Determine when it makes sense
Suppose you just discovered an omission on your 2014 federal tax return. Does this warrant an amended return? It depends.
Clearly, you should file an amended return if you owe the IRS more money as a result of an error, especially if you underreported income from interest, dividends, stock transactions and the like. Because the IRS receives matching Form 1099s from payors, it is likely that its computers will identify your name. And if it takes awhile for the IRS to catch the mistake, you will owe extra interest on top of your original tax liability. The IRS has three years to assess your return, but six years if income is understated by more than 25%. (There is no time limit if fraud is involved.)
However, the situation is not quite as clear if Uncle Sam owes you money. For example, you might have inadvertently missed a tax deduction or overstated your income. Some tax experts believe that filing an amended return opens up your original return for closer scrutiny. Rule of thumb: If there is a minuscule amount of money at stake, it may not be worth the effort, but you should file an amended return if you stand to reap a windfall. Barring extenuating circumstances, here are several common examples.
Estimated taxes: When you first filed your return, you may have asked the IRS to credit an overpayment toward your 2015 estimated tax liability. But suddenly you need the extra money to pay for an emergency. Secure a refund instead by filing an amended return.
Casualty losses: If you suffer a casualty loss in a federally designated disaster area this year, you don’t have to wait until you file your 2015 return to receive tax benefits. A special tax law rule allows you to claim a loss on the prior year’s return. File an amended return for 2014 to receive tax benefits quickly.
Sales tax: For 2014 returns, you can choose to deduct state sales tax (in lieu of state income tax) based on an IRS table or the state income tax you paid. But you can add the sales tax paid on certain big-ticket items, such as cars and boats, to the table amount. Amend your return to deduct the sales tax if the add-ons tip the scales the opposite way.
Separate returns: You and your spouse may have filed separate returns to take advantage of high medical or miscellaneous expenses for one of you. But now you discover that you would have saved more tax overall by filing jointly. You can both file amended returns in this situation, but you cannot do things the other way—file separately after filing an original joint return.
Seek professional assistance before filing an amended return on your own. Consider all the implications.