Tax Planning Isn’t Rocket Science, But it Can Save You Money!

Tax planning can save you money.

You don’t have to be a rocket scientist to do a little planning ahead to save big dollars on your tax return.

Today I want to talk about tax planning, and  why it’s so important.


I recently got a call from a woman who wanted to take $30,000 out of her IRA to buy something special.  She went to her financial planner to take the money out and he told her that she needed to take another $7500 out just to cover her taxes, but to talk to a tax person first.  So she called me.


Well, I ran the numbers for her and if she took $37,500 out of her IRA , it was going to cost her over $9,000 in state and federal taxes combined.  Even though she would be withholding $7500 for her federal taxes, she’d still have to come up with another $2000 to be whole.  Then we started talking.


You see, she didn’t need to make the purchase right away, she was just thinking about it.  So I decided to see what would happen if we split the $30,000  between 2013 and 2014, $15,000 each year.  What a difference!  Instead of paying over $9000, she’ pay $688 per year total for her state and federal income  taxes combined.  That wasn’t a typo–six hundred and eighty-eight dollars a year.  $1376 total tax for a savings of over $8000!


So by waiting for another 60 days to take half the money she wanted out of her IRA she’d save $8000.  How cool is that?


In fairness, the woman’s particular situation just put her into a sweet zone for this to work out so well.  For many people, splitting up the IRA withdrawal  would not save them any taxes at all.  But my point is–how do you know?   By taking the time to ask–she saved $8000.


What’s going on in your life that could benefit from a little tax planning?  Selling some stocks or mutual funds?  Donating to charity?  Do you own a small
business?   Are you getting married?  Getting divorced?  Having a baby?  Getting a new job?  Buying a home?  Any of these events, and many more, could use
a little tax planning.


My business card says, “If you don’t have a tax strategy, you’re probably paying too much.”    It’s true.  So often in my job, I’m trying to help people who’ve already made decisions and come to me when its’ too late to make changes.  Why would you want to give the IRS more money then you need to?  It’s not rocket science, it’s just common sense.   The best way to keep more of your money is to make a plan for keeping it.  Call me.  I can help.

Bad Calls


Photo by Otto Greule Jr at Getty Images

Let me start with full disclosure:  I am a card carrying member of Cardinal Nation.    As I write this I am sitting on the sofa wearing my St. Louis Cardinal’s jersey hoping to type this out before the first pitch of the game.   So forgive me if it’s considered blasphemy but, the infield fly rule called against Atlanta during the 2012 Wild Card Play-Off was a bad call.  (  Hopefully we would have still beaten the Atlanta Braves anyway, but we’ll never know.


Another bad call occurred in week 3 of the 2012 NFL season featuring the Green Bay Packers and Seattle Seahawks—a Hail Mary pass was thrown and members of both teams caught the ball while the replacement officials gave conflicting rulings. (  That was a horrible call.


Sometimes tax preparers make a bad call when they do your taxes.  We’re not perfect either.  The other day I got a phone call from a woman who needed help.  The IRS was going to garnish her paycheck and she needed some help stopping it.  After I got the immediate problem taken care of, I asked her some questions about her tax return.  After getting enough details, I realized that the woman’s previous preparer had missed a pretty major deduction.  I recommended that she amend her return and have it done correctly, it would seriously help with her tax debt.  You see, when you make a bad call on your taxes, unlike some of the referee calls in sports, you have a three year period to make it right by amending your return.


The woman asked me what I’d charge to fix her taxes and she was a little shocked by the price.  She told me that her other preparer at “Brand X Tax Company” had only charged her half that much so she wouldn’t hire me.  Ahem.  I used to work for “Brand X”.  I know their billing practices and they charge by the form.  Had the preparer done all the forms that this woman needed to correctly file her tax return, the price would have been much closer to, if not more than, what I was charging.  But besides that, we’re talking about reducing her tax burden by a few thousand dollars.  Really I’m not all that expensive.  So now who’s making the bad call?


I remember a few years back, an elderly woman came into my office with an IRS letter.  It said that she owed about $10,000 and she didn’t know what to do about it.  As I looked at the letter and then at her return, I realized that she had a bunch of stock transactions that hadn’t been reported on her tax return.  Although the IRS said that she owed $10,000, when I checked things out, she really didn’t owe anything at all, she just needed to have her tax return done correctly.


When I told her the cost, she too was shocked, “But my other lady only charged me $20 to do my taxes,” she said.  “But your $20 tax return is going to cost you $10,000,” I replied.  She was smart, and now her taxes are done correctly.


Here’s the big hint—if you get a document that says “Important Tax Document”, you probably need to report something from that paper on your tax return.  If you give your preparer that piece of paper and she ignores it, that’s a red flag that something’s wrong.  Shame on her.  If you don’t give that paper to your preparer, then it’s shame on you.


Preparers can make mistakes.  (Even me, that’s why I have my staff review my returns just like I review theirs.  We’re all human.)  If you get an IRS letter, the first thing to do is to contact your tax preparer and give her a chance to fix it.  She might not have even made a mistake; sometimes it’s an IRS mistake.  They’re human too—(some of them.)  But if your preparer can’t or won’t help you when there’s a problem, it’s time to make the right call and move on.

Is Your CPA Qualified to Do Your Taxes?

Adding machine

Photo by Paul Miller at

Is your CPA qualified to do your taxes?  Now that seems like a pretty dumb question right?  Obviously CPAs do taxes and they’re smart so they can, right? So the answer should be yes.  But to be honest, the real answer is:  not always.  And that’s been a pretty hot topic lately among tax professionals.


Here’s the story—The IRS has cracked down on tax preparers.  They’ve started a new program where all preparers (even CPAs) must have something called a PTIN (Preparer Tax Identification Number) that goes on every tax return so they can be identified.  They’ve also started a program that all tax preparers need to pass a test in order to get paid to prepare income taxes.  People who pass the test are called Registered Tax Return Preparers (RTRPs).  In addition to passing the test, RTRPs are required to take 15 hours of Continuing Professional Education credits every year.


Some people who do taxes do not have to take the RTRP test.  Enrolled Agents (that’s what I am) don’t have to take the RTRP test because we already passed a series of tests that is more complex than the RTRP test.  We’re licensed by the Department of Treasury, and we are required to take 24 income tax continuing education credits per year.  Our licenses come up for renewal every three years, and we basically have our personal tax returns reviewed by the IRS before they grant us a new license.  Because of our training, we can do things that RTRPs aren’t allowed to do.  If you hire an EA, you know that person has had quite a bit of tax training and should be up to date on all the tax laws.


CPAs are another group that does not have to take the RTRP test.  Once again, they’ve already passed the CPA exam—which is an even nastier test than the EA exam.  (I often get into the EA versus CPA debate but I will concede that their test is harder than the EA exam.)  CPA stands for Certified Public Accountant but one of my CPA friends says it stands for “the test is so awful I Couldn’t Pass it Again.”  It is a bear of a test.  CPAs are licensed by their respective states.  They are also required to take continuing education credits to keep up their licenses—but here’s the problem—CPAs aren’t required to take any income tax education to maintain their licenses and  do tax returns.  None.


Many CPAs who prepare taxes take tax classes for their CPE credits—at least an update class.  Update classes are important because the government changes the tax laws so frequently.  There are hundreds of tax law changes every year—sometimes it seems like we get daily reports of new laws from Congress.  Anyone who doesn’t at least take an update class every year shouldn’t be doing tax returns.


And that’s where the problem with CPAs doing tax returns lies—the ones who don’t keep up with the tax law.  For every year that a CPA doesn’t update his tax education—there are more and more mistakes that happen.  Sometimes it’s a little thing like a $30 telephone tax credit, maybe it’s a little bigger like missing a $400 making work pay credit.  It was quite awhile ago now that the IRS changed the definition of a qualifying child for EIC purposes—you get that wrong on your tax return and you could be in big trouble.  It was back in 2005 that the IRS changed the “uniform definition of a child” and I’m still seeing returns being prepared under the old rules.  2005!


I had a little “conversation” with someone who had incorrectly prepared my client’s tax return.  (I was representing the fellow in an audit, but I hadn’t done the return.)  “Well Missy, I’ve been doing taxes for over 20 years now and I think I know what I’m doing.”  That was the problem—he didn’t know what he was doing, that’s why the client was being audited.  The tax rules today are not the tax rules of 20 years ago.  Heck!  They’re not even the same rules as last year!  (By the way, don’t call me Missy either.)


So how do you know if you’ve got yourself a CPA who knows taxes or not?  Unless the IRS decides to monitor CPA training or licensing, the only way to protect yourself from a CPA who doesn’t really know taxes is to ask questions, the big one being—did you take a tax update class this year?  Any CPA who takes tax season seriously did.  Any CPA who didn’t take a tax update class doesn’t—and you should walk away.


There are competent, qualified CPAs out there who do a great job of preparing tax returns.  Right now, there’s no way to tell who they are unless you take the time to ask questions.  Until the IRS decides to officially identify the CPAs who are qualified to do taxes, asking questions is your only defense.

Tax Reporting of Insurance Premiums for Retired Public Safety Officers

Fire fighters in station prepare for next emergency call


Retired public safety officers may be eligible to exclude up to $3,000 from their pension distributions for money that was used to pay the premiums for accident or health insurance or long-term care insurance. Public safety officers include law enforcement officers, firefighters, chaplains, and members of a rescue squad or ambulance crew. In order to qualify for this deduction, the payment for the insurance must be made directly from the pension plan to the insurance provider. Basically you exclude the smaller of the amount of your insurance or the $3,000. If you’re excluding the insurance from your pension income, then you can’t include it as a Schedule A deduction.


So if you’re making this deduction, how do you show it on your tax return? First, I guess I should be using the right words. It’s not really a deduction – you are “making an election to exclude the insurance premiums from your income.” Now you’ve just had a lesson in tax geek semantics. I know you don’t care, but I’m supposed to use the right words. For what it’s worth, a reduction in income is better than a deduction.


Anyway, if you look at your 1099R, which shows your pension distribution, the box 2a which shows what part of your pension is taxable doesn’t show your insurance payment, so the exclusion isn’t automatic. Here’s what I mean – let’s say that you receive a public pension for $25,000 a year. $5,000 of it isn’t taxable so your 1099 shows $25,000 in box one (your gross distribution) and $20,000 in box 2a (the taxable amount). But if you paid $4,000 for your health insurance, you’re allowed to exclude $3,000 of that money from your income. So really your true taxable amount is $17,000.


If you are doing this by hand, you’d just write it on the 1040 like this: On line 16a you’d write $25,000 for the total amount of the pension, and on line 16b you’d write $17,000 for the taxable portion. You’d write PSO next to it so that the IRS would know why the number on line 16B didn’t match the number in box 2a of your 1099.


It’s really important that the numbers on your tax return match the numbers in the boxes on your 1099. When they don’t, you get little letters from your friends at the IRS. Writing PSO on your tax return basically tells them that you’re not just arbitrarily changing their tax figures for them.


So how do you do this if you’re using a computerized tax program? That’s a little trickier because you can’t just go and change the numbers without somehow notating it. If you just type in $17,000 in box 2a instead of the $20,000 number, I guarantee you you’ll be hearing from the IRS. And we don’t want that do we?


If you’re using the program, it’s really easy. When you’re in the 1099 input screen, you’ll see at the top there’s a little phrase in blue letters: “Special Tax Treatments.” You’re going to want to click on that button. It will take you to a new page with other items that also require special tax treatment. The “public safety officer” insurance is at the very bottom. All you have to do it type in how much you paid into the little box and the program will handle the rest.


Other tax programs should have something similar. If you can’t find a “special tax treatments” page, call the phone number listed with your program and they should be able to tell you how to get there. And if they can’t, come back here and use my site (sorry for the shameless plug but a girl’s gotta eat.)


Special thanks go out to Mr. A—– in California for the idea for this post.

Tax Organizer

I’m not a big fan of tax organizers. I got started in this business many years ago because of a bad CPA (if he was even a real CPA). He had me fill out a 20 page long ‘organizer,’ which quite frankly, I figured that after doing all that work I could have just done my taxes myself pretty easily. But the worst part was that after I did all that work, the guy still did my taxes wrong!

Being a bit of a tax geek already, I caught the mistake before I mailed in my return. (Yes, back in the stone age when we used the US Postal service to mail our tax returns.) So when I confronted him about it he blamed his secretary for inputting my numbers incorrectly.

But here’s the thing. I didn’t hire a secretary to do my taxes. I hired a CPA. I sort of made the assumption that the guy signing the tax return would actually look at it somewhere along the line.

Anyway, I was so mad I wound up going to tax school etc., etc. Here I am with my own tax company. (Maybe I should thank the guy but I don’t even remember his name.)

Anyway, I don’t like organizers because I like to talk to people and get to understand their situation. I like to look at a person’s actual W2 or 1099 and not what the person wrote down on a piece of paper – it makes for fewer mistakes. I also think that if a person is paying me to do their taxes for them, my job is to make it easy. I had spent hours working on that 20 page organizer for that dude. That’s not easy!

But some people really like to use organizers. I always have some clients that ask for one. I like this one because it’s only 8 pages and it doesn’t ask you to copy your W2 information, just to list them and bring the documents to your appointment. Some pages you might not need – for example, page 7 is for rental income. Well, if you don’t have rentals, then you don’t need to fill out the page. I like that.

So while a tax organizer is no substitute for meeting with your tax preparer in person, if you like to get organized and make sure that you have all your ducks in a row before going to your appointment this is the one I recommend. It’s also helpful if you’re preparing your own tax return as well.

Here’s the link so you can download a copy of the organizer for yourself: or check our downloads tab at the top of the page.

And here’s a request. Would you please do me a favor and let me know what you think? Do you like organizers, don’t like them? Do you like this one, or don’t like it? What’s your opinion? I’m afraid that my bad experience years ago gives me a jaded view. But if I get a lot of positive feedback about it, I’ll start printing them out and using them with all my clients. (I’m not so stodgy that I can’t learn to change. I learn new tax laws every year, right?) Thanks for your help.

Filing a Tax Return For Your LLC

Rosebud business solutions is a boost for businesses

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If you’ve started a new business and you filed the Articles of Organization in your state to become an LLC, then here are some things you need to know about filing taxes for your new company.

First, there is no such thing as an LLC tax return.  I know that sounds crazy, but it’s true.  Every year, thousands of people walk into their accountants’ offices and say, “I want to file an LLC tax return!”   This is what accountants joke about at their conventions and at the water cooler.  We even post silly You Tube videos about it.  This post is to help you not be the butt of some dumb accounting joke.

An LLC is a Limited Liability Company.  One of the most common mistakes people make is that they think LLC means “Corporation”, it doesn’t.  If you have an LLC, you probably are not going to file a corporation return (although you might, I’ll discuss that later).

The IRS considers an LLC to be something they call a “disregarded entity.”  That means that it doesn’t have a specific tax document that goes with it.  If your LLC only has one “member” (member is LLC-speak for owner) then the default tax return for your LLC is a Schedule C which is part of your 1040 income tax return.  It’s due on April 15th just like any other individual tax return.

If your LLC has two or more members, then by default you are considered to be a partnership and you must file a partnership return, form 1065.  Form 1065 is due on April 15th also, but it’s a good idea to get it done sooner because the information on the 1065 needs to go onto your personal tax return before you file it.   When your accountant prepares the 1065, she’ll also prepare a K-1 form that will be used to prepare your personal income tax return.

So, if you have an LLC, the default tax return you might file would be a Schedule C as part of your individual income tax return, or a 1065 partnership return (and you’d receive a K1 form so you could put your partnership income on your personal tax return).

Instead of using the default filing options, you can choose to have your LLC treated as an S corporation or a C corporation for income tax purposes.  It’s very rare to choose to have your LLC treated as a C corporation.  Usually, if a person wanted to pay corporation tax rates, she would file articles of incorporation to begin with.  But one advantage to filing as an LLC and then electing to be taxed as a C corporation would be to avoid some of the stringent reporting and meeting requirements that C corporations have.  Usually, it’s not advantageous tax-wise to be treated as a C-Corporation, but there are always some exceptions.  If you do go this route, you will need to file an election to be taxed as a corporation: form 8832.  The tax return for a C-Corporation is called an 1120.  You must file the 1120 or the extension by March 15th or you will be assessed a late filing penalty even if you owe no tax.  A C-Corporation pays taxes on its income and pays wages and/or dividends to the owner.

The more common corporate tax treatment for LLCs is to be taxed as an S Corporation.   A Sub-chapter S corporation passes its profits through to the owner.  If you elect to be a Sub S Corporation, you must pay yourself a wage.  For most businesses, the purpose behind a Sub-chapter S corporation is to avoid paying self-employment taxes.  There are two things you must know:

1. A Sub S Corporation isn’t always the best way to avoid paying self-employment taxes and,

2. You’re not allowed to say that you’re trying to avoid paying self-employment taxes, even though that’s pretty much the reason anybody ever makes the Sub S election.

To make the election to be taxed as a Sub S Corporation, you will need to file form 2553.  A Sub S Corporation tax return is called an 1120S form and it is due by March 15th.  The S corp does not pay income tax; the income from the S corp will be reported on a K1 and will flow through to your personal tax return.

If you make an election to be taxed as a C or an S Corp, you will have to keep that designation for at least five years unless you get special permission from the IRS to change.  You want to make sure you really want to make the election for corporate tax treatment before filing those forms.

Here’s my really important tax advice:  Assume that you’re filing your LLC return either as a Schedule C (sole proprietor) if you’re a solo owner, or a 1065 partnership return if you have more than one owner, at least for the first year.  But then, sit down with your preparer and run the numbers all three ways, (Schedule C, S-Corp, C-Corp) to see what makes the most sense for your business.  Make some projections about your future income and expenses and take into account the deductions that you may have missed last year but won’t miss again.  Smart planning can save you thousands of dollars in taxes over the years to come.  Saving on taxes helps your business grow and puts money in your pocket.

Five Tax Issues for these Crazy Financial Times

Wall Street

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Wow! The market’s up, the market’s down. It’s crazy! Now I don’t give advice about stocks—it’s actually against the law for me to give advice about stocks—but I do give advice about taxes. Here are some things you need to know about your taxes during all this market craziness.

1. On your tax return, you only acknowledge a gain or a loss if you actually sell the stock. Let’s say you own 100 shares of Billy Beer stock that you bought at $100 per share, that’s $10,000 worth of stock. If the price of the Billy Beer drops to $90 a share, then you have $9000 worth of stock right? So technically you’ve lost $1,000. But, the loss only counts if you actually sell the stock for the $90 a share. If you keep the stock, nothing about Billy Beer goes on your tax return.

2. Stocks that are held within a 401(k) plan or an IRA can be sold at a gain or a loss and it never gets reported on your tax return. The whole point of your retirement plans is that you can have tax free gains. Most of the time, your money is growing inside these vehicles and you’re not getting taxed on it. When you do have a loss inside your 401(k), you don’t get to claim a deduction for it.

3. The maximum loss from a sale of stock that you can use to offset your ordinary income (like wages) is $3,000. Let’s say you sold off some stock and had a loss of $10,000. Sales of stock are considered to be passive income or passive losses. (To be blunt—it’s called passive income because it’s possible to sit on your butt and make money.) The maximum amount of passive income loss you can have on your tax return for any given year is $3,000. Any extra loss you have can carry forward to the next year. You can use the passive loss from the sale of your stock to offset other types of passive income also, such as income from a partnership or rental real estate. The important thing to know though is that if you have a loss of $100,000 in the stock market, you’re not going to get to write it all off at once.

4. Just because the market has taken a nosedive, it doesn’t mean that you really have a loss on your stock. Remember, your gain or loss is based upon what you bought the stock for and what you sold it for. This is especially important for senior citizens to remember. Back in 2008, we had some serious stock market drops. When tax time came around, I had several clients tell me how much money they lost in the market, but when I did the paperwork they really had large gains because they had held the stocks for so long. They were very surprised to be paying so much money in capital gains tax.

5. You must report the sale of stock on a Schedule D form. One of the most common IRS letters is to people who sold stock and forgot to report in on a Schedule D form on their tax return. Stock sales are reported to the IRS. Using the Billy Beer example, let’s say you bought it for $100,000 back in 2007 and sold it for $90,000 this year but you forgot to report it on your tax return. You’ll get a letter from the IRS saying that you owe them $22,500 (if you’re in the 25% tax bracket) in income tax plus penalties and interest. (And the penalties will be huge because you “forgot” $90,000 in income!) The reality is that you should show a loss on your Schedule D and you’re probably due a refund ($750 if you’re in the 25% tax bracket.) Always remember to report your stock sales on your tax return.

How Long Should I Keep My Tax Records?

Files? What files?

Photo by Brian Wolfe.

It’s time for spring cleaning!  Every year around this time I receive phone calls from people who want to know what they can throw away.  Hopefully, this will help you decide what stays or goes.

According to the IRS, normally tax records should be kept for three years.  For the average taxpayer, 2007 and older can go. 

While the IRS says three, I prefer seven.  I personally wouldn’t throw away a tax return that’s any newer than 2004.  Here’s why:  Three years is the general statute of limitations for the IRS to pursue getting additional tax money from you.  Oops, you accidentally omitted a W2 when you filed your 2006 return—the IRS has three years to notify you of the mistake and request payment.  Normally, too late—too bad.  But—let’s say you omitted more than 25% of your gross income from your return, well then-now the IRS statute of limitations is six years instead of three.   How do you prove your case without your tax return?

If you haven’t filed a return at all-there is no statute of limitations so throwing away documents is certainly not a good idea there.  I always recommend filing a return even if you don’t owe anything in order to force the limitation period. 

(I’ve seen a few senior citizens get burned from not filing.  It’s rare but it does happen.  For example:   A business gets audited and they have issues going back 5 years.  The business finds it should have issued a 1099 so they send it late to avoid paying taxes and penalties  from their audit.  Now the senior citizen, who thought he didn’t have a tax issue get’s an audit letter for 5 years ago.  His only income was social security and that little job he did on the side.  The senior didn’t know about self employment taxes, he just figured the income was so small he didn’t have to file.   Now he’s facing huge penalties and interest on a bill that’s 10 years old.  Had he filed a tax return, even if he omitted the 1099 income, the statue of limitations would have prevented the IRS from coming after him  5 years later.)

There is also no statute of limitations if you file a fraudulent return.  Let’s say you claim a $10,000 deduction for contributing to a charity that doesn’t exist, or one that does exist but you never really gave them the money.  (Yes, that’s pretty common and yes you will get caught if you try.)   That’s tax fraud, and if the IRS proves that you committed fraud on the one return, they can go back and look at another return, and another, and another.  Get the picture?  Now, if you’re making stuff up about your charity you won’t have any documents to save in the first place.  But you should keep all of the legitimate documentation for those returns in a safe place.  Once you’ve been caught committing fraud, everything else on your tax return is subject to scrutiny and without documentation, you could wind up losing your legitimate deductions also.     

You’ll want to keep documents that relate to the purchase of a home, stock, or business property for longer; at least until the property is sold, and then for at least three years after that.  Especially hang on to documents showing that you have purchased stock.  Most people naturally hang onto home and business property documents, but stock purchase documents seem to get lost.  In a perfect world, you buy your stock and the company you buy it from keeps the records and you don’t have to think about it.  The world is not perfect.  Hang on to your stock purchase and sale documents.  Without them you’re leaving tax money on the table for the IRS.

If you are not a US citizen and you’re living in the United States, keep copies of all of your US income tax returns forever.   The IRS does not provide information to the Immigration Department.  Your tax returns could mean the difference between staying in this country and deportation. 

If you are a foreign citizen, living in a foreign country and you file or have filed US tax returns.  Keep a copy of any US tax return that you have filed and any proof of filing.  For you, the proof of filing is what’s really important.  If you electronically filed, you’ll want a copy of your e-file confirmation, if you mail returns, use certified mail, return receipt requested and keep those receipts with your tax papers. 

If you have business expenses, you’ll want to maintain receipts and records of any expenses you have relating to your business.  If you have a home office, that includes your expense records for your utilities, rent or mortgage interest also.  If you’re not claiming a home office, you don’t need to save all of your utility bill receipts.  Some cities have special programs for seniors where they can get rebates on their utility bills.  If you participate in a program like that, you’ll want to save your receipts for as long as the program requires, usually at least a year.

One final thing:  if you’re throwing away tax documents, use a shredder.  Your tax documents have your name and social security number.  Those two pieces of information plus your date of birth will pretty much give an identity thief everything he needs to access your bank accounts, which are often also listed on your tax returns.  Be safe out there.

Oops! There’s a Mistake in My Taxes, How Do I Fix It? Amended Returns

When you have a tax "oops" you fix it by filing an Amended Tax Return, form 1040X.

When you have a tax “oops” you fix it by filing an Amended Tax Return, form 1040X.

Mistakes happen.  You file your return and later get a W2 in the mail for a job you had forgotten about.  Maybe your investment firm sent you an amended 1099 because your interest income they reported was wrong.  Or maybe you were talking to a friend and learned about a deduction that you should have been claiming for the past three years and you’d like a refund.  What do you do?

It’s easy, you need to file an amended return, the form is called a 1040X and you can find it on the IRS website:

An amended return can’t be filed electronically like a regular return.  You must mail it in and it’s going to take about 12 weeks to process.   That’s a bummer if you’re expecting a refund, but that’s the way it works.   If your regular return had a refund, make sure you wait until you’ve received the first refund before you file the amended return.  (If they start processing the amended return before your original refund gets paid, it can mess up you getting the original refund.  You don’t want that to happen now do you?)

If you have more than one tax return that needs to be amended, you must file separate returns for each year and mail them in separate envelopes.  For example, say you found out that you had missed a $1000 deduction on your Schedule A every year and you’re in the 25% tax bracket.  You can’t just put $3000 on this year’s return for a $750 refund.  You’ll have to amend 2010, 2009, and 2008 separately and you’ll receive three checks for $250 each.  It’s too late now to claim a refund that should have gone on 2007.

When you amend your tax return, you’ll have to send in the schedules of anything that changed.  In the example above, the thing that changed was on the schedule A, so that form would also have to be attached.  Don’t attach any forms that didn’t change.  Warning:  for many folks, a change in one part of your tax return can cause a change somewhere else-most notably on your schedule A.  Before you actually mail anything in, go over it carefully to see if you have any unexpected changes.

When you file a 1040X, make sure you check the box for the tax year that you’re amending.   That’s a pretty common mistake.  The IRS can’t process the return if they don’t know what year it’s for.

When not to file an amended return:  You don’t need to file an amended return for a basic math mistake.  The IRS will automatically fix that for you.  You also don’t need to file an amended return if your original was missing a schedule.  That’s where you get a letter from the IRS saying that you claimed something on your return but that you’re missing the supporting documents.  A common example of that would be a capital gain of $2000 on your return, but there’s no schedule D to back it up.  You don’t need to amend the return, just mail them the schedule D.   The IRS will ask you for whatever schedule they’re looking for, you won’t have to guess at what’s missing.

I’ve talked a lot about filing an amended return because of a refund.  Sometimes when you file an amended return you’re going to owe.  If you have a balance due, mail the payment check with your 1040X.  The IRS will probably send you a bill for interest and maybe even penalties depending upon how much you owed.  Be prepared for that.

Often times, people are thinking about filing amended returns because they received an IRS letter.  Sometimes, you don’t need to amend, just pay the tax.  Sometimes, you really need to amend because you shouldn’t have to pay the tax but you need to submit more information.  Sometimes, you don’t need to amend and you don’t need to pay the tax—the IRS made a mistake and they just need to have it pointed out to them.  Before you start writing that check, get a professional opinion–you want to pay your fair share, not more than you owe.

IRS E-File Starts January 14th

The IRS will begin accepting e-filed individual income tax returns on January 14th.  Many people are anxious to file their returns, especially if they have big refunds coming to them.  But I’d like to issue a caution to those eager filers: don’t rush.  Here’s some common sense tips to help you hold out just a little.

1.  Do not try to file your tax return until you have all of your necessary paperwork–that means your W2s and 1099s.  It’s against the law for a professional preparer to file a return just using your check stub.  (Some companies will do a “loan” against your tax refund, that’s different, but you’ll pay a hefty fee for that.) 

2.  If you file your return without reporting all of your income, you will receive a letter from the IRS later.  It won’t be friendly either.  The headache of correcting a mistake like that is much worse than waiting a few weeks to have everything together and doing it right the first time.

3.  Your employer is required by law to send out your W2’s by January 31st.  You should have everything in your hands by February 5th.

4.  Even if you have all of your paperwork, some returns won’t be able to be filed until mid to late February because of delays.  When Congress changed the tax laws in December, it messed up the IRS’ ability to process some people’s returns.  If you itemize your deductions on a Schedule A frm, if you claim the teacher deduction, or if you claim the tuition and fees deduction; then you can’t file your return yet anyway.  (Other education credits weren’t affected.)

5.  If you’re doing direct deposit, there is no difference between whether you file on January 14th or filing on January 19th as far as how fast you get your refund.  It’s all related to the IRS cut off dates for issuing checks and direct deposits.  No difference.  It might make sense to hold off a day or two to make sure you’ve got everything you need.

For you FAFSA filers.  You want you tax return done as soon as possible so that you can include the information on your FAFSA application.  If you’re one of the many people whose return will be delayed because of itemizing, it’s okay to go ahead an prepare your return now and use the tax return information in your FAFSA and then file the actual return later once the IRS starts accepting them.