Ask Liz Weston

Get smart with your money

Taxes

Q&A: Tapping IRA creates a taxing problem

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Dear Liz: I took $250,000 out of my retirement account in 2019 to set up five 529 accounts for my young grandchildren. As a result, my federal and state tax bills are $80,000. I’ll need to take that money out of my IRA. Will I keep having to pay large tax bills in order to pay for that one-time large withdrawal?

Answer: While your heart was in the right place, your money wasn’t. Withdrawals from IRAs are taxable, and such a large withdrawal almost certainly pushed you into a much higher tax bracket. If you had consulted a financial planner or a tax pro, they would have advised you to either fund the 529s from a non-retirement account or to make smaller withdrawals over several years to avoid such a big tax hit.

If you continue to tap your IRA, you will continue to owe taxes on the money you withdraw. The $80,000 will incur state and federal taxes. If you again pay the tax bill on the $80,000 using your IRA, you’ll owe taxes on that money as well, and so on.

You may not think that’s fair, but the reason your IRA is taxable now is because you got a tax deduction when you made the original contributions, and the money has been growing tax deferred in the meantime. Eventually, the government wants to get paid back for those tax breaks.

Q&A: Once is enough for tax returns

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Dear Liz: You’ve covered the fact that 2019 tax refunds, especially for those of us who filed paper returns, are delayed. After days of trying to get through to someone at the IRS, I actually connected with an agent. After he told me there are massive problems in their mailroom, I said I was going to file again except this time I would do it electronically. His response, “Don’t do that because it will be a mess.” Can you check with your IRS contacts and see if they are adamant against refiling electronically?

Answer: Adamantly and emphatically, the IRS does not want people to file duplicate returns. Not only will that add to the agency’s already massive backlog, but duplicate returns can trigger identity theft protocols that could make it harder for you to file your returns in the future.

“The only time you would really want to file a duplicate return is when the IRS sends you a notice that the return you previously filed was never received,” said Henry Grzes, lead manager for tax practice and ethics at the American Institute of Certified Public Accountants. In the past, those notices were sent out 12 to 18 months after the return was due.

Many people have been waiting months for their refunds because of pandemic-related shutdowns. The IRS is slowly reopening the processing centers that were closed, but the backlog is tremendous. Although the agency was able to send out more than 150 million stimulus checks and to process most electronically filed returns, more than 10 million unopened paper returns and other mail had accumulated by mid-May.

The agency has been bringing back its workforce in stages, and the last of the IRS’ processing centers is scheduled to open June 29. In addition to the backlog, they’ll be dealing with even more filings as the extended July 15 tax deadline looms. In short, it’s unclear how much longer you’ll have to wait to get your refund.

The fact that you got through to a human being at all means you beat the odds. As mentioned in the previous column, the IRS was struggling even before the pandemic because of congressional budget cuts. Last year the agency was able to answer fewer than 1 in 4 phone calls, according to the Taxpayer Advocate Service.

Q&A: Why tax refunds are taking so long to arrive

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Dear Liz: You mentioned that people who file electronically and use direct deposit generally get their refunds much more quickly than those who file paper returns. That has always been true for me, but this year I filed in February and got a message that there was a problem but not to contact the IRS for 60 days. Then COVID-19 happened and the IRS basically shut down. Can you tell me when they will release my money?

Answer: No one knows. The IRS is still in the process of calling employees back to work and some operations centers won’t reopen until later this month.

As employees return, they’re confronting an almost incomprehensible backlog of paperwork and requests for help. Millions of paper returns are sitting in trailers, waiting to be input into the IRS’ computers, and no one has been available to process electronically filed returns that were flagged because of problems.

People who have already been waiting months may still have to wait several weeks more before they see their money or can even access someone who knows what’s happened to their returns. As a reminder, the IRS extended the tax filing deadline to July 15.

“Where’s My Refund?”

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If you’ve been waiting months for your tax refund, you’re not alone.

Many people who filed paper tax returns — and even some who filed electronically, but whose returns were flagged because of problems — have yet to see their money. Some are growing desperate, since they rely on refunds to pay bills or cover medical care.

Few can get through to anyone who can help. The IRS closed its processing centers, local offices and taxpayer help lines because of COVID-19 lockdowns, prioritizing the stimulus payments authorized by the CARES Act.

As I wrote in a previous post, taxpayers are reaping what their lawmakers have sowed:

“Over the last decade, Congress has cut the IRS’ budget by more than 20% after factoring in inflation, even as the population grew and tax law got ever more complicated. The agency was limping along with ancient technology and too few people to help the public even before the pandemic sent most of its workers home, without the ability to telecommute.

The agency has been trying to recall its workforce as quickly as it can, but there is a truly massive backlog of paper returns that has yet to be processed. Sending out stimulus relief checks has taken priority, and that Herculean effort is still in process.”

Processing centers in Kentucky, Texas and Utah opened this week. Re-openings are planned for June 15 in Georgia, Missouri, Michigan and Tennessee. Processing centers are scheduled to open June 29 in Indiana, Ohio, California, Puerto Rico and Oregon.

It’s unclear how long it will take employees to clear the massive backlog they’re facing. NerdWallet has some suggestions for workarounds, including contacting the Taxpayer Advocate Service, although that service is overwhelmed as well.

Please don’t re-file your tax return, as that won’t help and makes the backlog worse. If you’re still working, consider adjusting your withholding to increase your paycheck. (It’s far better to keep your own money than to make an interest-free loan to the government, which has no obligation to pay you back in a timely manner.) If you’re struggling, you may be able to find food banks,  and other resources to help you at 211.org.

How filing taxes could generate your coronavirus stimulus check

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Dear Liz: My adjusted gross income in 2019 was too high for me to get a stimulus relief payment. However, my income this year will be much lower and I would qualify. Will I automatically get the stimulus payment when I file my 2020 return or is there something I must do to get the money?

Answer: Just file your 2020 taxes and you’ll get the money.

The recent relief checks of up to $1,200 per adult were created using a refundable credit that will apply to 2020 taxes. (Refundable credits reduce your tax bill dollar for dollar, with any excess refunded to the taxpayer.)

The structure of this refundable credit has created some confusion. Many people thought the payments would reduce the refund they would normally get, but that’s not the case. Rather, the relief checks are an advance on a credit that has been added to their 2020 taxes. When people file their 2020 tax returns, they’ll deduct their relief payments from that new credit. (And although the credits are refundable, the money doesn’t have to be paid back if you got a payment but your 2020 income turns out to be too high.)

If you didn’t get a payment but you qualify based on your 2020 income, you’ll get the credit when you file.

Q&A: Where’s my refund?

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Dear Liz: I filed a paper 2019 federal tax return in mid-February. It’s been more than nine weeks, and they haven’t electronically deposited my refund yet. Last week, I called the “Where’s My Refund” IRS number and got an automated response that basically they couldn’t help me. I then called the taxpayer advocate number listed in the IRS booklet, and they couldn’t help me but transferred me to the IRS’ toll-free number. After taking my information, the service person couldn’t find my return and suggested I resubmit my forms. The whole process took over two hours. Then my brother told me IRS offices are closed or have limited staff and they aren’t processing the tax returns. Why don’t they just say that at the beginning of all of their messages, instead of saying you should get it within six weeks of filing?

Answer: Over the last decade, Congress has cut the IRS’ budget by more than 20% after factoring in inflation, even as the population grew and tax law got ever more complicated. The agency was limping along with ancient technology and too few people to help the public even before the pandemic sent most of its workers home, without the ability to telecommute.

The agency has been trying to recall its workforce as quickly as it can, but there is a truly massive backlog of paper returns that has yet to be processed. Sending out stimulus relief checks has taken priority, and that Herculean effort is still in process.

You may be frustrated by what you perceive as poor customer service, but this situation didn’t develop overnight and taxpayers are reaping what they sowed, or at least reaping what their lawmakers sowed. You should let those lawmakers know how you feel if you want this to change.

And you should change, as well. It is not smart to send a tax return through the U.S. mail. Electronic filing is a much more secure alternative, and it’s quicker. With direct deposit, you can get your refund within days. Even with the pandemic, most e-filers have gotten their refunds promptly.