15, 2021, by filing Form 4868. This will not extend the time to pay your taxes. You still need to pay any federal income tax due by May 17 to avoid interest and penalties.

State Tax Returns

Some states have already pushed back their own tax return filing deadline…and we expect more states to do the same now that the IRS extended the due date for filing federal returns. Check with the state tax agency where you live for any state tax deadline extensions.

Who's Not Eligible For a Third Stimulus Check

]]> https://www.kiplinger.com/taxes/tax-deadline/602449/irs-extends-tax-return-filing-deadline-to-may-17 jQy7JLJiQd6VRbepYi9eZd Wed, 17 Mar 2021 19:47:50 +0000 <![CDATA[ Kiplinger’s Best Values in Tax Software, 2021 ]]> If the COVID-19 pandemic forced you to move or work remotely, file for unemployment benefits or pick up a side gig to earn extra income, filing your tax return could be more complicated than in the past. The economic stimulus checks sent to millions of taxpayers, which represented advance payments of a 2020 tax credit, also create the potential for confusion.

Preparing your own return instead of hiring a preparer could save you money, but tax software can get expensive in a hurry, even for taxpayers with fairly straightforward returns. And a program that shortchanges your refund—or gets you in trouble with the IRS—is no bargain.

To help you find the program that’s right for you, Kiplinger reviewed the online versions of the most popular programs and ranked them based on cost, ease of use, tax help and more. We used two fictional tax returns: one for a single taxpayer who had income reported on Form W-2 and some freelance income, and a second for a married couple with a young child and a mortgage who itemized deductions. To account for some pandemic-related circumstances that could affect taxpayers, we looked at how the programs handled the economic stimulus payments millions of taxpayers received in 2020 and early 2021, which represented an advance payment of a tax credit on your 2020 tax return. In addition, we gave one of the spouses in our fictional couple unemployment benefits, and we had our single taxpayer move from Maryland to his parents’ home in Ohio to determine how the programs accounted for multiple state filings. (For more on your tax obligations if you moved last year, see There's Still Time to Save on 2020 Taxes.)

Prices quoted here are as of January 14. Many tax-software providers engage in surge pricing, which means the cost could rise as the tax-filing deadline approaches.

When to hire a pro

Although tax software is designed to handle a multitude of situations, sometimes the wiser course is to outsource the job to a tax professional. When to consider getting help:

You’re self-employed or own a business. Taxpayers who work for themselves are eligible for a long list of deductions that do-it-yourselfers might overlook. They’re also subject to more scrutiny by the IRS.

You own rental property. The rules governing tax treatment of rental property are complex, and this is another area that tends to attract IRS attention — particularly if you report large rental losses.

You need to file more than one state tax return. A tax preparer can help you comply with tax rules if you lived in more than one jurisdiction last year.

Check the credentials of anyone you hire. Certified public accountants are licensed by state boards of accountancy, studied accounting at a college or university, and have passed a rigorous exam. You can get a list of local certified public accountants from your state’s CPA society.

Enrolled agents must pass a rigorous test and meet annual continuing-education requirements, and are licensed to appear before the IRS. To locate an enrolled agent in your area, go to naea.org.

Who can file for free?

Even a taxpayer with modest income could end up spending more than $100 on tax software, particularly if he or she had freelance income, lived in more than one state or did something as mundane as contributing to a health savings account. So before you sign up for a program, see whether you’re eligible to prepare and file your federal tax return — and possibly your state tax return, too—for free.

If you had adjusted gross income of $72,000 or less in 2020, you can prepare and e-file your federal tax return through IRS Free File, even if your return is complex. Some tax-preparation companies that participate in IRS Free File include a free state tax return; others will charge you for that. This year, there are nine Free File participants. Each participant is permitted to impose its own criteria. The IRS provides a tool that will help you find a program you’re eligible to use.

Be careful: Some tax software providers use search terms such as “free file” to persuade customers to sign up for programs that end up costing them money. To avoid confusion, go straight to the source: I RS Free File.

If you don’t qualify for IRS Free File but have a fairly straightforward return, consider Free File Fillable Forms. This program allows you to fill out your tax return electronically and either e-file it or print it and mail it in. The program will do the math but doesn’t offer guidance or advice, and it doesn’t include a state tax return.

Our methodology

We ranked the programs on cost, navigation (ease of use), the availability of tax help and the number of state returns included in the base price. We deducted points if more-expensive upgrades were needed. For each tax program on our list, we applied our criteria to two fictional tax returns. One of our returns was for a single taxpayer who rents an apartment, received one W-2 form, earned $5,000 in freelance income, has a student loan and has no dependents. In addition, he moved from Maryland to his parents’ home in Ohio. The other return was for a married couple who own a home, have a young child, received investment income, donated to charity and contributed to a health savings account. They both received a W-2 form for earned income and one spouse collected unemployment benefits. They both contributed to IRAs and 401(k) plans.

The 10 Most Tax-Friendly States for Middle-Class Families

Pros: Free federal return for even complex tax situations
Cons: Program can’t import W-2s and 1099s
Website: freetaxusa.com

FreeTax USA still earns top marks this year for making the tax-filing process as smooth as possible. Unlike the other programs, such as those offered by H&R Block and TurboTax, you don’t need to upgrade to a more expensive version to report health savings account contributions, gig income or investment income. Both of our fictional taxpayers were able to file a federal tax return for free.

However, FreeTax’s treatment of stimulus payments could confuse some users. The program refers to the taxpayer’s “economic impact payment” with “stimulus” in parentheses. If you’re a nervous taxpayer, that could be alarming. (Other programs we reviewed were more straightforward in their stimulus nomenclature.)

If you have questions about your stimulus payment (or anything else), live help is available for just $7. FreeTax is also a good option for taxpayers who need to file multiple state tax returns, which cost just $13 each. If our single taxpayer required live tax help along the way, his grand total would be $33 to file a federal tax return and two state returns.

The 10 Least Tax-Friendly States for Middle-Class Families

Pros: Free federal return and one free state return for all tax situations
Cons: Doesn’t support multiple state returns
Website: creditkarma.com/tax

Credit Karma is the clear winner when it comes to cost. The tax software is still free and supports nearly all of the forms the average taxpayer needs.

But things have changed since last year, when this program received our top ranking. In late November, Credit Karma Tax was purchased by Square, a financial technology company that developed Cash App, a mobile payment service. With a new overlord comes potential privacy concerns, as you’ll be asked early on if you want to sync your tax and Cash App data. Note that you can opt out of this information-sharing request.

Even though the website states that you can import previous year’s tax returns from competitors such as H&R Block and TurboTax, no import button appeared during our test-drive. As was the case in the past, the program can’t handle multiple state returns, which makes it unpalatable for people who need to file in more than one state. Our fictional single taxpayer would need to buy a different program to file just one more state tax return. The program was more useful for our couple, who needed to file only one state return. For example, it went the extra mile to make sure all identification numbers were valid when reporting unemployment benefits. If cost is your biggest concern and you didn’t move last year, this program will deliver.

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Pros: Superior navigation, plenty of support, imports W-2s and 1099s
Cons: Costly, even for straightforward returns
Website: turbotax.com

TurboTax is the Mercedes of tax software, promising a smooth ride with plenty of bells and whistles and handholding along the way. Answers to your questions are readily available via the TurboTax community, how-to videos and other resources.

The program is a breeze to navigate, even if you need to go back to add information or fix errors. But you’ll pay a premium for this luxury vehicle. TurboTax’s free product is limited to taxpayers who claim the standard deduction, have only W-2 income and don’t deduct student loan interest (even though this deduction is available to nonitemizers). And it doesn’t take much to require an upgrade to the paid versions. Because our fictional single taxpayer had $5,000 in freelance income, he was required to use TurboTax Self-Employed, which costs $90. His two state tax returns cost $80, for a total of $170. On the plus side, TurboTax did a nice job of breaking down his state tax obligations based on where he lived last year. The married couple had to upgrade to TurboTax Premier ($70) because they had $5,000 in investment income.

14 IRS Audit Red Flags for Retirees

Pros: Low cost; imports W-2s and previous-year return
Cons: Marginal guidance; fee for professional help
Website: taxslayer.com

If you know your way around the tax laws, TaxSlayer Classic is a bargain. For only $17, you get access to all the forms you need. There are no forced upgrades if you have income from a side job, pay student loan interest, contribute to a health savings account or have any other tax situation that’s beyond the basics. You’ll have to pay an extra $32 for each state return, but even so, for our hypothetical single taxpayer who lived in two states last year, the total bill for one federal and two state returns is $81. That’s not bad when compared with the competition.

If you get stuck on a tax question, there’s some basic guidance available. Free e-mail and phone support is offered, too. But if this is your first time preparing a tax return on your own, you might want to upgrade to TaxSlayer Premium for an extra $20. Not only will that bump you to the front of the line for e-mail and phone support, but it will also get you live chat and help from a tax professional. Because the written advice is only so-so and navigation can be tricky, you’ll recoup that $20 and more if a tax pro helps you avoid a costly mistake on your return.

12 States That Won't Tax Your Retirement Income

Pros: Deluxe offering now available for gig workers
Cons: High price
Website: hrblock.com

If consistency is what you’re looking for, H&R Block does not disappoint. Last year, the company offered eight options with prices tied to the forms you needed to use and availability of live tax help. This year, the company has scaled back to four programs, and each has the option to add live help before you start or as you’re working through the program.

The Deluxe offering, which costs $30, did a good job of recognizing tax issues that arose because of the pandemic. The program explains how to report unemployment benefits and claim any stimulus money you haven’t already received. Gig workers who don’t have any deductible expenses to report don’t have to upgrade to H&R Block Self-Employed. However, our single taxpayer had to use the Self-Employed version because he had deductible business expenses. His cost: $84.99, plus $36.99 for each state return; because our hypothetical taxpayer moved to another state, his total cost was about $159.

On the plus side, retirees, students and workers with just W-2 income should be able to file a federal return and up to three state returns for free by using Block Free Online. (They may also be eligible for IRS Free File.)

5 Ways to Prepare for Higher Taxes Under President Biden

Pros: Frequent tax tips; imports W-2s and previous-year return
Cons: Limited support
Website: taxact.com

TaxAct has improved its navigation since our last tax software review, with easily digestible tax advice sprinkled throughout the program. But you won’t get much help with your questions (unless you’re willing to pay for it), so users need to be comfortable with the tax code to use this program effectively.

On the plus side, TaxAct lowered prices for its federal tax returns from a year ago. Its Deluxe version, available to itemizers who don’t have investment income, is $24.95, down from $30 in 2020. But because our fictional single taxpayer had freelance income, he had to upgrade to TaxAct Self-Employed, which costs $64.95 for a federal tax return plus $44.95 for each state tax return. That works out to nearly $155 for a federal return and two state returns. Because the married couple had some investment income, they were required to use TaxAct Premier, which costs $34.95, plus $44.95 for a state tax return, for a total of about $80.

Tax Relief Available for California Wildfire Victims

]]> https://www.kiplinger.com/taxes/tax-filing/602135/kiplingers-best-values-in-tax-software-2021 3dfMCSSdz72WFmE9dmjPnC Wed, 27 Jan 2021 14:49:48 +0000 <![CDATA[ How to Handle an IRS Audit of Your Tax Return ]]> Regardless of why you're chosen, it's quite a shock to learn that you have to deal with an IRS audit. Even if you have no reason to think you did anything wrong, you can't escape the anxiety that accompanies an IRS audit notice.

For one thing, the tax return being audited is unlikely to be the one you just filed. (The IRS generally has three years from the due date of your return to initiate an audit. So, for example, the IRS generally has until April 18, 2023, to flag your timely filed 2019 return for an examination.)

But, whatever you do, don't panic! Here's what to expect and some tips on how to handle an IRS audit of your tax return. Hopefully, we can lower your stress level a notch or two.

IRS Audit: How it Begins

If you're selected for an IRS audit, you'll get a letter announcing your fate. The simplest IRS audit, called a correspondence audit, requires only that you mail in the records needed to verify a specified claim on your return.

Over the past several years, the IRS has been doing more of these types of audits. For a field audit, an IRS agent comes to your home or place of business to go over your records.

Most common face-to-face meetings, though, come during office audits, which typically take place at a local IRS office.

You'll probably have at least a couple of weeks to prepare. If the appointment is set for an inconvenient time or you find that you'll need extra time to pull your records together, call the IRS as soon as possible and ask for the audit to be rescheduled.

IRS Red Flags: What Are Your Chances of Being Audited?

The written notice will note the items on your return that are being questioned – usually such broad categories as employee business expenses or casualty losses – and outline the types of records you'll need to clear up the matter. Office audits are usually limited to two or three issues, so you won't be expected to haul in all your records.

What kind of evidence do you need? Here's what a retired IRS official with 30 years of auditing experience said when we asked him that question: "I expect to see the records you used when you prepared the tax return. You must have had some. Otherwise, how did you know you gave $5,000 to charity?"

Often Overlooked Tax Breaks

Also, be aware that auditors are sometimes looking for more than proof of what's on your return. They're also interested in whether income that should have been reported on your return was left off. That could mean a review of your bank records, for instance, in search of deposits that might represent unreported income.

Audit Yourself

The best way to begin preparing for your meeting is to pull out your copy of the return being audited. Before the IRS puts your forms to the test, do the deed yourself. And to get an idea of the IRS's methods, check to see if there's an IRS audit technique guide for your business or industry. These manuals are designed to help IRS agents understand how various kinds of businesses work and what to look for when going over a return. That guidance can be helpful for the taxpayer on the receiving end of the audit, too.

Pore over the items being questioned and pull together the documents that support your entries. Of course, there will be gaps, but don't automatically concede defeat. Try to reconstruct missing records:

If, as luck would have it, you can't find the return, call the IRS office that contacted you and ask how to get a copy.
Get copies of canceled checks from the bank or duplicates of receipts or written statements from individuals who can back up your claims.
If you can't come up with written evidence for certain entries, prepare an oral explanation.

Your records don't need to be perfect. If you can reasonably explain how you came up with a figure that's not fully corroborated by the evidence, the IRS may well accept it. The IRS likes to stress how reasonable audit personnel are. However, when you're pulling together your records, remember this: The more thorough your documentation is in general, the more likely an auditor will cut you some slack on an occasional point.

Do You Need Help?

You can avoid going to the audit by hiring someone to go in your place. However, a representative must have written authorization to act for you. The IRS provides a power-of-attorney form – Form 2848 – for this purpose. Whether you go alone or hire a representative to go with you or in your place depends primarily on the issues involved. If they're relatively simple, cut-and-dried matters, you may be able to settle things without help. However, when matters are more technical or require interpretation of the law, it's more likely you'll need assistance. You have to make this judgment, and it will turn in part on how you feel about going head-to-head with the IRS. If you're scared, by all means get someone to go with you or in your place.

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If someone else prepared your return, let him or her know about the audit and ask for tips on how to get ready for it. Whether you want this person to go along may depend on how much that would cost. Although the IRS prefers to wrap up cases with one meeting, if you don't agree with the auditor's conclusions or need time to round up extra evidence, you can schedule a follow-up meeting. Unless you fear you might capitulate if you go to the audit alone, you may want to try to settle as many issues as you can by yourself. If disagreements remain and the amount of money at stake justifies the expense, you can take an adviser along to the next session. That way you'll have help when you really need it but won't have to pay for handholding while you clear up routine matters. And don't forget that the Taxpayer Bill of Rights gives you the right to stop an audit in its tracks if you decide you want representation. If the audit begins to veer off of the topics you are prepared to discuss, for example, you can call a halt to the proceedings and seek help if you need it.

The Big Day

The key to success is being well prepared. Forget the old slapstick routine of dumping a box of canceled checks and ratty receipts on the auditor's desk. That suggests your records are sloppy, and that's the last impression you want to give. Remember, it's up to you to back up the information on your return. The better organized your records, the more smoothly things will go.

What Are the Income Tax Brackets?

Establish credibility right from the start. If you do, there's a better chance a gap later may be overlooked. Say that the audit notice states that your interest deductions, charitable contributions, and travel write-offs will be reviewed. If you're solid on interest and contributions but shaky on travel, try to steer the audit to your strong suits first.

Don't go into the session looking for a fight, but don't equate being cooperative with giving in whenever the auditor raises an eyebrow, either. If the agent tells you your records don't substantiate a deduction, for example, ask what might suffice. Perhaps you can mail it in later.

Don't chat your way into a problem. Keep in mind that the agent is trained to zero in on tax issues. A comment you consider totally unrelated to your return might lead you into a thicket. Defending a deduction by saying you've taken it in the past, for example, could prompt a review of previously filed returns; discussing the family's cross-country driving vacation might lead the agent to recalculate the ratio of business/personal miles for your car; or bemoaning the problems that led your child to drop out of college could cost you a tax credit. Fear that taxpayers will talk themselves into trouble is the key reason many advisers recommend sending a representative to the audit rather than showing up in person.

Cutting a Deal – or Not

If you do go, above all, keep your wits about you. Don't be pressured into settling an issue just to bring the audit to an end. The IRS argues strenuously that it doesn't judge its agents on how much extra money their audits produce. Even so, the fact is that one of the best guides to an agent's efficiency is the amount of additional tax he or she generates without going through all the formal assessment procedures or litigation.

10 Most Tax-Friendly States for Middle-Class Families

Also remember that there may be room for compromise on the issue at hand. It may save time and money all around to agree on some in-between point or even for one side to give up on one disputed item in order to win on another.

Most office audits take a few hours. You'll spend a lot of that time watching the agent crunch numbers. When it's over, you'll get the auditor's decision – usually that you owe more tax. He or she should explain each proposed change to your return and the reason for it.

If you agree, that's fine. But remember that the auditor doesn't have the final say. If you disagree with a finding, tell the auditor so and restate your position. He or she may be willing to compromise to close the case promptly.

You have several options if you choose to fight on. Even if you've handled things by yourself so far, at this point you may need professional help. You can ask for another meeting with the auditor to present additional evidence, or you can make an informal appeal to the auditor's boss. If you're still unhappy, you can go to the IRS regional appeal level. Or you can take your case to court.

10 Least Tax-Friendly States for Middle-Class Families

]]> https://www.kiplinger.com/taxes/tax-returns/602092/how-to-handle-an-irs-audit-of-your-tax-return 6fKdMuHfjXVdzd5BdjngDv Fri, 15 Jan 2021 20:16:40 +0000 <![CDATA[ What Are Your Chances of an IRS Audit? 18 Audit Red Flags ]]> As you're getting ready to file your tax return, you may be wondering about the chances that the IRS will audit your return.

Your fear might be heightened, knowing that the 2022 Inflation Reduction Act gave the IRS $80 billion in extra funds over 10 years, with a large chunk of that money to be used by the agency for increased enforcement activities. This money is in addition to the IRS's annual funding. Congress has since clawed back about $25 billion of that windfall, and Republican lawmakers are promising to slash it even more.

Most people can still breathe easily because the majority of individual returns escape the audit machine.

In recent years, the IRS has audited significantly less than 1% of all individual tax returns.
Plus, most audits are handled solely by mail, meaning taxpayers selected for an audit typically never actually meet with an IRS agent in person.
Also, increased audits aren't happen overnight. It is taking the IRS time to hire experienced examiners and to train them to audit complicated tax returns. Most of the enforcement effects from the IRS funding won't be felt by taxpayers for at least another year or so.

But this doesn't mean it's a tax cheat free-for-all. The bad news is that your chances at the unenviable audit lottery escalate (sometimes significantly) depending on various factors, including the amount of income you report, the complexity of your return, the types and amounts of deductions or other tax breaks you claim, whether you're engaged in a business, or whether you own foreign assets. Math errors could also draw an extra look from the IRS, but they usually don't lead to a full-blown exam.

In the end, there's no sure way to predict an IRS audit, but these 18 audit red flags could increase your chances of drawing unwanted attention from the IRS.

The IRS gets copies of all the 1099s and W-2s you receive, so be sure you report all required income on your return. IRS computers are pretty good at cross-checking the forms with the income shown on your return.

A mismatch sends up a red flag and causes the IRS computers to spit out a bill that the IRS will mail to you (these letters don't count as audits for purposes of the IRS's audit rate). If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.

Report all income sources on your 1040 return, whether or not you receive a form such as a 1099. For example, if you get paid for walking dogs, tutoring, driving for Uber or Lyft, giving piano lessons, or selling crafts through Etsy, the money you receive is taxable.

While the overall individual audit rates are extremely low, the odds increase significantly as your income goes up (especially if you have business income). Remember, the IRS is getting more money for audits, with a significant chunk of its extra funding over 10 years dedicated to enforcement activities and collection measures.

The Treasury Department and the IRS say that some enforcement funds will be used to audit more high-net-worth individuals and pass-through entities, such as LLCs and partnerships, among other taxpayers.

Treasury officials and the IRS have made a big promise, saying that individuals and small businesses earning under $400,000 won't see more audits when compared with historic rates.

This applies only to taxpayers with total positive incomes of less than $400,000, meaning income before taking losses and deductions on their federal tax returns. The IRS is not considering hiking the $400,000 figure for couples filing a joint tax return.

Empty listAudits of 2023 returns will be the first year for the under-$400,000-income audit directive.
And the audit rate on 2018 returns will be used for the historic rate comparison, which is good news for taxpayers.
The overall audit rate for 2018 returns was 0.3% for individuals, 0.6% for C corporations, and 0.1% for partnerships and S corporations.

The IRS's high-wealth exam squad is also back into the action. This specialized group within the IRS tackles examinations of the super-rich. Revenue agents take a kitchen-sink approach in auditing these individuals by reviewing not only their 1040 returns, but also returns of entities they control, both foreign and domestic.

We're not saying you should try to make less money — everyone wants to be a millionaire. You just need to understand that the more income shown on your return, the more likely it is that the IRS will be knocking on your door.

The IRS hasn't always been diligent in pursuing individuals who don't file required tax returns. In fact, the agency has been chastised by Treasury inspectors and lawmakers on its years-long lack of enforcement activity in this area. So, it shouldn't come as a surprise that high-income non-filers now top the list of IRS's strategic enforcement priorities.

The primary emphasis is on individuals who received income in excess of $100,000 but didn't file a return. Collections officers will contact taxpayers and work with them to help resolve the issue and bring them into compliance. People who refuse to comply can be subject to levies, liens, or even criminal charges.

Last year, the IRS sent letters to over 125,000 people with incomes of more than $400,000 who hadn’t filed a federal income tax return since 2017. As of September 2024, nearly 21,000 of those nonfilers have now filed 1040s, leading to $172 million in additional taxes paid.

If the deductions, losses, or credits on your return are disproportionately large compared with your income, the IRS may want to take a second look at your return. Taking a big loss from the sale of rental property or other investments can also spike the IRS's curiosity. Ditto for bad debt deductions or worthless stock.

But if you have the proper documentation for your deduction, loss or credit, don't be afraid to claim it. Don't ever feel like you have to pay the IRS more tax than you actually owe.

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

That's because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file IRS Form 8283 for noncash donations over $500, you become an even bigger audit target.

And if you've donated a conservation or façade easement to charity, or if you are an investor in a partnership, LLC or trust that made such a donation, your chances of hearing from the IRS rise exponentially. Battling abusive syndicated conservation easement deals is a strategic enforcement priority of the tax agency.

Congress has even recently stepped in to disallow charitable deductions in the most egregious conservation easement cases.

Schedule C is a treasure trove of tax deductions for self-employed people. But it's also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don't report all their income. The IRS looks at both higher-grossing sole proprietorships and smaller ones.

Sole proprietors reporting at least $100,000 of gross receipts on Schedule C and cash-intensive businesses (taxis, car washes, bars, hair salons, restaurants and the like) have a higher audit risk. Ditto for business owners who report substantial losses on Schedule C, especially if those losses can offset in whole or in part other income reported on the return, such as wages or investment income.

Also, claiming 100% business use of a vehicle is a prime audit red flag. IRS agents know that it's rare for someone to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. That's because these vehicles are eligible for more favorable depreciation and expensing write-offs.

Be sure you keep detailed mileage logs and precise calendar entries for every road trip. Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.

Sorry to inform you, but you're a prime audit target if you report multiple years of losses on Schedule C of Form 1040, run an activity that sounds like a hobby, and have lots of income from other sources.

The IRS is on the hunt for taxpayers who year after year report large losses from hobby-sounding activities to help offset other income, such as wages, or business or investment earnings.

The hobby loss rules are often litigated in the Tax Court. The IRS usually wins in court, partly because it tends to settle cases in which it doesn't believe it can prevail. But taxpayers have also pulled out a victory in several court cases.

To be eligible to deduct a loss, you must be running the hobby in a business-like manner and have a reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise.

The analysis is trickier if you can't meet these safe harbors. That's because the determination of whether an activity is properly categorized as a hobby or a business is then based on each taxpayer's facts and circumstances. If you're audited, the IRS is going to make you prove you have a legitimate business and not a hobby.

Some limited partners and LLC members who don't file Schedule SE or pay self-employment tax are on the IRS's radar. The agency has an ongoing audit campaign involving the issue of when limited partners and LLC members in professional service industries owe self-employment tax on their distributive share of the firm's income.

In 2017, the Tax Court ruled that members of a law firm organized as a limited liability company and who actively participated in the LLC's operations and in management weren't mere investors and were liable for self-employment taxes. Just last year, the Tax Court decided that limited partners who actively participate in a limited partnership could owe self-employment tax.

That case involved a hedge fund. LLC and LP owners in law, medicine, consulting, accounting, architecture, and other professional service sectors are being eyed by IRS examiners, who have been conducting audits over the past few years.

The passive loss rules usually prevent the deduction of rental real estate losses, but there are two important exceptions. First, if you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000.

A second exception applies to real estate professionals who spend more than 50% of their working hours and over 750 hours each year materially participating in real estate as developers, brokers, landlords, or the like. They can write off rental losses.

The IRS actively scrutinizes large rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. It's pulling returns of individuals who claim they are real estate professionals and whose W-2 forms or other non-real-estate Schedule C businesses show lots of income. Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business.

The IRS is consistently plagued by taxpayers taking improper refundable tax credits. For instance, the IRS estimates it wrongly refunded $21.9 billion in earned income tax credits to taxpayers in fiscal year 2023…a 33.5% improper payment rate. The IRS attributes these erroneous payments in part to complexity in the tax rules, unscrupulous or incompetent preparers, the high turnover of taxpayers eligible to take the credit, and refund fraud.

We'll take a look below at the premium tax credit, the earned income tax credit, the refundable portion of the child tax credit, and the American Opportunity tax credit.

Premium Tax Credit

The premium tax credit, which is over 10 years old, helps individuals pay for health insurance they buy through the marketplace. Before 2021, the credit was available for people with household incomes ranging from 100% to 400% of the federal poverty level. For 2021 through 2025, some people with incomes over 400% of the poverty level can also get credits, depending on the cost of the policy. Individuals who are eligible for Medicare, Medicaid, or other federal insurance do not qualify. Nor do people who can get affordable health coverage through their employer.

The credit is estimated when you go on a marketplace website like healthcare.gov to buy insurance. You can have the credit paid in advance directly to the health insurance company to lower your monthly payments. You then generally have to attach IRS Form 8962 to your tax return to compute your actual credit, list any advance subsidy paid to the insurer, and then reconcile the two figures. If your credit exceeds the premium advances, you can claim the excess on your Form 1040. If the credit is less than the advances, most people will need to repay all or part of the excess.

Erroneous reporting of the health premium credit is an audit red flag. The IRS’s computers flag returns showing incomes above the limit to take the credit. The IRS is also on the prowl for people who elected to have their subsidy paid directly to the insurance company but did not file an income tax return to reconcile the advances with the actual credit.

Earned Income Tax Credit

Millions of lower-income workers with children claim the earned income tax credit (EITC) on their Form 1040. But the eligibility rules are complicated, leading to common mistakes. For example, many errors involve the eligibility of a qualifying child.

A qualifying child must be a son, daughter, stepchild, foster child, sibling, niece, nephew, or grandchild who lived with you for more than half the year and is under 19.

There are two exceptions to the age requirement: Full-time students may be younger than 24, and permanently and totally disabled children can be any age. Additionally, each qualifying child that you claim for the EITC must have a Social Security Number.

Refundable Child Credit

The total child tax credit is worth $2,000 per kid under 17 claimed as a dependent on your return. The child must be related to you and generally live with you for at least six months during the year. He or she must be a citizen, national, or resident alien of the United States and have a Social Security number.

The credit begins to phase out if your modified adjusted gross income (AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return.

Up to $1,700 of the credit is refundable for some lower-income individuals with children, provided the taxpayer has at least $2,500 of earned income.

American Opportunity Tax Credit

College is expensive, and the tax law gives individuals some tax breaks to help with the cost. One of these is the American Opportunity Tax Credi t.

The AOTC is worth up to $2,500 per student for each of the first four years of college. It's based on 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000. And 40% of the credit is refundable, meaning you get it even if you don't owe any tax. This tax saver begins to phase out for joint-return filers with modified adjusted gross incomes above $160,000 ($80,000 for single filers). The student must be in school at least half-time. Eligible expenses include tuition, books and required fees, but not room and board.

The IRS is ramping up its efforts in enforcing the AOTC. Among the problem areas, it focuses on:

Taking the credit for more than four years for the same student
Omitting the school's taxpayer ID number on Form 8863 (the document used to claim the AOTC)
Taking the credit without receiving Form 1098-T from the school, and
Claiming multiple tax breaks for the same college expenses.

The IRS knows that a substantial number of filers make errors on their income tax returns with respect to retirement payouts, with most of the mistakes coming from taxpayers who don't qualify for an exception to the 10% additional tax on early distributions. A report found that 2.8 million taxpayers who received early distributions totaling $12.9 billion in 2021 didn't pay the 10% additional tax.

Alimony paid by cash or check under pre-2019 divorce or separation agreements is deductible by the payer and taxable to the recipient, provided certain requirements are met. For instance, the payments must be made under a divorce or separate maintenance decree or written separation agreement.

The document can't say the payment isn't alimony. And the payer's liability for the payments must end when the former spouse dies. You'd be surprised how many divorce decrees run afoul of this rule.

Alimony doesn't include child support or noncash property settlements. The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off don't satisfy the requirements. It also wants to make sure that both the payer and the recipient properly reported alimony on their respective returns. A mismatch in reporting by ex-spouses will almost certainly trigger an audit.

Alimony paid under post-2018 divorce or separation agreements is not deductible (and ex-spouses aren't taxed on the alimony they receive under such agreements). Older divorce pacts can be modified to follow the new tax rules if both parties concur and modify the agreement to specifically adopt the tax changes.

The IRS closely polices whether taxpayers comply with the changes. Schedule 1 of the 1040 form requires taxpayers who deduct alimony or report alimony income to fill in the recipient's Social Security number and the date of the divorce or separation agreement.

Whether you're playing the slots, betting on the horses or trying your luck at the Powerball jackpot lottery, one sure thing you can count on is that Uncle Sam wants his cut. Recreational gamblers must report winnings as other income on the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially if the casino or other venue reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings (and recreational gamblers must also itemize). The IRS is looking at returns of filers who report large losses on Schedule A from recreational gambling but aren't including the winnings in income. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get extra scrutiny from IRS examiners, who want to make sure these folks really are gaming for a living.

U.S. citizens who work overseas can exclude up to $126,500 of their income earned abroad on their 2024 tax return if they were bona fide residents of another country for the entire year or they were outside of the U.S. for at least 330 complete days in a 12-month span. (The 2025 exclusion amount is $130,000). Additionally, the taxpayer must have a tax home in the foreign country. The tax break doesn't apply to amounts paid by the U.S. or one of its agencies to its employees who work abroad.

IRS agents actively sniff out people who are erroneously taking this break, and the issue keeps coming up in disputes before the Tax Court. Among the areas of IRS focus: Filers with minimal ties to the foreign country they work in and who keep an abode in the U.S. (note that the U.S. abode restriction doesn't apply to individual taxpayers who work in combat zones such as Iraq and Afghanistan), flight attendants and pilots, and employees of U.S. government agencies who mistakenly claim the exclusion when they are working overseas.

Marijuana businesses have an onerous income tax problem. They're prohibited from claiming business write-offs, other than for the cost of the weed, even in the ever-growing number of states where it is legal to sell, grow and use marijuana. That's because a federal statute bars tax deductions for sellers of controlled substances that are illegal under federal law, such as marijuana.

Legal marijuana firms might soon see some relief. Last May, the Department of Justice proposed rules to reclassify marijuana from a Schedule I drug to a Schedule III drug under the Controlled Substances Act. If DOJ adopts final rules that downgrade the drug to Schedule III, and those regulations are published and put into effect, marijuana businesses in states in which the drug is legal can begin deducting expenses on their federal income tax returns and engage in banking and interstate commerce.

But will Donald Trump's administration take the same approach as Joe Biden? Trump said on the campaign trail that he supports weed as a Schedule III drug. But when Trump was president the first time, his administration upheld the federal prohibition of cannabis, and he proposed ending a policy that protects state medical marijuana programs.

The research and development credit is one of the most popular business tax breaks, but it's also one that IRS agents have found to be prime for abuse. The IRS is on the lookout for taxpayers that fraudulently claim R&D credits and promoters that aggressively market R&D credit schemes. These promoters are pushing certain businesses to claim the credit for routine day-to-day activities and to overinflate wages and expenses in the calculation of the credit.

To be eligible for the credit, a business must conduct qualified research – that is, its research activities must rise to the level of a process of experimentation. Among the activities that aren't credit-eligible: customer-funded research, adaptation of an existing product or business, research after commercial production, and activities in which there is no uncertainty about the potential for a desired result.

The IRS is on the hunt for taxpayers who sell, receive, trade or otherwise deal in bitcoin or other virtual currency or other digital asset and is using pretty much everything in its arsenal. As part of the IRS's efforts to clamp down on unreported income from these transactions, revenue agents are mailing letters to people they believe have virtual currency accounts. And the IRS has set up teams of agents to work on cryptocurrency-related audits. Additionally, all individual filers must state on page 1 of their Form 1040 whether they received, sold, exchanged or otherwise disposed of a digital asset.

The tax rules treat bitcoin and other cryptocurrencies as property for tax purposes. The IRS has a set of frequently asked questions that address selling, trading and receiving cryptocurrency, calculating gain or loss, figuring tax basis when the currency is received by an employee or someone else for services, and much more.

The IRS is intensely interested in people with money stashed outside the U.S., especially in countries with the reputation of being tax havens, and U.S. authorities have had lots of success getting foreign banks to disclose account information.

Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them. This means electronically filing FinCEN Report 114 (FBAR) by April 15, 2025, to report foreign accounts that combined total more than $10,000 at any time during 2024. (Filers who miss the April 15 deadline get an automatic six-month extension to file the form.)

Taxpayers with a lot more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns.

]]> https://www.kiplinger.com/taxes/tax-returns/602068/irs-audit-red-flags jv5Ns4GHzw8DBNeUvG35Zb Tue, 12 Jan 2021 19:00:00 +0000 <![CDATA[ Amending Your Tax Return Just Got Easier ]]> Fixing errors on your tax return will be less of a hassle going forward. For the first time, taxpayers are now able to file Form 1040X, the document used to amend tax returns, electronically with commercial tax-filing software.

11 Tips on How and When to File an Amended Tax Return

Taxpayers amend their federal tax returns for all kinds of reasons—for failing to report some income, for example, or because of an overlooked deduction that would have lowered their tax bill. But in the past, you had to submit the form by mail. You could use tax software to fill out the form but had to print it out and mail it in.

"E-filing has been one of the great success stories of the IRS, and more than 90% of taxpayers use it routinely," IRS Commissioner Chuck Rettig said in a statement. "But the big hurdle that's been remaining for years is to convert amended returns into this electronic process."

While taxpayers generally have up to three years from the date they filed their original return (or two years from the date they paid any tax due) to amend a return, e-filing will initially be limited to 2019 tax returns, the IRS says. If you want to amend an earlier return on Form 1040X, you'll still have to print it out and mail it in.

]]> https://www.kiplinger.com/taxes/tax-returns/601278/amending-your-tax-return-just-got-easier tq3wcZbrejHdMc8qu5bNvZ Fri, 21 Aug 2020 20:43:50 +0000 <![CDATA[ Millions of Americans Will Receive a Tax Refund Interest Check from the IRS ]]> The IRS will send interest payments to about 13.9 million taxpayers this week. The average payment will be about $18. You can expect a payment if you filed a 2019 return before this year's July 15 deadline and either received a refund in the past three months or will receive a refund. Most interest payments will be sent separately from tax refund payments.

What Trump's Payroll Tax Cut Will Mean for You

Normally, the IRS only adds interest to refunds issued more than 45 days after the return due date. The typical tax return due date is April 15. However, because of the coronavirus pandemic, this year's filing deadline was pushed back to July 15. The change is considered a disaster-related postponement, which means the IRS is required by law to pay interest calculated from the original April 15 filing deadline for anyone who files their return by the postponed deadline. This refund interest requirement only applies to individual income tax filers – businesses are not eligible.

How Will the Payment Be Made?

For about 12 million people, the interest payment will be directly deposited into the same bank account that their tax refund was deposited. Everyone else will receive a paper check. A notation on the check saying "INT Amount" will identify it as a refund interest payment and indicate the interest amount.

How the Interest Amount is Calculated

Interest is paid at rates set by law. The rate for the second quarter ending June 30 was 5%. The rate for the third quarter starting July 1 dropped to 3%. Interest is compounded daily.

Where the calculation period spans more than one quarter, a blended rate consisting of the number of days falling in each calendar quarter applies. No interest will be added to any refund issued before the original April 15 deadline.

Taxability of Interest Payments

If you receive one of the IRS interest payments, you must report the interest as taxable income on your 2020 federal income tax return that you'll file next year. In January 2021, the IRS will send a Form 1099-INT to anyone who receives interest totaling at least $10.

Election 2020: Joe Biden's Tax Plans

]]> https://www.kiplinger.com/taxes/tax-refunds/601238/millions-of-americans-will-receive-a-tax-refund-interest-check-from-the 9ttGQgoLBtoGCFLkA89UxR Tue, 18 Aug 2020 16:02:50 +0000

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