Have a Tax Question? Ask a Tax Expert
Hi. My name is ***** ***** I will be happy to help you.
Your tax pro is correct. Amending your prior years returns will not help you. Reporting deductions are optional but reporting income is mandatory. You are not required to take the deduction. You cannot shift income received in one year to another year by removing the deduction.
Did you received any tax form for that income? 1099Int? 1099C maybe?
You can reduce the over payment with the current year interest. For the prior years, you can only reduce by the amount the deduction didn't reduced your taxes. It depends on how much of the interest you paid and your amount of your itemized deduction. You do the analyses but you do not amend prior year returns or claim the refund.
... If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. If you need to include the refund in income, report it on Form 1040, line 21....
95K is lot of interest. How many years are we talking here?
Amending your returns will not make any difference. First you will only be able to claim the refund for 2013 and 2014 and you will still not be able to exclude the entire amount of your 2015 return: only the amount of the deduction that didn't increase your tax. If take out the interest and your total deductions fall bellow the standard deduction amount, you will automatically get standard deductions.
I am sorry to say, but taxes are not always fair.
I am sorry, I was thinking about the deduction. Forget the refund. If you amend your prior years returns and remove the deduction, you will increase your taxable income, your taxes and you actually may owe more taxes for that year plus penalties and interest. I am saying "may" because I do not know your overall tax situation. You may have certain credits that you couldn't take because your tax was low. But removing the interest will still not change the fact that you can only exclude the amount that didn't increase your tax liability. The IRS doesn't say that if you didn't claim the interest you can exclude the entire amount of the interest you didn't claim.
You will have to look at your prior year returns and calculate the difference between the standard deduction and your itemize deduction and this will be about what you have to claim as income in 2015.
For instance, if your claimed 18K in itemize deduction in 2014 and the standard deduction was 12,400, you will have to claim the lower of 5.600 (18K - 12,400) or actual interest for that year. That will be by how much claiming the interest reduced your taxable income. If you claimed standard deduction for that year you will not need to include anything for that year. You will do the calculation for every year in question and than you total your numbers. That will be the amount you will need to claim as income in 2015.
Also, the IRS doesn't have to accept your amendments for the closed year (2012 and earlier) if they figure out the reason.
You can amend how far you want but it doesn't mean IRS will accept it. If you suddenly amend 8 years of returns removing a large deduction that you were entitled to somebody will notice and start asking question and even reopen returns from six years and audit it.
If you have 30K increase in 2012 and 2013, what about the other years? You have to account for all 8 years. Plus you will owe back taxes, interest and penalties. It is really up to you what you want to do but I think it is a bad idea.