Learning from Your Mistakes when Filing Taxes
Sign up for our FREE Monthly Email Newsletter
In addition to keeping in the financial know, you may be interested in checking your credit score and report.
¹The credit scores provided under the offers described here use the Equifax Credit Score, which is a proprietary credit model developed by Equifax. The Equifax Credit Score and 3-Bureau scores are each based on the Equifax Credit Score model, but calculated using the information in your Equifax, Experian and TransUnion credit files. The Equifax Credit Score is intended for your own educational use. It is also commercially available to third parties along with numerous other credit scores and models in the marketplace. Please keep in mind third parties are likely to use a different score when evaluating your creditworthiness. Also, third parties will take into consideration items other than your credit score or information found in your credit file, such as your income.
²The Automatic Fraud Alert feature is made available to consumers by Equifax Information Services LLC and fulfilled on its behalf by Equifax Consumer Services LLC.
³Equifax Credit Report Control™ is only available while you have a current subscription to Equifax Complete Premier. Locking your credit file with Equifax Credit Report Control will prevent access to your Equifax credit file by certain third parties, such as credit grantors or other companies and agencies. Credit Report Control will not prevent access to your credit file at any other credit reporting agency, and will not prevent access to your Equifax credit file by companies like Equifax Personal Solutions which provide you with access to your credit report or credit score or monitor your credit file; Federal, state and local government agencies; companies reviewing your application for employment; companies that have a current account or relationship with you, and collection agencies acting on behalf of those whom you owe; for fraud detection and prevention purposes; and companies that wish to make pre-approved offers of credit or insurance to you. To opt out of such pre-approved offers, visit www.optoutprescreen.com/.
4We will require you to provide your payment information when you sign up and we will immediately charge your card $4.95. After that, we will charge the card $19.95 for each month you continue your subscription. You may cancel at any time; however, we do not provide partial month refunds.
Equifax® is a registered trademark and Equifax Complete™ Premier is a trademark of Equifax, Inc. © 2014, Equifax Inc., Atlanta, Georgia. All rights reserved.
During the last two weeks of tax season, TaxMama got some heartbreaking requests for information from people who had done things in 2011 that couldn’t be fixed when filing taxes.
Perhaps these are things you’re also thinking of doing right now? Let’s learn from their mistakes.
First-time homebuyer credit errors
The first-time homebuyer credit had tight strings attached. The home for which you received the credit must then be your personal residence for 36 months.
People have said they moved out, or rented out the home, or were evicted. Those things bring about a required repayment to the IRS. There’s no reduction for living in the home for 22 months instead of 36 months.
Only one person called me before selling her home to find out the restrictions on this credit. She opted to stay for several more months instead of taking the hit when filing taxes.
How can you avoid the repayment? The credit must be repaid up to the amount of the profit. Selling at a loss, or being evicted, might mean either no repayment or repaying a smaller amount. Beware—if your loan(s) were for more than the price of the house, you may find you owe more of that credit than you expected.
If you simply cannot afford the house, consider remaining in it but renting out rooms. There’s no law to prevent you from renting out part of your house.
Drawing money from a 401(k) or retirement plan
You probably know that you can draw money from your IRA for things like a down payment on a home or to cover medical insurance when you are unemployed.
However, these situations only enable you to avoid early withdrawal penalties. The taxes are still due.
Worse—those penalty waivers only work for IRAs, not for funds drawn from a job-related retirement plan, like a 401(k) or 457 plan. It’s quite a shock getting hit with these penalties when filing taxes.
But if you need money badly, what are your options to avoid paying penalties?
1) While you are still employed, borrow the money from your retirement plan, if possible. You can borrow 50 percent of the account balance, up to $50,000. You pay no taxes, and you repay yourself over several years.
2) Roll the money from your retirement plan over into an IRA first. You’ll avoid the early withdrawal penalties for certain uses of the funds.
3) Get a loan. Credit card loans are cheaper than paying the highest federal and state tax bracket plus penalties—usually close to 45 percent by the time you’re done.
Getting your spouse’s retirement funds in a divorce
A special provision in the Tax Code allows the penalties and taxes to be waived when the court orders a distribution from one spouse’s retirement plan to be paid to the ex-spouse: a QDRO, or qualified domestic relations order.
But taking the money and cashing it all out or putting into your bank account is a mistake. While you’ll avoid the 10 percent early withdrawal penalty, you’ll pay taxes on money you don’t really need presently.
The solution: Split the distribution into two funds. Draw the money you absolutely need for current expenses. Put the rest into an IRA you open specifically for this purpose.
If the account has a lot of money in it, arrange to draw out the funds like an annuity using a special formula. That gives you a budget and avoids the early withdrawal penalties.
Cancellation of debt
Yippee! Your credit card company cancelled your balance. Your mortgage was modified. You’ve cut your debt by a fortune.
Oops! That’s all taxable income. Read this blog post to learn how to avoid paying taxes.
Bottom line when filing taxes
Before taking any major financial steps, please, please, please get advice from a competent tax professional, an estate attorney, or whoever is the right person for the job.
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.