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By law, you are responsible for your own tax return. This is true even if you hire someone else to do them and it’s one of the contradictions at the heart of the personal filing system. On the one hand, lawyers and accountants dedicate their careers to understanding the tax code, and even they sometimes get it wrong. On the other hand, Congress and the IRS expect you (personally) to get it right every time, on time. So if you hire a tax preparer to help with this complicated process and they make a mistake, the IRS will hold you responsible for correcting that error. Here’s what you need to know if that happens.

","

A financial advisor who specializes in tax planning could help optimize your portfolio to lower your tax liability.

","

Don’t Panic in Case of Error

","

First things first, remain calm. When dealing with the IRS, the golden rule is good faith. Be honest, disclose all of your known income, and don’t invent expenses that didn’t happen. The tax agency does understand that people often make mistakes on their taxes, so most punitive measures are generally off the table as long as they don’t think you’re deliberately lying to them. In particular, hiring a tax preparer is generally considered a per se indication of good faith on your part (it’s called “acting on the advice of counsel” among lawyers).

","

The agency will still bill you, including for any associated interest and fees, but as long as you aren’t committing deliberate fraud they’re unlikely to impose serious fines and you won’t be arrested. The IRS will even typically work with you on a structured payment plan if you can’t pay everything all at once.

","

When to File an Amended Return

","

There are a number of different ways that a tax error can crop up. If you discovered the error before receiving a notice from the IRS, then you will need to file an amended return.

","

An amended return is an updated filing that corrects some material mistake. It’s particularly likely that you will want to file an amended return in cases where you overpaid your taxes, since that means you’ll be getting money back.

","

Regardless, to make an amended return you will file form 1040-X with the updated and corrected information. You will pay any additional amount that you owe, or get a refund for any amount you overpaid once the IRS accepts the new numbers. Typically, you can file an amended return for up to three years after filing the original return, or up to two years after you paid the tax, whichever comes later.

","

Now, in all cases, when your tax preparer makes a mistake you will still be responsible for any underpayment. As discussed below, you can pursue reimbursement for any penalties and costs caused by your tax preparer’s mistake, but you can’t get them to pay the tax bill itself.

","

Correction Letters and Audits

","

","

If the IRS discovered the error, you will usually receive one of two responses:

","

a correction letter
an audit notice

","

In most cases of simple error the IRS will send a correction letter. This is a notice that the IRS believes you accurately represented your finances, but either made a miscalculation, left something out by accident, or misapplied the tax code. In the correction letter the IRS will state what they believe you owe, along with any applicable interest and fees.

","

If you receive a correction letter, review your taxes. For small amounts, it may be easiest to simply make payment. Otherwise, if you still have confidence in your tax preparer, ask them to review the filing. If you think they are unreliable, ask a new accountant to conduct the review. From there, you will either make payment if you think the IRS is right or ask your paid preparer to discuss the matter if you think the IRS is wrong (you can also contact the IRS directly yourself if you did your own taxes).

","

In cases of more serious error, the IRS may send an audit notice. (Take note: Some random audits are still conducted but those are less common.) Generally, the agency does this when it finds a problem with your financial information. That is, it has reason to doubt the income, expenses, or other substantive facts that you claimed in your tax filing. To correct this, the agency may review additional documents such as your receipts, bank accounts and other documents to compare them with your tax forms.

","

If you receive an audit notice, it’s generally wise to speak with a tax professional immediately. As above, either use your existing tax preparer or find someone new depending on how much confidence you still have in their services. You might be able to resolve this issue by filing an amended return, but audits are very case-specific and best resolved with professional advice.

","

What to Do in Case of Serious Error

","

While rare, occasionally your tax preparer may introduce a serious error into your filing. When this happens, it can be important to move quickly.

","

Serious errors can cost you a lot of money, such as the expenses involved with a lengthy audit or the penalties involved with the appearance of impropriety. If this has happened as a result of your paid tax preparer’s mistake, you don’t want to get stuck with the bill.

","

If you believe that your tax preparer’s mistake was inadvertent, rather than intentional, speak with them first. Ideally, you want them to voluntarily correct the mistake and reimburse you for any costs involved.

","

If your tax preparer is not willing to help you correct the error, or if you suspect misconduct, then immediately speak with another tax professional. Work with the IRS and your new tax pro to correct the error and try to negotiate down any fines or penalties.

","

From there, you have two remaining issues to resolve:

","

First, in the case of misconduct or serious mistake you can (and likely should) report your tax preparer to the IRS. You will use forms 14157 and 14157-A, and the IRS may then take steps to penalize the tax preparer or revoke their ability to act as a paid preparer.
Second, if this mistake cost you a lot of money you can speak with a lawyer about suing your tax preparer. This is a significant undertaking, so only pursue a lawsuit if very large amounts of money are involved, but at the same time don’t shy away from the fact that you are likely entitled to reimbursement.

","

Bottom Line

","

","

If your tax preparer makes a mistake, you are responsible for making any corrections and remaining payments. How you deal with this depends entirely on the scope and nature of your tax preparer’s mistake, and on the response it generates from the IRS.

","

Tax Preparation Tips

","$4f","

Photo credit: ©iStock.com/elenaleonova, ©iStock.com/Dean Mitchell, ©iStock.com/vorDa

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There are a couple of different sets of rules around inherited IRAs and you’re subject to theleast flexible. While there are more options for a spouse or someone who’s chronically ill ordisabled, a minor child, or someone not more than 10 years younger than the deceased IRAowner, you have just 10 years to withdraw the […]

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","

There are a couple of different sets of rules around inherited IRAs and you’re subject to the
least flexible. While there are more options for a spouse or someone who’s chronically ill or
disabled, a minor child, or someone not more than 10 years younger than the deceased IRA
owner, you have just 10 years to withdraw the money.

","

Typically, heirs open their own IRA Beneficiary Distribution Account, which must be closed by
Dec. 31 of the tenth year after the original IRA owner passed. But even with that deadline, you’ve still got a few choices to make – and rules to understand.

","

Consider matching with a financial advisor to discuss tax mitigation strategies.

","

Take It All Now

","

Someone in the 32% tax bracket is earning between $191,950 and $243,725
in taxable income if they’re single, so withdrawing the entire $450,000 now will push you
solidly past the 35% tax bracket and into 37% bracket beyond an adjusted gross income of $609,350. While your exact liability you would pay depend on your income and other factors, you can expect your withdrawals to be taxed completely at the highest two tiers.

","

If you’re married and filing jointly, the 37% bracket comes into play when your taxable income is
more than $731,200 or more. Being at the 32% tax bracket now, this means that this strategy is less advantageous than someone who is filing single. Based on the disproportionate income thresholds, a higher proportion of the withdrawals will be subject to the 37% tax rate.

","

Pros:

","

You take the tax hit now and can invest the remaining roughly $300,000 in any way you choose.
If you put the money in long-term investments, you can take the lower long-term capital gains tax
rate, which ranges from 20% to 0%, depending on your income, which lowers the effective tax
rate on the money in the long run. Based on your income now, you’re likely to face a 15%
long-term tax rate.

","

Cons:

","

Right off the bat, you’d be sending an additional money to the IRS. You also
sacrifice 10 years of potential tax-deferred growth within the IRA.
You can force yourself into a higher tax bracket.

","

On the other end of the spectrum, you can opt to draw your payments out over the full length of time allowed, or find somewhere in between the two. Consider matching with a financial advisor for free to discuss the best option for you.

","

Take It Over 10 Years

","

The longer approach means spreading your withdrawals out to keep your tax bracket and tax liabilities down. While any growth of your account will be tax-deferred in the meantime, those gains will also be taxed at your marginal income tax rate when you do eventually withdraw them.

","

Pros:

","

Easier to keep your marginal tax rate lower.
You may reduce the risk of timing the market poorly on a one-time withdrawal.

","

For example, let’s say you’re single and have taxable income of $200,000 for 2024, and that the IRA value
drops by 50% before the end of the year, reducing the balance to $225,000. You could
withdraw $43,725 at the 32% tax rate, then reinvest that money before the market bounces
back. That effectively doubles your withdrawal for the year from one-tenth of the balance to
one-fifth, but keeps you in the lower tax bracket. The cash you withdrew can grow at the lower
long-term gains rate, also lowering your effective tax rate over the long term.

","

Cons:

","

Growth on principal will be taxed at your marginal income tax rate, rather than the favorable capital gains rate, when you do eventually withdraw them.
If you otherwise see income growth, you may be pushed into higher tax brackets in the future anyway.

","

A financial advisor can help you understand the considerations that matter in your situation.

","

A Dynamic Situation

","

The “best” withdrawal strategy could change drastically from year to year, depending on what
happens with tax laws and tax rates, as well as your other financial and life changes, such as:

","

Tax laws change: An increase in tax rates and changes in tax rules could help or hurt your
withdrawal strategy, especially since you’re facing that 10-year deadline for taking all the
money out. Remember that significant changes to tax rules have taken place in just the past
several years, making unlikely that you can go an entire decade without your tax situation
changing.

","

RMDs: Depending on a handful of factors, required minimum distributions, or RMDs, might come into play if you don’t withdraw the money all at once. Consider speaking with a financial advisor about the nuances of RMD rules.

","

Your finances change: If a financial disaster hits, you may need that IRA money sooner than
later, although you’ll likely be in a lower tax bracket. Another possibility is that you’re able to
defer some income in one year, lowering your tax rate and making a big withdrawal a good
move. On the other hand, if your income increases significantly, your tax hit is likely to be
bigger on your future IRA withdrawals.

","

Bottom Line

","

As with so many personal finance questions, there’s no one “best” answer that works for
everyone. Depending on your other financial factors, your age, your health, your goals, you
lifestyle, possible changes in tax laws and other elements, each individual needs to calculate
what works best for their situation.

","

Tips

","

A knowledgeable financial advisor can help you decide how to structure and coordinate these
payments over the span of your retirement.
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with
up to three vetted financial advisors who serve your area, and you can interview your advisor
matches at no cost to decide which one is right for you.

","

Photo credit: ©iStock.com/fizkes

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\n","featuredImage":{"id":"cG9zdDoyMjAyNDM=","databaseId":220243,"altText":"A couple estimating how much they will have to pay in taxes.","date":"2023-11-17T15:38:53","fileSize":279476,"mimeType":"image/jpeg","modified":"2023-11-17T15:39:35","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2023/11/iStock-1393598855.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-11-17","readable":"November 17, 2023"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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If you earn income that doesn’t have taxes automatically withheld, such as income from investments or self-employment, you may need to pay estimated taxes. Estimated taxes are pay-as-you-go tax payments individuals make throughout the year, typically quarterly, to cover their expected tax liability. The quarterly payment approach can help avoid underpayment penalties. However, instead of paying quarterly, you can also pay estimated taxes when you file your return, increase tax withholding from another source of income, or apply your refund to any balance due. Consider asking a financial advisor to walk through the process and help avoid penalties.

","

Estimated Tax Basics

","

You generally need to pay estimated taxes if you expect to owe at least $1,000 when you file your tax return. This includes income earned from self-employment, freelancing, side jobs, interest, dividends and capital gains. The IRS requires you to pay as you earn to ensure the government receives a steady stream of tax revenue, rather than getting a lump sum payment once a year.

","

It’s usually in your best interest to go along with this requirement. That’s because, if you don’t pay enough estimated taxes during the year, you may owe an underpayment penalty when you file your return. The IRS calculates underpayment penalties by charging interest on the amount underpaid. The interest rate it charges changes periodically, with the rate currently set at 8% annually.

","

Different Ways to Pay

","

While you have to pay, you have a few options for the way you make estimated tax payments:

","

Pay quarterly: Most taxpayers do this, sending in quarterly installments on April 15, June 15, September 15, and January 15. Each installment generally is equal to one-quarter of the total tax bill you expect. You can pay online, by phone, or by mail using Form 1040-ES.
Pay when filing: Instead of quarterly payments, you can pay your full estimated tax liability when you file your return by the April deadline. This increases your risk of penalties if you underpay, however.
Withhold from other income: If you have W-2 job income, you can increase your withholdings to cover estimated taxes on 1099 income.
Apply refund to balance: If you’re owed a refund, you can apply it to estimated taxes due instead of receiving a check.

","

Avoiding Underpayment Penalties

","

","

You can sidestep underpayment penalties even if you haven’t paid enough in estimated taxes to equal your total current tax bill. Do this by meeting one of the IRS safe harbor rules. For most taxpayers, this means paying estimated taxes equal to at least 90% of your current year tax liability or 100% of your prior year liability.

","

That is, if you owed $9,000 last year and have paid in $9,000 in estimated taxes for this year, you have met the safe harbor provision and won’t be subject to underpayment penalties, even if you owe more in taxes this year. You would also satisfy the safe harbor provisions if you paid $9,000 in estimated taxes this year and your current tax liability is no more than $10,000, since $9,000 is equal to 90% of $10,000.

","

Higher-income taxpayers have a different standard. If adjusted gross income (AGI) exceeds $150,000, they must pay at least 110% of their prior year liability.

","

An Estimated Tax Example

","

Consider a self-employed taxpayer who expects to earn $60,000 this year. They had no tax liability last year. To avoid underpayment penalties, they must pay at least 90% of their expected 2023 tax liability.

","

They calculate this will be about $13,500 based on their income and deductions. To meet the safe harbor, they must pay at least $12,150 during the year. That amount is equal to 90% of $13,500, which fulfills the IRS safe harbor provisions. They decide to pay quarterly installments of $3,037.50 each.

","

This helps avoid a penalty while providing a framework for budgeting tax payments over the year. If they owe any additional amount when filing their return, they can pay it by April 15.

","

Bottom Line

","

","

Paying estimated taxes is required for anybody who earns income from self-employment or another source that does not withhold taxes. Making quarterly payments of enough to meet the IRS safe harbor provisions helps avoid penalties. It also allows you to budget tax payments each year so you don’t face a big payment at filing time. However, you can wait to pay estimated taxes until you file your return if you are willing to pay the underpayment penalty. Other options include withholding more from another income source or allocating part of your refund to estimated taxes.

","

Tax Planning Tips

","$74","

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\n","featuredImage":{"id":"cG9zdDoyMzQ2MDM=","databaseId":234603,"altText":"A woman calculating how much she could save on taxes by filing either as a head of household or single.","date":"2024-01-10T14:10:09","fileSize":168089,"mimeType":"image/jpeg","modified":"2024-01-10T14:11:08","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/01/iStock-1326287975-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-1-10","readable":"January 10, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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The choice between single and head of household tax filing status can have a sizable impact on the taxes you owe or the refund you receive. Yet many don’t realize they may qualify for the more beneficial head of household status that offers larger standard deductions and often lower tax rates. Taking the time to understand the differences could put hundreds or even thousands of extra dollars in your pocket. A financial advisor can determine if head of household, single or or another status is right for your situation.

","

Filing Status Fundamentals

","

You must select a filing status when filing your federal income taxes each year. The IRS provides five options: Single, married filing jointly, married filing separately, head of household and qualifying widow or widower with dependent child.

","

Your eligibility for each status hinges largely on your marital and dependents situation. Single filing status usually applies to unmarried taxpayers without dependents who live with them. Head of household is for unmarried taxpayers supporting dependents, like minor children, who live with them for most of the year.

","

Why Filing Status Matters

","

Opting for head of household over single status triggers two key advantages: Placing the taxpayer in lower federal income tax brackets and enabling larger standard deductions. These two factors work together to reduce both your tax rate and your taxable income.

","

For example, in tax year 2024 the head of household 12% tax bracket is $63,100 (which is up from $59,850 in 2023) of taxable income compared with just $47,150 for single filers (which is up from $44,725 in 2023). The standard deduction also rises from $14,600 for single filers to $21,900 for heads of household (in tax year 2023 it went up from $13,850 to $20,800). Bigger deductions reduce taxable income, while lower rates mean less taxes owed on remaining income.

","

Filing Status Effects in Practice

","

","

Consider a single parent earning $60,000 while providing more than half the support for two dependents who live with them for most of the year. This person qualifies for head of household filing status. Opting to use this status rather than the single filing status moves the parent into more favorable tax brackets for tax year 2023 (which they will file in 2024) and boosts their standard deduction. This combination can save them hundreds on their tax bill. Here’s how it works:

","

If they file as single, they would be able to apply a $13,850 standard deduction to their $60,000 income, leaving taxable income of $46,150. For a single filer in tax year 2023, this taxable income puts them into the 22% bracket. In this instance, taxes owed as a single filer are $5,460.

","

By filing instead as head of household, they are eligible for a much larger $20,800 standard deduction. Now taxable income is reduced to $39,200. Plus, for a head of household filer this income level falls into the 12% tax bracket, significantly below the bracket that applies to single filers with this income. Accounting for lower taxable income and a lower tax bracket, total taxes owed as a head of household filer would equal just $4,390.

","

In this example, the difference in taxes owed based strictly on filing status is the difference between $5,460 and $4,390. That is a savings of $1,070, just for selecting head of household versus single filer.

","

Making the Call

","

You can’t select a filing status based purely on which one saves you the most. You have to be eligible for the one you select.

","

When deciding on filing status, first assess marital, dependent and household support status. Unmarried taxpayers supporting a qualifying child dependent and paying for over half of household costs likely should explore head of household filing. Run comparisons to see the tax bill impact of head of household vs. single filer status based on income, deductions and tax brackets.

","

As shown in the example, simply changing status could save several hundred dollars for some typical families. Make whether you qualify based on your situation. But if you automatically default to single status, you risk leaving money on the table.

","

Bottom Line

","

","

Selecting the right tax filing status goes beyond basic marital status. For unmarried taxpayers with dependents, qualifying for head of household over single filer status can generate major tax savings through larger standard deductions and more favorable income tax rates. Yet many eligible taxpayers simply claim single status without exploring options. Avoid overpaying by first understanding the key differences in filing single versus head of household, assessing qualification criteria for each and determining the best approach for your personal tax situation. Hundreds or even thousands of dollars potentially are at stake based on what you check on one form entry box.

","

Tax Planning Tips for Beginners

","$8c","

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