FORGOT SOMETHING ON YOUR TAX RETURN? IT’S NOT TOO LATE TO AMEND THE RETURN

Corrections on Tax Return

If you discover that you forgot something on your tax return, you can amend that return after it has been filed. The need to amend can include a number of issues: 

• Receiving an unexpected or amended K-1 from a trust, estate, partnership, or S-corporation. 
  
  
• Overlooking an item of income or receiving a late or corrected 1099. 
  
  
• Forgetting about a deductible expense. 
  
  
• Forgetting about an expense that would qualify for a tax credit. 

These are among the many reasons individuals need to amend their returns, whether it is for the just-filed 2021 return or prior year returns.

Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return.

1. If you are amending for a refund, you should be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. For example, the statute of limitations for the 2021 return will generally expire on the April filing due date for 2025. Some states have a longer statute. 
   
   
2. Generally, you do not need to file an amended return to correct math errors. The IRS or state agency will automatically make those corrections. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS or state agency will send a request asking for the missing forms. 
   
   
3. If you are filing to claim an additional refund, we should wait until you have received your original refund before filing Form 1040X. 
   
   
4. If you owe additional tax, file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
    
5. When amending multiple paper-filed returns, send them in separate envelopes. Sometimes when filed together, they are mistaken for a single return, and the additional returns filed in the same envelope are not processed. 
   
   
6. If the changes involve a new schedule or form that wasn’t part of the original return, it must be completed and included with the amended return. And if there are changed forms, they must be included as well. In addition, it may be appropriate to include documentation related to the changes to avoid subsequent correspondence from the IRS or state agency. 
   
   
7. A detailed explanation of the changes must also be included. This is required to explain to the government’s processing staff the reason for the amendment. An insufficient explanation can lead to additional correspondence and delays. 
   
   
8. Depending on why an amended federal return is required, it may be necessary to amend your state return. However, if the federal amendment is filed to claim or correct a tax credit that the state does not have, no state amended return will likely need to be filed. In most other circumstances, we will need to amend the state return as well as the federal. 

An amended return can be more complicated than the original, so please contact this office for assistance in preparing your amended returns.

Wedding planning checklist: cake, rings, flowers … tax forms?

The summer wedding season is fast approaching. Wedding planning is often overwhelming but figuring out how marriage will affect a couple’s tax situation doesn’t have to be. Here are a few things couples should think about as they prepare for the big day.

Name and address changes

People who change their name after marriage should report it to the Social Security Administration as soon as possible. The name on a person's tax return must match what is on file at the SSA. If it doesn't, it could delay any tax refund. To update information, taxpayers should file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213, or at a local SSA office.

If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, people should send the IRS Form 8822, Change of Address. Taxpayers should also notify the postal service to forward their mail by going online at USPS.com or their local post office.

Double-check withholding

After getting married, couples should consider changing their withholding. Newly married couples must give their employers a new Form W-4, Employee's Withholding Allowance within 10 days. If both spouses work, they may move into a higher tax bracket or be affected by the additional Medicare tax. They can use the Tax Withholding Estimator on IRS.gov to help complete a new Form W-4. Taxpayers should review Publication 505, Tax Withholding, and Estimated Tax for more information.

Filing status

Married people can choose to file their federal income taxes jointly or separately each year. For most couples, filing jointly makes the most sense, but each couple should review their own situation. If a couple is married as of December 31, the law says they're married for the whole year for tax purposes.

WHAT EVERY EMPLOYEE NEEDS TO KNOW ABOUT 401(K) SAVINGS

Are you familiar with 401(k) retirement funds? 

More and more employers are offering 401(k) plans as an employee benefit, and if you have the option and are not currently taking advantage of it, it may be time to rethink your savings strategy. Not only do these popular plans offer the advantage of using pre-tax dollars (and thus lowering your taxable income each year), but they are also a simple way to ensure that you’re putting away money regularly, without having to give it a thought once you’ve set up the plan.

Employers can sign you up automatically in the 401(k) plan that they offer, but even if you have to opt into a plan, once you’ve done so the amount that you’ve elected will automatically be deducted from your paycheck and deposited into your retirement savings account. All you have to do is decide how much you want to set aside each week. The answer to that question is entirely up to you and should be based on what your goals are, as well as variables like your living expenses and your age.

The closer you are to retirement age, the less time you have to save so you may want to bump up the amount that you deposit. Because the money that you invest will compound, the sooner you start investing the better. To give you an idea of how money can grow, consider the difference between investing $3,000 a year at an 8% annual return for 30 years – which would add up to $340,856 – versus only saving for 20 years, which would leave you with just $137,752. You also need to keep in mind that there is an annual maximum amount that you are permitted to contribute. Fortunately, that number increases each year. For 2022, the limit is $20,500.

You’ll also want to consider whether your employer offers a match, and if so how much that match is. One of the advantages of the 401(k) type of account is that employers can match all or a portion of your contribution, but you need to make sure that you understand exactly how your individual program works. Some employers will only offer a match up to a certain point, and others will only match if you opt for a minimum percentage of your income. Most experts encourage employees to make sure that they are fully taking advantage of whatever match their employer is willing to contribute.

To give you a sense of how much the average American has in their 401(k) account, consider the results of a recent survey conducted by Vanguard. It showed that those between the ages of 45 and 54 have an average 401(k) balance of $161,079 (median $56,722), while those who are between the ages of 55 and 64 have saved an average of $232,379 (median $84,714). The group that is closest to retirement – those who are 65 and older – do not have that much more than the group closest to them in age: they have an average 401(k) balance of $255,151 with a median of $82,297.

When thinking about your retirement and how you’ll fund your lifestyle, one of the most important questions you need to answer is exactly how you’re hoping to spend your golden years. If you plan to spend your time at home with family, you will need less than someone who plans world travel.

If you don’t have access to a 401(k) account, a Roth IRA is another good option. Though the contributions that you make come from after-tax dollars, you are able to withdraw them and their earnings tax-free at any point after you turn 59 ½. The annual limit that you can contribute to a Roth IRA is currently only $6,000, which is much lower than the $20,500 allowed each year for the 401(k) accounts.

It’s never too early to start saving for retirement, and there are plenty of good options available. If you need guidance on how best to save, contact us today to set up a time to discuss your situation.

Summer Employment For Your Child

Summer is almost here, and your children may be looking for a summer job. The standard deduction for single individuals increased from $12,550 in 2021 to $12,950 in 2022, meaning your child can now make up to $12,950 from working without paying any income tax on their earnings.

In addition, they can contribute the lesser of $6,000 or their earned income to an IRA. If they contribute to a traditional IRA, they could earn up to $18,950 tax-free, by combining the standard deduction and the maximum allowed deductible contribution to an IRA for 2022 of $6,000. However, looking forward to the future, a Roth IRA with its tax-free accumulation and distributions would be a better choice. But the contributions to a Roth IRA are not deductible.

Even if your child is reluctant to give up any of their hard-earned money from their summer or regular employment, if you have the financial resources, you could gift them the funds to make the IRA contribution, giving them a great start and hopefully a continuing incentive to save for retirement.

With vacation time just around the corner and employees heading out for their summer vacations, if you are self-employed, you might consider hiring your children to help out in your business. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.

Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child.

Example: Let’s say you are in the 24% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,000 for the year. You reduce your income by $16,000, which saves you $3,840 of income tax (24% of $16,000), and your child has a taxable income of $3,050, $16,000 less the $12,950 standard deduction, on which the tax is $305 (10% of $3,050).

If the business is unincorporated and the wages are paid to a child under age 18, the pay will not be subject to FICA (Social Security and Medicare taxes) since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either.

Example: Using the same information as the previous example, and assuming your business profits are $130,000, by paying your child $16,000, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $429 (2.9% of $16,000 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($147,000 for 2022) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion.

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there's no extra cost to your business if you're paying a child for work that you would pay someone else to do anyway.

Retirement Plan Savings - Referring to our original example, if the child had made a traditional IRA contribution of $6,000 the taxable income and the tax would be zero. So, it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement, and the future tax-free retirement benefits will far outweigh the current $305 savings. Of course, some children will not be thinking about retirement at a young age and may object to contributing to an IRA. If that is the case, perhaps you as the parent, or even the grandparents, can make a gift of the IRA contribution, which can grow to big bucks by the time the child reaches retirement age.

If you have questions related to your child’s employment or hiring your child in your business, please give this office a call.