Don’t forfeit past tax returns
Does this sound familiar? A few years back your yearly earnings were pretty low so you figured you wouldn't owe any income tax. Thus, when April 15 rolled around the following year you didn't bother filing a tax return, knowing you wouldn't be pe...
Does this sound familiar? A few years back your yearly earnings were pretty low so you figured you wouldn’t owe any income tax. Thus, when April 15 rolled around the following year you didn’t bother filing a tax return, knowing you wouldn’t be penalized.
Even if your income fell below the threshold at which you’d owe anything, chances are taxes were deducted from your paycheck throughout the year. (Check your year-end W-2 form). If so, you probably left a sizeable tax refund on the table.
And you wouldn’t be alone. The IRS estimates that each year close to a million people don’t bother filing federal tax returns, thereby forfeiting around $1 billion in refunds they were due - refunds that average several hundred dollars apiece.
Here’s the good news: The IRS generally gives you a three-year window to go back and file a past year’s tax return if you want to claim an unpaid refund.
For example, to collect a refund for 2010 you have until April 15, 2014, to file a 2010 return. After that, the money becomes the property of the U.S. Treasury.
You can order prior year tax forms at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
If you’re missing any supplementary paperwork (e.g., W-2 or 1099 forms), you’ll need to request copies from your employer, bank or other payer.
If that doesn’t work, file IRS Form 4506-T to request a free transcript showing information from these year-end documents.
Keep in mind that if you file to collect a refund on your 2010 taxes but have not also filed tax returns for 2011 and 2012, the IRS may hold onto the refund until you file those subsequent returns.
Also, past refunds will be applied to any amounts you still owe to the IRS or your state tax agency, and may be used to offset unpaid child support or past-due federal debts, such as student loans.
Another good reason to consider going back and filing a previous year’s tax return: the Earned Income Tax Credit (EITC).
Chances are, if the reason you didn’t file a return was because you didn’t earn enough to owe taxes, you may have been eligible for the EITC, a “refundable” tax credit for low- to moderate income working taxpayers. (“Refundable” means that if you owe less in tax than your eligible credit, you not only pay no tax but also get a refund for the difference.)
As an example, for tax year 2010, a married couple filing jointly with three or more qualifying children whose adjusted gross income was less than $48,263 were eligible for an EITC of up to $5,666.
To find out how EITC works and whether you qualify, consult IRS.gov.
For the rest of us, April 15 looms as the deadline for filing our 2013 taxes.
At the very least you should request a filing extension by then; otherwise the penalty on any taxes you owe increases dramatically.
Typically you’ll have to pay an additional 5 percent of taxes owed for each full or partial month you’re late, plus interest, up to a maximum penalty of 25 percent.
However, if you file your return or request an extension on time, the penalty drops tenfold to 0.5 percent per month, plus interest.
Bottom line: If you skipped filing a tax return in the last three years, go back and crunch the numbers - you may be pleasantly surprised by a hefty refund.
Jason Alderman directs Visa’s financial education programs.