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Ask The Experts: Tax Prep

Thanks for joining us! AARP Foundation staff and volunteers from the Foundation’s Tax-Aide program are here to answer your questions about this year’s tax season and filing your return.

 

Please note:  If your inquiry is about requesting service by appointment only, please visit the AARP Foundation website: www.aarpfoundation.org/taxaide.

 

Post a reply below for a chance to have your questions answered.

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Contributor

According to the CARES ACT, 100% of the $600.00 contributions we made in 2020 are recoverable, even though we are taking the standard deduction.  How and where do we apply it on our 1040-SR form?  Thanks!

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AARP Foundation Tax-Aide

@PamG960041 

 

Actually, for 2020 tax returns, $300 of cash donations to qualified charities is an adjustment to income per return  ($150 if filing as married filing separately). This is entered on Form 1040-SR Line 10b. For 2021, this increases to $300 for the taxpayer plus $300 for the spouse if filing as married filing jointly.

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Contributor

Hi, I just saw online this comment about the American Rescue Plan.

Taxation of unemployment compensation—Create a tax exclusion for unemployment compensation (not to exceed $10,200) received in 2020 for households with AGI of less than $150,000.

Are you aware yet if the statement above is in regards to unemployment compensation received in 2020? Does it mean that in my 2020 tax return, I can exclude up to $10,200.00 of my unemployment compensation?  My son is also filing his own return but we do claim him as a dependent - can he also exclude up to $10,200.00 of his unemployment compensation on his 2020 return?

Thank you for your attention and time. This is a wonderful service you provide.

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AARP Foundation Tax-Aide

@DesireeO365538 ,

 

Yes, you will be allowed to exclude the first $10,200 of 2020 unemployment compensation from taxable income, but at this time, the IRS has not yet issued guidance regarding exactly how to do this.

 

We assume that the same rule will apply to dependents.  However, we suggest that you use this IRS Interactive Tax Assistant to verify that you can actually claim your son as your dependent for tax year 2020, particularly if he received a significant amount of unemployment compensation:   https://www.irs.gov/help/ita/whom-may-i-claim-as-a-dependent

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Contributor

Hi, In 2020, my son earned 6,827.00 in wages from part time jobs and received unemployment of 10,467.00.  We are planning to claim him as a dependent for 2020.  We paid for his college and housing for Spring 2020, but because of due dates 7,477.86 was paid in 2019. We paid 483.50 for Spring 2021 in Dec 2020.  He is a college student and was 21 years old in 2020.  Does the amount of the 10,467.00 unemployment make him ineligible for us to claim him as a dependent for 2020?

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Info Seeker

Due to being in hospitals and rehab from March 6,2020 to August and then being confined to a wheelchair for a couple more months, I did not get my taxes filed last year.  should I file both last years and this years at the same time?

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AARP Foundation Tax-Aide

@brendah376800 

 

File your 2019 return first since if you have a balance due, there may be interest and penalties for late filing so sooner is better. Or, if you are due a refund, file now to get it. Then file your 2020 return. The due date for it is still April 15 unless you request an extension until Oct 15 by filing Form 4868 but note that if you will have a balance due it must still be paid by April 15.

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Contributor

I filed my 2020 taxes last month but I would now like to make an additional IRA contribution for the 2020 tax year. Can I make the contribution now and file an amended return to receive the tax benefit or is it too late because I've already filed? 

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AARP Foundation Tax-Aide

If you make the IRA contribution by April 15, you can amend your return to claim any tax benefits.

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Newbie

I have been carrying losses from stock sales and real estate sales for over 10 years.  I have been using $3000 each year to offset income tax.  Since the amount of my carry over is greater than what I can expect to use in my lifetime, one CPA has suggested rolling over funds from an IRA to a Roth IRA and using some of the losses to negate the tax I would pay from the IRA withdrawal. I am looking for verification that this is a possibility

 

Thank you

Clay Kennedy

flmopa@aol.com

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AARP Foundation Tax-Aide

Clay - 

 

A capital loss carryover will offset any current capital gains and up to $3,000 of ordinary income. IRA distributions are treated as ordinary income, not as capital gains. Therefore, the most that could be offset is $3,000 assuming no other ordinary income. 

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Contributor

settlement money

Helping my brother who is memory impaired do his taxes. He lost his condo due to non foreclosure about 4 years ago. Bank eventually auctioned off the property and received more than he owed. Several other units were I same situation. Attorney filed lawsuit on behalf of group of 5 people to recover money. In 2020 bank agreed to settlement. Bank sent my brother and attorney a 1099 misc for 68,400. Attorney sent check to my brother for 44,000. The difference was his fee.

Received the following from attorney

“Please note that we are not tax attorneys, so we do not give tax advice. However, because we have handled many of these settlements, we originally engaged a tax attorney to study the best way to characterize these settlement monies.  His conclusion was that it is properly treated as "additional sales proceeds" from the auction by the Bank.  This may mean that the money is not taxable if your "basis" was high enough.  Also, we have been told that because it is a suit to pursue additional sales proceeds from an investment asset, the fees spent on our firm (basically the difference between the $68,400 and the net that was wired to you) should be deductible.”

So my plan is to report this as a home sale, the unusual part to me is the 1099-misc showing the monies received. Dollars involved are well below $250,000 so would not be taxable.  I think I would attach a statement about the 1099 misc?

Advice?

Ron

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AARP Foundation Tax-Aide

@RonaldW276946 ,

 

Unfortunately your situation falls outside the scope of our volunteer training.  We suggest you get assistance from a tax professional.

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Contributor

My 1099-DIV has $174.13 on line 3 (Nondividend Distribution). My software says it is nontaxable until the amount is equal to my cost basis. Should I omit it from my filing? Or enter the $174.13 as Nondividend Distributions? If I enter it will it cause me problems with the IRS?

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AARP Foundation Tax-Aide

Your software is correct. Go ahead and complete the entry in the software. The software will ignore it when calculating the taxes, but the information will be retained for your records. The non-dividend distribution is simply returning some of your own money that you paid for the stock.  

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Contributor

I sold some stock and when I am filling out the form it asks for "Purchase Date". My 1099 says "Various". Will the IRS accept this for the date? or is that going to be a problem?

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AARP Foundation Tax-Aide

"Various" will not cause a problem. Be sure to keep your long term and short terms transactions separate. The Broker's statement 1099 does that for you. If you are using Tax Software, there may be a box to check that indicates that there are multiple transactions.

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Contributor

I maxed out my IRA contributions for 2020, only to learn that, because I made $246 over the earnings limit, those $7,000 in IRA contributions were not deductible. What can I do now to avoid double taxation when I withdraw those contributions?

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AARP Foundation Tax-Aide

@FrancisN748673 ,

 

You can make nondeductible contributions to your traditional IRA if you like.  To avoid having to pay taxes when you withdraw these nondeductible contributions, document them by filing Form 8606 for 2020 to establish your "basis" in the IRA.  Since you already filed your 2020 return, you can file Form 8606 on its own. 

 

Another alternative is to recharacterize your traditional IRA contribution as a Roth IRA contribution.  Ask your IRA custodian about how to do this or read about it in IRS Publication 590-A.  Note that you cannot reverse a recharacterization of a traditional IRA contribution to a Roth IRA contribution, so be sure this is really what you want to do.  You have until April 15, 2021 to recharacterize your 2020 traditional IRA contribution.

 

The advantage of having the money in a Roth IRA is that you will not have to pay any taxes on qualified distributions (generally those that occur 5 years after you first establish a Roth IRA).  If you leave the nondeductible contributions in your traditional IRA, part of your distributions will be tax-free, but you cannot recover the nondeductible contributions all at once - you will use Form 8606 each year you take a distribution to determine how much of the distribution is not taxable that year.

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AARP Foundation Tax-Aide

@FrancisN748673 .

 

NOTE:  The below response did not really address your issue, since you didn't actually make an excess contribution - you simply could not deduct your traditional IRA distribution.  However, we will leave this information here in the event you need information about EXCESS contributions (when you contribute more than allowed based on your income and/or your spouse's income).

 

If you remove the excess contribution (in this case $7,000) PLUS the investment earnings on that money before the due date of the return you will avoid any penalties. You will have to pay taxes on the amount, but no penalties. The date can be extended to October 15. This is only applicable for funds contributed for 2020. 

 

If you have up to $300 of  cash contributions to a charity and are not itemizing, a new provision this year allows you adjust your income by the amount of the contribution. The contribution must have been made in 2020. If you have overlooked that provision, that might solve your problem by reducing your MAGI to below the limits. If you are Married filing separately the limit is only $150.

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Contributor

When you say "the due date of the return" do you mean April 15th. I ask this because I have already submitted my 2020 Tax return?

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AARP Foundation Tax-Aide

Yes, as long as you remove the excess contributions plus the earnings before April 15th, you are not subject to a penalty.  You should not need to amend your 2020 return - any earnings that are taxable will be taxable on your 2021 return if you removed them in 2021.

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Regular Contributor

If tax laws do not change, and my projection is correct, I have a $600,000 IRA at 70 or 72 what will be the minimum distribution every year?

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AARP Foundation Tax-Aide

AARP has a calculator that will do all the work for you.

Required Minimum Distribution Calculator (aarp.org)

 

Just enter your information and you will be able to calculate whatever year and amount that you like. The amounts are determined by a life expectancy table published by the IRS.

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Contributor

Question: I took out a large sum of money out of my IRA to pay cash for my house (which I live in). Any way to reduce tax obligations?

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AARP Foundation Tax-Aide

James,

Unfortunately this is a question that should be asked before the money is taken out of the account. We see many examples from Seniors who take large distributions that they really did not need at the time of the withdrawals. Usually it results in adverse tax consequences. In most years by this time most options to reduce the tax impact have passed. 

 

This year you may be eligible for some COVID related relief. If you are a "Qualified Individual" to be eligible for Disaster relief treatment on the first $100,000 of the distribution. 

 

This includes allowing you to repay the distribution (up to $100,000.)  and relieve you of tax consequences for 2020. This may be possible by obtaining a home equity loan to obtain the funds. You would also be eligible to spread the income (up to $100,000.) over 3 years, Only one third of the first  $100,000 (less any repayment before the due date of the return with extension) 2020. 

 

Being a qualified individual you would also be able to eliminate any early withdrawal penalty if under 59 1/2 at the time of the withdrawal. The 2020 Instructions for Form 8915-E (irs.gov) will provide you help in determining if you qualify for this relief.

 

Because of the amounts involved and the potential problems of coming up with the funds to pay for any taxes you have incurred I recommend talking to a financial advisor before filing your taxes.

 

I don't want to scare you. The IRS will work with individuals who are in this type of predicaments. it may be a onetime event for you, but this is something that the government sees often.  The worse thing you can do is to not file your taxes on time. Even if you cannot pay, file the return.

 

 

 

 

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Contributor

Do I post my tax question here?

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AARP Foundation Tax-Aide

Please post and we will try and answer. 

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Contributor

How much do U have to owe before you pay a penalty for not having enough withheld? It's hard to calculate how much interest I'll make with the every changing rates! 

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