Author Topic: Quick question about my tax situation  (Read 3234 times)

Cwadda

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Quick question about my tax situation
« on: April 15, 2014, 06:41:41 PM »
So today I paid my taxes and fought against filing kicking and screaming the entire way there. But now it's done. This year I made approximately $3700 and contributed $5500 to my Roth IRA. That said, I also found out that I'm not allowed to contribute more than what I earned. In 2012 I contributed $3000 but only earned around $1500. Am I in trouble? I got the money from having saved my first 17 years of life and from scholarships. But will I be penalized?

Is there any way to avoid penalties? What is the best way to correct things if they're wrong?
« Last Edit: April 15, 2014, 06:52:20 PM by Cwadda »

aj_yooper

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Re: Quick question about my tax situation
« Reply #1 on: April 15, 2014, 06:52:30 PM »
You should not have any taxes due at your income level, but you should get a refund.  You did over contribute to your IRAs.  You could forget about it or contact the IRS; I favor being straightforward as there probably would not be a repercussion.

Cwadda

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Re: Quick question about my tax situation
« Reply #2 on: April 15, 2014, 06:57:49 PM »
You should not have any taxes due at your income level, but you should get a refund.  You did over contribute to your IRAs.  You could forget about it or contact the IRS; I favor being straightforward as there probably would not be a repercussion.

I get miscellaneous income which needs to get taxed I believe. I have a W-2 from another job which gives me a refund. But I end up paying because the miscellaneous tax exceeds the W2 refund. So you think I should call up the IRS and explain the situation?

AccidentalMiser

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Re: Quick question about my tax situation
« Reply #3 on: April 15, 2014, 07:02:57 PM »
File a 1040x amended return to correct your errors.

seattlecyclone

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Re: Quick question about my tax situation
« Reply #4 on: April 15, 2014, 07:10:38 PM »
It sounds like you made excess contributions of $1500 in 2012 and $1800 in 2013, since you are only allowed to contribute up to your earned income. See this article for more information about how excess contribution rules work. Basically you owe a 6% penalty tax each year on excess contributions. These excess contributions build up from year to year, so if you do nothing you would owe 6% of $1500 ($90) for 2012 and 6% of $3300 ($198) for 2013. The excess contribution keeps accruing the 6% penalty every year until you correct it. You can correct it by withdrawing the excess amount from your IRA (talk to your IRA provider about how to do this), or by contributing less than your maximum in a future year.

The article says that if you filed this year's tax return on time (which you did), you have six months after Tax Day to correct an excess contribution from 2013. So if you withdraw the $3300 (plus any earnings on that money) within six months from now, you will get out of paying the 6% penalty for 2013. If your IRA did go up in value, you will likely have to pay your regular income tax rate plus a 10% early withdrawal penalty on the gains (but not the principal). You will need to file an amended tax return to report this situation.

The deadline to correct your 2012 excess contributions has passed. You will need to file an amended tax return to pay the 6% penalty. You may owe interest on this late payment as well.

Cwadda

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Re: Quick question about my tax situation
« Reply #5 on: April 15, 2014, 07:15:17 PM »
Ok. Thanks for the info. It turns out that I will be making well over $5500 this year so I can withdraw all the excess and just re-contribute it for 2014.

aj_yooper

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Re: Quick question about my tax situation
« Reply #6 on: April 15, 2014, 08:30:39 PM »
You should be in a 0% tax rate so I don't understand 'miscellaneous taxes'.  The IRS collects federal income taxes. 

beltim

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Re: Quick question about my tax situation
« Reply #7 on: April 15, 2014, 09:09:16 PM »
You should be in a 0% tax rate so I don't understand 'miscellaneous taxes'.  The IRS collects federal income taxes.

It's probably self-employment taxes -  social security and Medicare.  The IRS collects those too.

secondcor521

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Re: Quick question about my tax situation
« Reply #8 on: April 16, 2014, 01:39:17 PM »
Ok. Thanks for the info. It turns out that I will be making well over $5500 this year so I can withdraw all the excess and just re-contribute it for 2014.

You can just call your IRA custodian and tell them to recharacterize the contributions from the older years to this year.  It'll need to be contributions plus any associated earnings, but they should take care of those details for you.

No need to actually remove the money and then recontribute, in other words.

Cwadda

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Re: Quick question about my tax situation
« Reply #9 on: April 16, 2014, 07:30:13 PM »
You should be in a 0% tax rate so I don't understand 'miscellaneous taxes'.  The IRS collects federal income taxes.

It's probably self-employment taxes -  social security and Medicare.  The IRS collects those too.

Precisely.