No one likes surprises from the IRS, but they do occasionally happen. Here are some examples of tax situations you could find yourself in and what to do about them.
- Kids getting older tax surprise. Your children are a wonderful tax deduction if they meet certain qualifications. But as they get older, many child-related deductions fall off and create an unexpected tax bill. And it doesn’t happen all at once.As an example, one of the largest tax deductions your children can provide you is via the child tax credit. If they are under age 17 on December 31st and meet several other qualifications, you could get up to $2,000 for that child on that year’s tax return. But you’ll lose this deduction the year they turn 17. If their 17th birthday occurs in 2023, you can’t claim them for the child tax credit when you file your 2023 tax return in 2024, resulting in $2,000 more in taxes you’ll need to pay.
- Limited losses tax surprise. If you sell stock, cryptocurrency or any other asset at a loss of $5,000, for example, you can match this up with another asset you sell at a $5,000 gain and – presto! You won’t have to pay taxes on that $5,000 gain because the $5,000 loss cancels it out. But what if you don’t have another asset that you sold at a gain? In this example, the most you can deduct on your tax return is $3,000 (the remaining loss can be carried forward to subsequent years).Herein lies the tax surprise. If you have more than $3,000 in losses from selling assets, and you don’t have a corresponding amount of gains from selling assets, you’re limited to the $3,000 loss. So if you have a big loss from selling an asset in 2023, and no large gains from selling other assets to use as an offset, you can only deduct $3,000 of your loss on your 2023 tax return.
- Getting a letter from the IRS surprise. Official tax forms such as W-2s and 1099s are mailed to both you and the IRS. If the figures on your income tax return do not match those in the hands of the IRS, you will get a letter from the IRS saying that you’re being audited. These audits are now done by mail and are commonly known as correspondence audits.Assuming you already know you received all your 1099s and W-2s and confirmed their accuracy, verify the information in the IRS letter with your records. Believe it or not, the IRS sometimes makes mistakes! It is always best to ask for help in how to correspond and make your payments in a timely fashion, if they are justified.
Please call to schedule a tax planning session so you can be prepared to navigate around any potential tax surprises you may encounter on your 2023 tax return.