There’s usually an element of relief after your annual tax return has been filed. But what do you do if you find an error on your tax return? Should you always file an amended return? Here are some things to consider.

Errors in the IRS’s favor

Errors discovered that lead to an additional tax obligation are legally required to be fixed by filing an amended tax return. This is especially true if the discovered error is from missing information found on a Form 1099 or Form W-2. Remember, information is being reported to the IRS and matching programs will typically catch the error.

Errors that result in lower tax

If correcting the error or omission results in a large, additional refund, the answer is usually obvious. File the amended return! But this isn’t always the case.

1. Your tax return is now open for a longer period of time. Federal tax returns are typically subject to audit for three years after the original tax return due date OR the date the return was filed whichever is later. If you file an amended tax return, the audit clock may change based on the amended return filing date and degree of change requested. It may trigger a request from the IRS to extend the audit review period. The refund also resets the IRS erroneous refund recovery statute, adding two to five years of possible review based upon the date of the latest tax return refund.

2. The amended return may be examined. Amending a tax return could put a spotlight on your tax return. The IRS has certain topics that often trigger individual examination when amended returns are file. Amended tax returns based on things like the Earned Income Tax Credit, Small Business Income and the Research Tax Credit for small businesses, could result in a visit from your local IRS examiner.

3. Amending one tax return may require amending others. Making a minor change in one year may require you to make changes in other tax years. Is it worth it?

4. Other taxing authorities take an interest. Making a change on your federal tax return may require you to file an amended state or local tax return. Do not assume that an amendment in your favor at the federal level will necessarily be in your favor on the state and local level.

5. Don’t expect the refund to be timely. Amended tax returns can take a long period of time to be reviewed. There have been cases where the IRS has delayed initial review of an amended return for more than a year, then decided to examine the return. While not typical, the process could take up to 1 1/2 years to resolve.

6. Timing is important. Remember, there is also a time limit to request a change in your tax return and receive an additional refund. This limit is typically three years after the initial filing deadline of the tax return. Make sure you file these tax returns using certified mail. Should the IRS delay responding to your amended return, you may need to prove it was filed timely.

7. You have a chip in your pocket. If the refund amount is not large enough to justify an amended tax return, you should still keep the documentation. Should you be chosen for an audit, you can often present your case at that time to offset any additional tax.

While finding an error or omission on your tax return can be unsettling, rest assured that there are ways to fix the problem, but it is often worth taking a balanced approach to determining the best solution.

While the maximum capital gain tax rate can be as high as 23.8 percent, most taxpayers pay 15 percent. But there is the possibility to have your capital gains go tax-free…yes, zero percent! In fact, this tax break has been around for more than a decade and comes into play more often than you may think. Here is what you should know:

Qualifying for the 0% capital gains rate

You qualify for long-term gain treatment if you sell stocks, bonds or real estate (and other capital assets) you’ve owned longer than a year.

For 2023, the zero percent rate applies to long-term capital gains for single taxpayers with taxable income up to $46,625 and married filing joint taxpayers up to $89,250. This zero percent rate can apply if you’re having a low income tax year due to:

• Temporary job loss
• A tax loss passed through to you from an S corporation or partnership
• Income fluctuation for a commission-based job
• Retirement
• Moving to part-time employment

But you could also have a higher income and qualify for this zero percent rate. For example, if a married couple earns $116,950 in 2023, their taxable income would equal the $89,250 zero percent rate threshold after subtracting the $27,700 standard deduction for a married couple.

Awareness is the key

While you may not always have the zero percent capital gains tax rate available to you, it is important to note when it comes into play.

Here’s an example: Adam and Eve Johnson recently retire. They have a number of mutual funds they’ve owned for years and have retirement savings accounts. Their current income is $58,700. Should they withdraw money from a retirement account or sell some of their mutual funds? Because they’re aware of the zero percent capital gains, they decide to sell mutual funds with $25,000 in capital gains to get the money tax free!

Plan your own tax moves

So keep the zero percent capital gains rate in mind as the year winds down. Know your projected income for the year and depending on your situation, you might realize capital gains that are subject to no or lower tax rates. Remember other factors often come into play, including the taxability of Social Security Benefits, so call if you would like a review of your situation.

Contribution limits for the ever-popular health savings account (HSA) are set for 2024. And inflation adjustments break through the historic trends of 1 to 2% increase each year. Next year the amount you can save to pay for health costs with pre-tax dollars jumps by more than 7%!

HSA defined

An HSA is a tax-advantaged savings account whose funds can be used to pay qualified health care costs for you, your spouse and your dependents. The account is a great way to pay for qualified health care costs with pre-tax dollars. In fact, any investment gains on your funds are also tax-free as long as they are used to pay for qualified medical, dental or vision expenses. Unused funds may be carried over from one year to the next. To qualify for this tax benefit you must be enrolled in a high-deductible health plan (HDHP).

The limits

Note: An HDHP plan has minimum deductible requirements that are typically higher than traditional health insurance plans. To qualify for an HSA, your health coverage must have out-of-pocket payment limits in line with the maximums noted above.

The key is to maximize funds to pay for your medical, dental, and vision care expenses with pre-tax money. By building your account now, you could have a nest egg for unforeseen future expenses.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this web page. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does Willis & Jurasek have any control over, or responsibility for, the content of any such Websites.
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“Time is running out for more than a million people to get their tax refunds for 2019,” said IRS Commissioner Danny Werfel. “Many people may have overlooked filing a 2019 tax return due to the pandemic. We don’t want people to miss their window to receive their refund. We encourage people to check their records and act quickly before the deadline.”

That deadline is quickly approaching: July 17, 2023

The three year rule

Refunds have to be claimed within three years or they are forfeited to the government. The unclaimed $1.4 billion comes from over 1 million taxpayers who still haven’t filed returns for the 2019 tax year. Often the people who leave these refunds behind are young adults, college students, senior citizens and low-income taxpayers.

What’s new this year is the July 17 deadline versus the traditional April 15 deadline due to a filing delay during the pandemic.

Why refunds go unclaimed

Most readers of this June alert will breeze right past this friendly reminder. But not so fast, everyone who reads this tip probably knows of someone that will be donating their 2019 refund to the federal government. Here are some examples:

Forgetting withholdings. Even if you have very little income, your employer may have taken some money from your paycheck for federal tax withholdings. The only way to get it back is to file a tax return. This impacts part-time employees and students.

Not claiming refundable credits. Many tax credits are “refundable credits.” This means you can receive a refund even if you owe no income tax. Common examples available to students and parents are the earned income tax credit and the premium tax credit.

Missing information. Some people don’t file because they’ve lost the information they need. If the reason you can’t file is because you lost your data, you can request an online transcript from the IRS that will give you your wage, income and other tax information. You can also mail the IRS a Form 4506-T to get paper copies mailed to you. However, this will take between five and 10 business days, so don’t delay.

Fear of penalties. Sometimes taxpayers fail to file old returns because they think the IRS may penalize them. There is no penalty for filing a late return if you are owed a refund.

Get your money

The IRS is great at tracking down people who owe them money, but not so great at reaching out to people they owe. This irony should motivate you to get your money back. To be safe, send your 2019 return by certified mail early enough so that the IRS receives it before July 17. Any refunds that aren’t claimed within the three-year due date will be gone forever, swallowed up by the U.S. Treasury Department.

Remember, just because you are not required to file a tax return doesn’t mean you shouldn’t. There are more than a billion dollars in unclaimed refunds – make sure you get yours.

With the recent interest rate increases made by the Federal Reserve, it is time once again to actively manage your savings to ensure you are getting the most for your money. Here are some tips to consider.

Maximize the kiddie tax opportunity. Remember, the first $1,150 of your child’s unearned income such as interest and dividends is tax-free and the next $1,150 is taxed at your child’s tax rate. Leverage this information by using the Unified Gifts to Minors Act to manage a savings account in their name. Just understand that when your child reaches adulthood, the account transfers to them.

Look into tax-advantaged bonds. Municipal bonds, most of which are exempt from federal income tax, are starting to make a comeback. In addition, bonds within your home state may also be exempt from state taxes. So with higher interest rates, review the tax benefit of these bonds versus higher interest, taxable alternatives. But understand the underlying risks of individual bonds in case the municipality is unable to pay back the debt.

CDs are making a comeback. Banks are competing for your deposits once again. But what is new this time around are higher, often unpublished, penalties for early withdrawal. So before you leap at that great rate, understand the cost if you need the funds before maturity. Also understand the true after-tax interest rate.

U.S. Treasury Securities. U.S. Treasury investments are generally not subject to state or local tax. So as rates go up, and if banks look uncertain to you, you may wish to consider this tax-advantaged savings alternative. And investing in Treasury alternatives is now easier than ever by visiting www.treasurydirect.gov.

With savings alternatives at interest rates of 4% to 5%, savers now have many choices to manage their money. The key message: review your options, apply an after-tax calculation to understand your true return, and know your risks!

Getting audited is no one’s idea of a good time, yet you can minimize the stress if you take the right approach.

Step 1: Understand why and when. While it’s possible you were selected randomly, it’s more likely you were selected for a specific reason. One example might be if your deductions for charitable donations or business expenses were greater than is typical for your income or profession. Before proceeding, try to understand what is being challenged and when you must reply.

Analysis: Your chance of being audited rises along with the size of your income. With $200,000 a year in income your chance of being audited nearly doubles (1.01% in FY2016) compared with a person who has half that income. People with more than $10 million in income have a nearly 1-in-5 chance of an audit every year.

Step 2: Consider the type of audit. There are three types of audits, in increasing levels of seriousness: a correspondence audit, (conducted through the mail); an office audit (a visit to the nearest IRS office); and a field audit (an IRS agent comes to visit you). How you prepare will vary depending on the type of audit.

Analysis: About 70 percent of audits are conducted through mail correspondence which typically involves routine issues like providing information about deductions. With proper documentation and prompt attention, they can be relatively painless to resolve. Office and field audits can be trickier and will involve more work and preparation.

Step 3: Gather documents. Once you’ve understood the reason and the type of audit, gather and organize as much of your relevant records as possible to prepare your response. For example, if the audit is specifically about deducting vehicle costs for business use, gather your mileage logbook, receipts and other supporting documentation. This will help prove your case and let the IRS know you are a responsible taxpayer.

Analysis: If you do not have adequate documentation, you can try to get third-party corroboration. For example, if you took charitable deductions but lost the receipts, you could try reaching out to the charity for their records. While the charity cannot create new receipts, they may have copies of confirmations sent out to you at the time of your donation.

Step 4: Know your rights. You have rights to ensure you get a fair chance to state your position. Specifically, you have the right to clear explanations about what the IRS wants and their decision regarding your case. You have the right to appeal the IRS’s decision. You also have the right to have your accountant or lawyer represent you during the audit. In addition, there is a special Taxpayer Advocate Service that is available to help you navigate through problems with your case.

Analysis: While you should stand up for your rights, always be polite with the IRS agent assigned to your case. They are just doing their job and you aren’t doing yourself any favors if you show hostility during your audit.

Step 5: Get help. No matter what, reach out immediately if you get a letter from the IRS. It pays to have the right help, because an experienced professional can guide you away from costly mistakes. Too many taxpayers have corresponded with the IRS without this help and have paid the price. Try as you might, you probably do not know the tax law as well as the IRS.

Audits happen. How you handle them can make all the difference. Please call if you need help.

Beginning in 2023 there is a new way to save money for college that won’t impact your student’s ability to qualify for financial aid. This change is in the 529 college saving program and is a change that every parent, grandparent, or friend of a future scholar should know.

Simply put, grandparents can now open up 529 savings plans without hurting the student’s ability to get financial aid!

Background

529 college savings plans provide a way to contribute after-tax money into an account designated for a beneficiary (the student). The plan is controlled by the account holder on behalf of the student, so there is little risk that the funds won’t be used as intended for education. As the deposits grow over time, any gains on the deposits are tax-free as long as they are used for qualified educational expenses. Even better, these funds can be used for both college and K through 12 qualified expenses. Funds not used for education will be subject to ordinary income taxes AND a 10% penalty.

The problem

While anyone can open a 529 savings plan for a future student, any time a distribution was made to the student from a non-parent account, that distribution used to be treated as untaxed income to the child. Up to 50% of this distribution could impact the student’s ability to receive other aid through the Free Application for Federal Student Aid (FAFSA). On the other hand, if the account is in the parent’s name, the reduction in aid eligibility is maxed out at 5.64%!

The new opportunity

It appears now that a grandparent (or potentially any non-custodial parent or friend) can open up a 529 savings plan without it hurting the future student’s ability to get federal aid. In the eyes of the new FAFSA, this funding is now virtually invisible to them as they calculate a student’s financial needs because they are no longer asking the questions about the grandparent’s contributions. So not only will the assets in the 529 account be ignored, but the distributions from the 529 account will also not influence the FAFSA results.

Considerations

If you are considering this option to help fund the ever-increasing cost of college, here are some considerations and ideas:

• Let grandparents know of the change. Consider having your parent set up an account for the benefit of your child (their grandchild). Then put their gifts into the account, instead of giving cash to your child. Remember, they can contribute up to the gift threshold limit each year (currently $17,000 per person in 2023) or even more with special funding rules.
• No college? No problem. If your grandchild does not go to college and there isn’t a need to fund K through 12 education, you can change the beneficiary to another grandchild or family member.
• Need to pull the money. If you need to pull the money, remember that the original contributions are tax and penalty free. Taxes and penalties only apply to earnings in the account that are distributed.
• Consider other applications. If the student goes to a private school, these grandparent contributions may need to be disclosed, so plan accordingly.

Given the ever-increasing cost of college, now is a great time to have more advocates helping to save for future educational expenses. These extra savings could make a big difference in reducing your student’s future debt obligations.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this web page. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does Willis & Jurasek have any control over, or responsibility for, the content of any such Websites.
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As a busy working parent, you may be concerned about what activities are available for your kids this summer. There may be a solution that’s also a tax break: summer camp!

Using the Child and Dependent Care Credit, you can be reimbursed for part of the cost of enrolling your child in a day camp this summer.

Am I eligible?

1. You, and your spouse if you are married, must both be working.
2. Your child must be below age 13, your legal dependent, and live in your residence for more than half the year.

Tip: If your spouse doesn’t work but is either a full-time student, or is disabled and incapable of self-care, you can still qualify for the credit.

How much can I save?

You can claim a minimum credit of $600 for one child on up to $3,000 in expenses, or $1,200 for two or more children on up to $6,000 in expenses, if your adjusted gross income (AGI) is greater than $43,000. If your AGI is less than that, the credit per child scales up to $1,050 and $2,100, respectively.

What kind of camps?

The only rule is: no overnight camps.

The credit is designed to help working people care for their kids during the work day, so summer camps where kids stay overnight aren’t eligible for this credit.

Other than that, it doesn’t matter what kind of camp: soccer camp, chess camp, summer school or even a simple day care. All of them are eligible expenses for this credit.

Other ways to use this credit

While summer day camp costs are a common way to use this credit, any cost to provide care for your children while you are working may be eligible.

For example, if you pay a day care center, a housekeeper or a babysitter to take care of your child while you are working, that qualifies. You can even pay a relative to care for your child and claim the credit for that expense, as long as the relative isn’t your dependent, minor child or spouse.

This is just one of many possible tax breaks related to children and dependents. Call if you have questions about this credit, or if you’d like to discuss any other tax savings ideas.