The Best Home Insurance Companies in Florida of 2021

The best homeowners insurance company in Florida is an individual decision, but in general, we found that State Farm is great for home insurance in Florida. When assessing home insurance companies, we looked at price, value and customer service. But we’ll get into that in a bit. You might wonder, how can you get a […]

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Source: thesimpledollar.com

What Happens if I File My Taxes Wrong?

A woman sits at her desk in front of her laptop, her head in her hands in frustration.

Update: Due to the pandemic, the IRS has extended the tax deadline for the 2020 tax year from April 15, 2021 to May 17, 2021. This only applies to individual federal income returns and tax payments, not a state’s income tax deadline, including state payments or deposits. 

It’s the beginning of the 2021 tax season, and you’re raring to go. You gather up your documents for the 2020 tax year and file your federal and state taxes before the dinner bell rings. But once you’re done, you realize you forgot to claim a deduction. So, can you correct a mistake on a tax return you’ve already filed?

Many people make mistakes on their tax returns each year. Some forget to include income, while others don’t claim credits they’re entitled to. Reassuringly, you can correct your tax return after filing—and we’ll show you how.

  • What Happens if I File My Taxes Wrong?
  • How to Amend Your Tax Return
  • Common Tax Blunders
  • Avoid Making Mistakes This Tax Season

What Happens if I File My Taxes Wrong?

If you make a mistake on your tax return, it’s important to correct it as soon as possible. Several things can happen, depending on who finds the snafu—you or the IRS—and how you handle your error. Let’s look at three common scenarios.

You Realize Immediately

Let’s imagine you notice your mistake right away. Your first instinct might be to file a brand new return—but don’t do that. Instead, follow the instructions we give later to complete an amended return.

The IRS Finds Your Mistake

People make mistakes all the time—and that includes the IRS. The IRS might notice your mistake and send you a notice to correct your return. If this happens to you, don’t worry—just complete the appropriate tax form by the deadline written on your notice. It’s that simple.

Nobody Finds Your Mistake

If nobody finds your error, your tax return might get processed with the mistake intact. Unfortunately, your oversight might turn up during an IRS audit, and if that happens, you could end up with an unexpected and large tax bill—plus interest.

How to Amend Your Tax Return

Tax amendments aren’t a one-size-fits-all thing. If the IRS sends you a notice, follow its instructions to the letter to resolve your mistake. If you notice an error independently, here’s what you need to do:

  1. Double check to make sure you really have made a mistake. Taxes can be extremely confusing, and you might not always remember all of your calculations to a T. 
  2. Check to see if the IRS has already noticed the issue. If your return has been processed, is your tax refund larger or smaller than expected? The IRS holds 1099 and W2 information on file, and it does sometimes correct returns based on known information.
  3. If you do need to make a correction, file an amended tax return, also known as a Form 1040-X. You can use a 1040-X to submit additional or updated information to the IRS and to attach another form to your tax return. 
  4. Pay any additional tax owed as quickly as possible to avoid accruing interest.

Common Tax Blunders

Tax returns are complex—some more so than others—and they’re easy to get wrong. Even pros miscalculate from time to time. Here are a few of the most common tax blunders.

  • Math miscalculations. From a forgotten zero or a decimal point in the wrong place to a simple mistake with the calculator, math miscalculations are common—especially on paper returns.
  • Forgotten deductions or credits. You might owe more tax than you expect if you forget about a deduction or a credit. The IRS won’t automatically flag this type of thing, so if you realize your mistake, file a Form 1040-X and fix your mistake.
  • Not reporting all income. Maybe you forgot about a W2 or you got a 1099 in the mail after you filed your taxes. In either case, you need to file an amendment to let the IRS know, or you risk triggering an audit.
  • Lying. Whether bold-faced or sly, lies have no place on tax returns. Exaggerating charitable donations, hiding income deliberately, or falsely claiming dependents all amount to tax fraud, which is illegal. If you lie on your taxes, you could face criminal charges.

Will the IRS Correct My Return?

The IRS does sometimes correct returns automatically. If the IRS notices an arithmetic error, for example, it’ll usually fix the oversight and notify the taxpayer.

Avoid Making Mistakes This Tax Season

Most tax filing errors are innocent mistakes. Still, there are things you can do to reduce careless errors and improve accuracy. Here are three tips to help you stay on top of your tax return.

1. Organize Your Finances

Create a filing system for receipts, payments, business miles and invoices so that you don’t have to scrabble to retrieve information at tax time. Organized people miss deductions and credits less often.

2. Gather All Your Info Before Filing

Triple check that you have all the information you need before filing your taxes. If you need extra time to do your taxes, file a six-month extension by April 15th, 2021. Do pay the taxes you’ll owe by April 15th, though, or they’ll accrue interest—and a tax estimate is much better than nothing. 

3. File Your Taxes with TaxAct

To get the most out to tax season, make sure you use a high-quality tax filing software like TaxAct. TaxAct has four products, which range from Free to Self Employed, making it an ideal solution for nearly anyone—from college students and married couples to small business owners. If you use TaxAct, you’ll be backed by their $100k Accuracy Guarantee and you might also be able to apply additional credits and deductions.

Mistakes Happen—But Try to Prepare for Tax Season

You’re only human. And taxes can be complicated. If you make a mistake on your taxes, don’t panic—do your best to fix it. But if you can, try to avoid making mistakes on your taxes by being as careful as possible. 

Don’t rush your taxes this season. Instead, wait until you have all the information you need, file with a highly rated DIY solution like TaxAct. Create a filing system for tax-related documents to keep them straight, and double check your forms before hitting the submit button. One more thing—if you sign up for TaxAct via ExtraCredit, you’ll not only get 25% off TaxAct services, but you’ll also get cashback rewards.

$100k Accuracy Guarantee: If you pay an IRS or state penalty or interest because of a TaxAct calculation error, TaxAct will pay you the difference in the refund or liability up to $100,000. This guarantee applies only to errors contained in our software; it doesn’t apply to errors the customer makes. It also only applies to returns that are e-filed by taxpayers preparing their own tax returns using TaxAct’s Consumer 1040 products (those located at http://www.taxact.com/taxes-online). Find out more about TaxAct’s $100k Accuracy Guarantee.

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Reducing Capital Gains Tax on a Rental Property

House for rentOwning a rental property can help you to grow wealth long-term and diversify your income streams. Receiving regular rental income can help supplement withdrawals you might make from a 401(k) or an individual retirement account (IRA) in retirement or give you an extra cushion in addition to your regular paychecks if you’re still working. But rental income isn’t tax-free money; you do have to pay the IRS taxes on the income you earn. Capital gains tax can also apply when you sell a rental property. If you’re interested in how to avoid capital gains tax on rental property, there are some strategies you can try. It can also be helpful

How Rental Property Is Taxed

There are two dimensions to the tax picture when talking about rental properties. First, there’s the tax you pay on rental income paid to you. And second, there’s the taxes you might pay if you were to sell a rental property for a profit.

In terms of taxes on rental income, it’s subject to the same treatment as any earned income you might have from working or side-hustling. In other words, rental income is taxed as ordinary income at whatever your regular tax bracket may be for the year. The good news is, you can reduce what you owe in income taxes on rental income by claiming deductions for depreciation and rental expenses, such as maintenance, upkeep and repairs.

When you sell a rental property, you may owe capital gains tax on the sale. Capital gains tax generally applies when you sell an investment or asset for more than what you paid for it. The short-term capital gains tax rate is whatever your normal income tax rate is and it applies to investments you hold for less than one year. So, for 2020, the maximum you could pay for short-term capital gains on rental property is 37%.

Long-term capital gains tax rates are set at 0%, 15% and 20%, based on your income. These rates apply to properties held for longer than one year. If you own rental property as an investment year over year, you may be more likely to deal with the long-term capital gains tax rate. If you’re interested in minimizing capital gains tax on rental property or avoiding it altogether, there are three avenues open to you.

Use Loss Harvesting

Tax-loss harvesting is a strategy that allows you to balance out capital gains with capital losses in order to minimize tax liability. So, if your rental property appreciated significantly in value since you purchased it but your stock portfolio tanked, you could sell those stocks at a loss to offset capital gains.

Essentially, this could cut your capital gains tax bill to zero if you have enough investment losses to cancel out the profits. This strategy assumes, of course, that some of your other investments didn’t perform as well over the previous year.

If your entire portfolio did well over the past year then you may need to consider other ways to cut your taxes than loss harvesting. Or it may not yield enough of a benefit to offset all of your capital gains from selling a rental property.

Use a 1031 Exchange

"PROPERTY TAX" written on a piece of paperSection 1031 of the Internal Revenue Code allows you to defer paying capital gains tax on rental properties if you use the proceeds from the sale to purchase another investment. You don’t get to avoid paying taxes on capital gains altogether; instead, you’re deferring it until you sell the replacement property. There are a few rules to know about Section 1031 exchanges. First, this is a like-kind exchange, which means that the rental property you buy must be the same type of property as the one you sold. The good news is the IRS allows for some flexibility in how like-kind is defined. So, for example, if you own a duplex and you decide to sell it, then use the proceeds to purchase a single-family rental home that could still meet the criteria for a 1031 exchange.

You also need to be aware of the timing when executing a 1031 exchange. If you want to use this strategy to avoid capital gains tax on a rental property, you must have a potential replacement property lined up within 45 days. The closing on the new property must be completed within 180 days. If you don’t meet those deadlines, you’ll owe capital gains tax on the sale of your original rental property.

Again, a 1031 exchange doesn’t let you off the hook for paying capital gains tax on rental property. But it could buy you time for paying those taxes owed if you’re interested in swapping out your rental property for a new one.

Convert a Rental Property to a Primary Residence 

One perk of being a homeowner is that the IRS offers a significant tax break if you sell at a profit. Single filers can exclude up to $250,000 in gains from the sale of a primary home from taxation. That amount doubles to $500,000 for married couples who file a joint return.

If you like your rental property enough to live in it, you could convert it to a primary residence to avoid capital gains tax. There are some rules, however, that the IRS enforces. You have to own the home for at least five years. And you have to live in it for at least two out of five years before you sell it.

This might be something to consider if you’re no longer interested in owning a rental property for income or you’d like to move from your current home into the rental.

The Bottom Line

Model house with a calculator next to itCapital gains tax on rental properties can quickly add up if you’re able to sell a property you own for a large profit. Keeping an eye on conditions in the housing market and reviewing your overall financial situation can help you determine whether it’s the right time to sell to minimize taxes. For example, if your regular income is down for the year, then selling a rental property at a capital gain may not carry as much of a sting if you’re in a lower tax bracket. Talking to a tax expert or a financial advisor can help you find the best ways to manage capital gains tax.

Tips on Taxes

  • Consider talking to a financial advisor about how including rental properties into your financial plan could affect your taxes. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area in a few minutes. If you’re ready, get started now.
  • Tax-loss harvesting isn’t limited to rental properties. You can also use stock losses to offset stock gains, for example. One thing to keep in mind, however, is the IRS wash-sale rule. This rule specifies that you can’t sell a losing stock and then replace it with a substantially similar one in the 30 days before or after the sale.

Photo credit: ©iStock.com/xeni4ka, ©iStock.com/designer491, ©iStock.com/supawat bursuk

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What’s the Difference Between a Traditional and Roth 401(k)?

If you work for a company that offers a retirement plan, such as a 401(k) or 403(b), you probably have the option of making "traditional" or "Roth" contributions to your account. While having more investment options is a good thing, it might leave you feeling overwhelmed or confused about the benefits of each. 

Today, I'll review critical points about the differences between a traditional and Roth retirement plan at work. You'll learn who qualifies to participate, how much you can contribute, and how they affect your retirement and taxes.

What is a 401(k) retirement plan?

Only employers can offer a traditional or Roth 401(k) or 403(b) to eligible workers. You may have to reach a certain age, such as 21, or be employed for a period, such as one or six months, to qualify. 

Employers can customize certain features of their retirement plans; however, they must comply with the Employee Retirement Income Security Act of 1974 (ERISA). It's a federal law that sets minimum standards for most workplace retirement plans, which protects participants. Your employer should provide a Summary Plan Description every year, which explains your retirement plan's features and your rights.

There aren't many ways to save for retirement that guarantee a 100% return before you even factor in investment returns!

When you enroll in a 401(k), you authorize your employer to automatically deduct elected contributions from your paycheck and send them to your retirement account. If your company offers matching funds, they contribute additional money for free. 

An example of a typical 401(k) match is 2% or 3% of your compensation. For instance, if your salary is $40,000 a year, 2% is $800. If you contribute that much, so will your employer, giving you a total contribution of $1,600 ($800 from your paycheck plus $800 from your company). And if you can only contribute $500, your employer contributes $500, for a total contribution of $1,000 for the year. There aren't many ways to save for retirement that guarantee a 100% return before you even factor in investment returns! So always be sure to participate in a workplace plan and max out matching funds when offered.

Some retirement plans come with a vesting schedule. It's a period you must remain employed to fully own your matching contributions or other employer-provided funds, such as profit sharing. However, your contributions are always 100% vested. You never forfeit your own money that you put in a retirement account (unless your chosen investments lose money).

The annual 401(k) and 403(b) contribution limits have been slowly increasing every few years, based on IRS rules. For 2021, you can contribute up to $19,500, or $26,000 if you're over age 50. The high contribution limits, automatic payroll deductions, and free matching make workplace retirement plans popular and useful for growing wealth to spend in retirement.

Differences between traditional and Roth retirement accounts

Now that you understand retirement account basics let's cover the differences between traditional and Roth accounts.

traditional retirement account permits pre-tax contributions, which gives you a tax benefit in the year you make them. You don't pay any income tax on the money you invest. Instead, you pay income tax on your contributions and their investment earnings when you take withdrawals in retirement. 

Roth retirement account requires you to make after-tax contributions, which don't give you an upfront tax benefit. However, the massive upside is that you take withdrawals of both contributions and earnings that are entirely tax-free in retirement (as long as you've owned the account for at least five years).

The downside of any retirement account is that you get penalized for tapping amounts that weren't previously taxed before reaching the official retirement age of 59.5.

So, the main difference between traditional and Roth accounts is when you pay taxes. A traditional retirement account helps cut your current income tax bill. And a Roth allows you to avoid income tax when you tap the account in the future.

With a Roth, you're allowed to withdraw your contributions at any time. That's because you already paid tax on them. However, if you take out earnings before age 59.5, you must pay a 10% penalty, plus income tax, on the untaxed portion.

The downside of any retirement account is that you get penalized for tapping amounts that weren't previously taxed before reaching the official retirement age of 59.5.

5 ways a workplace Roth is different from a Roth IRA

Many people mistakenly assume that a Roth is a Roth. It's important to understand five main differences between a Roth 401(k) and a Roth IRA.

1.  Limits on annual income apply to a Roth IRA but not a Roth at work. When your income exceeds yearly limits, you can't make new contributions to a Roth IRA. For 2021, single taxpayers with income exceeding $140,000 and joint filers with household income over $208,000 get locked out. However, with a Roth 401(k) or 403(b), you can contribute no matter how much you earn.   

2. Annual contribution limits for a Roth IRA are much lower than a workplace Roth. For 2021, you can contribute up to $6,000, or $7,000 if you're over age 50, to all your IRAs. As I previously mentioned, you can contribute a total of up to $19,500, or $26,000 if you're over 50, to your workplace retirement accounts.

3. Required minimum distributions (RMDs) don't apply to a Roth IRA. You can keep money in the account indefinitely and pass it along to your heirs. But you must take RMDs from a Roth at work no later than age 72 (unless you're still employed there). As long as you've owned the account for five years, your distributions will be tax-free.

4. Early withdrawals of Roth IRA contributions can be made at any time without triggering income taxes or a penalty. However, taking withdrawals from a Roth at work typically come with conditions, such as experiencing a financial hardship like unpaid medical bills or funeral expenses.

5. Loans are typically permitted for a Roth at work. You must pay your account back with interest on a five-year schedule. However, taking a loan from a Roth IRA isn't allowed.

So, you can see that a Roth 401(k) and a Roth IRA have similar advantages and have differences in how participants can use them.

RELATED: What Is a Backdoor Roth IRA?

Should you choose a traditional or Roth retirement account?

A significant factor in choosing a traditional or a Roth retirement account is the income tax rates in the future and how much you'll make during retirement. None of us can predict the future, so we have to guess what will be best.

If you prefer a "bird in the hand" to cut taxes sooner rather than later, then a traditional account may appeal to you. But if you don't mind paying taxes in the current year, then a Roth has more long-term advantages.

If you prefer a "bird in the hand" to cut taxes sooner rather than later, then a traditional account may appeal to you. But if you don't mind paying taxes in the current year, then a Roth has more long-term advantages. 

When you're not sure which type to choose, or you want benefits of both types of accounts, you can split contributions between both a Roth and a traditional 401(k) or 403(b) in the same year. You can choose any proportion, such as 50/50 or 20/80, as long as your total doesn't exceed the allowable annual limit set by the IRS.

If your income is too high for a Roth IRA, having a Roth at work is a terrific benefit. As I mentioned, there are no income limits on a workplace Roth. That means high earners can use one and enjoy tax-free withdrawals in the future.

Having both taxable and non-taxable income in retirement is a good idea. So, instead of deliberating between a traditional or a Roth at work, consider the benefits of using both. If you have employer matching, those contributions are always traditional or pre-tax. So, choosing a Roth 401(k) or 403(b) is an excellent way to diversify your future income and choices.

Source: quickanddirtytips.com

The Best Car Insurance Companies of 2021

Ease of filing claims, customer service, discounts for such habits as being a good driver or student — these are some of the criteria we look at when choosing the best auto insurance companies on our radar. The standout was Amica Mutual Group, with its perfect SimpleScore of 5 out of 5, but the others […]

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Source: thesimpledollar.com