Expert Advice on 3 Tricky Tax Situations
Unless you’re an accountant with a passion for work, it’s hard to imagine that anyone enjoys tax season. But 2021 threw several curveballs that could make this year’s returns a chore even by the standards of settling up with the IRS. Here’s a look at a few sticky situations that taxpayers across the country might find themselves staring down this year — and what to do about it if you’re one of them.
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Social Security Schedule: When August 2022 Benefits Will Be Sent
You’re Claiming Missed Stimulus Money
Anyone who missed out on pandemic support money that they had coming to them in 2021 needs to watch out for some hidden traps when they do their taxes in 2022.
“An easy error people can make when requesting a Recovery Rebate Credit (RRC), if they did not receive the full amount of the third stimulus payment they were entitled to in 2021, is reporting their stimulus payment received incorrectly and, therefore, over or understating the RRC amount they may be due,” said Robbin E. Caruso, partner at Prager Metis’ CPAs. “Similarly, if advance Child Tax Credit (ACTC) payments received are not correctly tracked and reported, then the tax return will be incorrect. In either of these cases, the return will require additional review by the IRS, and this may cause significant delays in processing and issuing any refunds that may be due to the taxpayer.”
Double-Check IRS Documents Against Your Own Records
In this case, an IRS error on an important tax document could lead to a costly mistake on your returns.
“Some taxpayers received their December ACTC payments in late December 2021 or in early 2022,” Caruso said. “Other ACTC payments may have been lost, sent to incorrect addresses, or were deposited to closed bank accounts and not received. As a result of these types of situations, the IRS has indicated that in limited instances, the Letters 6419 sent out to report advance Child Tax Credit payment amounts may contain misinformation.”
The IRS started the process of mailing these letters early in an effort to provide information on a timely basis for use in tax return preparation, according to Caruso.
“However, because these letters may contain incorrect amounts, it is very important that taxpayers verify their ACTC payments,” Caruso said. Although the Child Tax Credit Update Portal created for this purpose is no longer available, you can find the information in your online IRS account, which you can create or access here. Your account also lets you verify how much stimulus you received.
You’re a Crypto Investor Who Uses Multiple Trading Platforms
If you trade bitcoin or some other digital token, the IRS wants you to know that your profits are not flying under the radar this year — but reporting crypto can be tricky, particularly if you trade on more than one platform.
“The IRS is targeting cryptocurrency taxpayers who hide their cryptocurrency income,” said Augy Arbulu, president and chief operations officer of the W Tax Group. “Unfortunately, many cryptocurrency exchange platforms do not provide consolidated reports to their users in terms of gains and losses for the year. Some do provide these reports, but many users leverage multiple cryptocurrency exchanges because some cryptocurrencies are only available in certain exchanges. Therefore, many users will need to export transaction history reports from different platforms and calculate the capital gains or losses themselves — scary!”
Rely On Software — and Your Own Numbers
There are services that allow users to import crypto transactions from many different platforms in order to accurately calculate capital gains or losses, but according to Arbulu, many users simply don’t know about them.
One of them is CoinTracker, a cryptocurrency portfolio tracker and tax calculator where Shehan Chandrasekera works as the head of tax strategy[x]. He cautions users to prevent mistakes by taking ownership of the numbers that appear on the tax returns they file.
“Don’t blindly rely on the 1099-Bs you receive from exchanges,” Chandrasekera said. “Make sure the numbers make sense to you. If the numbers don’t seem correct or you see a missing cost basis, make sure to reconcile them using a tool like CoinTracker before adding them to the tax return. Otherwise, you will end up paying more taxes than necessary.”
Even if you hire a tax pro, the crypto calculations that appear on the return are your responsibility — and crypto is still alien to many accountants.
“Don’t expect your CPA to calculate these numbers manually,” Chandrasekera said. “It’s virtually impossible to calculate the amounts correctly if you have multiple wallets and exchanges with transfers in and out.”
Also, don’t spend all that time making sure the difficult math is accurate only to sink the ship with an avoidable mistake.
“Make sure to answer the virtual currency question on the front page [of Form-1040] correctly,” Chandrasekera said. “If you dealt with crypto during 2021, you will most likely have to say ‘yes’ to this question.”
You Joined the Great Resignation and Are Rolling Over a 401(k)
Finally, the labor-market drama of 2021 will leave a whole lot of question marks on a whole lot of retirement plans.
“With the Great Resignation, many workers have completed a rollover of their employer retirement account, such as a 401(k), to a new employer plan or an individual retirement account (IRA),” said Stephanie Spies, CFP, a financial advisor with Modera Wealth Management. “There are tax forms associated with this type of transaction, and while the rollover may not have tax implications, not properly indicating this on your tax return could result in the rollover being taxed as income and leave you with a tax bill.”
Do Your Future Retirement a Favor and Get Help
401(k) rollovers are reported as distributions, even when they’re moved into an eligible retirement account, which is a nontaxable event. Your employer will provide you with a 1099-R that shows the distribution, but you’ll have to report it on your tax return — a fairly simple process unless you have a special circumstance. In those cases, the stakes — your retirement — are so high that it’s worth enlisting the help of a pro to make sure you report your rollover correctly and help you avoid paying unnecessary tax. For example, “[i]f you have started a side-hustle or a business, you may be able to reduce your current tax liability by starting or contributing to a retirement plan,” Spies said. “A tax professional can help you better understand the pros and cons of this as well as the potential tax savings.”
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Daria Uhlig contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: Expert Advice on 3 Tricky Tax Situations
