Things to Consider When Moving From a House to an Apartment

Moving from a house to an apartment has its perks and its challenges – and planning your move strategically can help with the latter! Whether you’re looking for a fresh start in a new town or moving cross-country for school, there are several things to consider as you downsize to an apartment. 1. Measure your […]

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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.

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What to Do Now to Prepare for Tax Season

Couple preparing for tax season

Preparing for tax season often seems more like a sprint than a marathon. You receive your W2 forms in the mail in late January, and then it’s time to excavate your receipt shoe box and spend a stressful weekend trying to make sense of your tax return. All in all, it feels like a hurried, overwhelming, and nerve-wracking chore that you dread every year.

But what if filing your taxes didn’t have to be quite so stressful?

The trick to making your tax season a breeze is preparing for it early. As in, right now. If you want an easy and relaxed tax season, here’s what you can do now to get ready.

Make a list of the information you’ll need

One of the most frustrating moments in tax preparation is discovering you’re still missing one vital piece of information after you’ve gathered everything you thought you needed. And it’s even worse if you don’t know how to find the missing information. 

So look over the specific info you need to file now, to give yourself time to gather all the items well before Tax Day. Specifically, you’ll need:

  • A copy of last year’s tax return
     
  • The Social Security or Tax ID number of every member of your household
     
  • The income records of every member of your household
     
  • Receipts for your deductible expenses
     
  • Records of any taxes you’ve paid throughout the year

Putting together your list of necessary information and checking each item off as you gather it will ensure that you’re fully prepared when you finally sit down to file. (See also: The 7 Most Common Tax Questions for Beginners, Answered)

Organize your receipts

Keeping track of tax-related receipts throughout the year is one of the most difficult parts of handling your taxes. Many people throw all of their receipts for work-related expenses, charitable donations, mortgage payments, medical expenses, and interest statements in a single folder or box to deal with "later." 

Now is an excellent time to dig out your receipts and start organizing them according to category. Having your receipts neatly separated now will make it easy to sort the last few that come in as the year comes to a close, and can help you get into the habit of putting them in order as you receive them.

Gather your paystubs together

Though the majority of filers will receive either a W2 or 1099 form from their employer(s), it’s still a good idea to gather your paystubs before the end of the year to get a rough idea of your income. That will help you identify any potential mistakes on your W2 or 1099 forms as soon as they arrive. It’s far better to catch a mistake early rather than find you need to request a corrected form close to the IRS deadline.

Plus, checking over your paystubs all at once gives you a chance to take a look at your federal and state tax withholding over the year, as well as any pretax contributions you’ve made to your 401(k) or IRA. 

Review your W4

Another great reason to look at your paystubs now is that it gives you a chance to review your W4 with your employer. 

The W4 form determines how much tax withholding is taken from each paycheck. If you expect to receive a large refund this year, you can adjust your withholding allowances now to ensure that more of your paycheck will come home with you in 2020. If, on the other hand, you worry that you may owe money because you didn’t have enough withheld, now is a good time to adjust your W4 to be sure you don’t have the same problem in the coming year. (See also: Are You Withholding the Right Amount of Taxes from Your Paycheck?)

Send more money to your retirement fund

If you have access to a tax-deferred retirement account like a 401(k) or an IRA, now is the time to see how much money you have set aside this year, and try to increase that number. 

As of 2019, workers under 50 years old can save up to $19,000 in a 401(k) and up to $6,000 in an IRA. And every dollar you put into these kinds of accounts reduces the amount of income you have to pay taxes on. 

Now is an excellent time to try to maximize your 2019 contribution. You have until the end of the calendar year to maximize your 2019 401(k) contribution, but you can continue contributing to your 2019 IRA until April 15, 2020. 

Getting into the habit of increasing your contribution now can also help you reach the maximum in 2020, which is going up to $19,500 for 401(k) accounts, although the IRA maximum will hold steady at $6,000. (See also: 8 Tax Return Mistakes Even Smart People Make)

Plan ahead for your refund

If you expect to receive a refund this year, start thinking about the best way to use the money now. We tend to think of a tax refund as "free money," even though it’s just your own salary being returned to you. But with a free money mindset, it’s very easy to go overboard spending the refund on fun stuff, like a vacation or a new gadget.

There’s nothing wrong with enjoying your tax refund, but taking a hard look at your budget and finances now can help you to determine if having fun with your refund is the best use of the money. Is there some debt you could pay down (or pay off) with the refund instead? Or is there a major goal you’re saving toward — like a down payment on a house — that would benefit from an injection of cash? 

Thinking through the best use of your tax refund before you have it in your hot little hands makes it more likely you’ll make good decisions with it. Once you have the money in your possession, it’s very tempting to make it rain instead of saving for a rainy day.

Make your tax season less stressful

Getting a jump start on your filing chores will not only make tax season much easier, but it can also help you prepare for your finances in the coming year. Start 2020 on the right financial foot by starting your tax season preparation early.

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The trick to making your tax season a breeze is preparing for it early. As in, right now. If you want an easy and relaxed tax season, here's what you can do now to start planning. | #tax #taxreturn #financetips


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