According to the IRS‘s most recent notice, 5 million people were expected to file amended tax returns for 2014, out of 131 million original filings. For 2016, the IRS received over 151 million individual returns. This means even more amended returns will follow over the next few years.
Why Do I Care About Amended Returns?
Many amended returns actually result in a refund. The refund is the difference between what you actually received & what you should have gotten if your original return was filed properly. You might be leaving money on the table if you:
- Prepare your own taxes
- Changed tax professionals
- Use a ‘tax preparation service,’ like H&R Block, or
- Had a major life change (such as change in marital status, dependents, or house move)
Conversely, you could be waiting for the IRS to find your mistakes. In that case, the IRS might tell you that you owe more than your tax return indicated. If this happens, you may not have enough liquidity to address your ‘sudden’ tax liability. All this from a return you filed several years ago.
The general rule is that you are able to file amended returns for up to 3 years after the original due date (or the file date if the due date was extended). However, there may be additional restrictions that apply if you:
- Missed previous filing or payment deadlines
- Are amending a previously amended return
Where to Start
If you think you may want to amend a return, below are five places to start:
- Change in status. This can be:
- PCS or separation move
- Change in filing status (such as getting married or divorced, having a baby)
- Math Errors. In its most recent report, the IRS reported over 2.1 million math errors for 2015 individual tax returns. This is approximately 1.4% of the approximately 151 million returns filed for 2016. The IRS usually will correct math or transposition errors during the initial processing of a filed tax return by comparing the return to supporting documents. However, it doesn’t hurt to check for errors, particularly on things that the IRS might not be able to see, such as receipts.
- Schedule A-Itemized Deductions. If you recently bought or refinanced a house, or you give a lot to charity, it may benefit you to take a look at your Schedule A to see whether you should amend your return. If you forgot a contribution, or noticed that you missed information on your return this is an area worth looking at. Schedule A contains most of your itemized deductions. These include:
- Charitable contributions
- Mortgage interest
- Real estate taxes
- State income or sales taxes (you choose which to deduct)
- Miscellaneous deductions.
A commonly missed deduction is from your end of year mortgage statement (also known as a Form 1098), where people may have deducted mortgage interest, but forgot to include such things as real estate taxes paid, interest from a second mortgage, or other related costs.
- Schedule D-Capital Gains & Losses. Tax harvesting seems to be a catch phrase during the end of year. However, many people make mistakes when recording their capital gains on their tax return. A common mistake is listing the sale price for a security, but forgetting to note the basis (purchase price + commission). Not only does this apply to securities such as stocks & mutual funds, but it applies to selling your home. When calculating your home’s basis, don’t forget to add the cost of:
- Major improvements, systems & renovations. Think roof replacement, air conditioners, or kitchen remodeling. Major projects (not repairs) will increase your basis, therefore lowering your taxable gain.
- Closing costs from buying the house.
- Real estate commissions & closing costs should be considered when selling. While these don’t lower your basis, they lower the sales price for tax purposes.
Many military families rent out their homes when they PCS. When selling a rental property, depreciation is also something to consider. I cannot recommend highly enough that you have your taxes professionally prepared in the year that you sell any rental property (before, actually). Furthermore, if you are considering the sale of your home/rental property, you should sit down with a fee-only financial planner who specializes in tax planning to make sure you’re taking everything into account.
- Schedule C-Profit or Loss from Business. Got a side gig, like some consulting or project-based work? If you do, but you never filed a Schedule C, you should look a little further to see what you may be able to deduct. You’re also responsible for paying both sides of the self-employment tax (1/2 of which is tax-deductible). If you did your own taxes and filed your own Schedule C, you might want to sit down with an enrolled agent or CPA to make sure you did it correctly.
This article isn’t meant to replace competent tax advice that is tailored to your specific situation. It definitely is not an all-inclusive list of mistakes that could be in a tax return. Doing your own taxes or sticking with a bad tax preparer could have you leaving money on the table. Even worse, the IRS could find your mistakes and come after you for the difference (plus interest). If you’re not sure what to do, consult with a fee-only financial planner or tax professional that you can trust.
As always, this blog serves to answer your questions and address concerns. If you like this blog, please subscribe, and feel free to forward it on to other people who may benefit. If you have issues or concerns you can reach me through my website, or via email. In the meanwhile, take charge of your life!