Did you end up having to amend your return or pay any penalties for the Form 1116 mistake? I'm leaning toward just not claiming the credit at all at this point.

No penalties or amendments needed, thankfully. I just had to send in some additional documentation to clarify how I calculated the credit. But it was definitely an unnecessary hassle for $8! For your $1.99 credit, I absolutely wouldn't bother claiming it if it requires paying for software upgrades. Even beyond the immediate cost, the potential for questions or confusion just isn't worth it for such a small amount. The IRS certainly won't flag you for not claiming a credit you're entitled to - that's your choice.

FreeTaxUSA has been my go-to for years. So much cheaper than TurboTax and includes most forms. I've claimed foreign tax credit with them without issues.

Thanks for the suggestion! I've been with TurboTax for so long I guess I just assumed all tax software had similar pricing tiers. I'll definitely check out FreeTaxUSA for next year. For now I think I'll just skip claiming the tiny credit since it's literally less than my lunch cost today lol.

1 I didn't have any side income and I don't think I had any special credits before. I've always just taken the standard deduction since my situation is pretty simple. I did pick up more hours at work toward the end of the year but I didn't think that would affect things so much.

13 The additional hours actually might be a big part of it. If you earned significantly more in the last quarter of the year, the withholding system might not have adjusted properly. The system typically assumes you'll earn the same amount consistently throughout the year. Another thing to check is if you had any changes to your health insurance situation. If you started getting insurance through your employer or had marketplace coverage with premium tax credits, these can significantly impact your refund calculation.

4 This is a good point. I've seen this happen with friends who didn't realize that just checking different boxes could change their refund by hundreds of dollars. Especially things like whether someone can claim you as a dependent.

Good point about state taxes! I'm in Illinois - do you know if they have any special rules for small amounts of self-employment income? I'm already stressing about the federal forms.

Illinois follows the federal guidelines pretty closely for self-employment income. They don't have a separate self-employment tax, but you do need to report that income on your IL-1040 form. The $842 will flow through to your state return once you've completed the Schedule C for your federal taxes. It's actually pretty straightforward on the state side compared to the federal requirements.

This is such overkill for a one-time payment under $1000. The tax system is ridiculous for small amounts. In other countries they make this so much easier!

Thanks for bringing this up! I don't plan on doing more freelance work this year, this was really just a favor for my cousin. Based on my regular tax situation I usually get a refund of about $800, so I'm guessing this small amount won't push me over that $1000 threshold?

Thanks for pointing out the actual tax difference! I was thinking about the $5 of income, not the actual tax amount which would be even smaller. That makes me feel better about the situation. Did you send your late 8606 forms with an amended return or just on their own with the cover letter? I'm debating both approaches and trying to figure out the easiest way to handle this without triggering unnecessary scrutiny.

I sent the late 8606 forms on their own with just the cover letter since they didn't actually change my tax liability for those years. The 8606 forms were just establishing basis for future use. In your case, since you do have a small change to your actual tax liability for 2019, I'd probably file an amended return for that specific year along with all the 8606 forms and a comprehensive cover letter explaining both issues. The reality is that the IRS isn't going to launch an audit over a dollar and change, but it's still technically the correct way to handle it. And having everything documented properly will save headaches down the road if you ever need to reference your IRA basis.

First Time Abatement is for failure-to-file and failure-to-pay penalties on returns, not specifically for the $50 penalty for late 8606 forms. Those are two different types of penalties. Are you sure that's what you received?

Thank you for mentioning the exclusion ratio! I think that's what I need to calculate. Do you happen to know which specific form or worksheet I should be using? My MIL's annuity was purchased about 12 years ago, and I do have the original paperwork showing the purchase amount.

You'll want to use the Simplified Method Worksheet, which you can find in the instructions for Form 1040. If her annuity started payments when she was between 65-69 years old, you would divide her total investment by 260 to get the amount of each payment that's considered return of principal. For example, if she invested $130,000 in the annuity, then $130,000 ÷ 260 = $500 of each payment would be tax-free return of principal. If she receives $800 monthly, then only $300 would be taxable as earnings. Keep track of this calculation each year because once she's recovered her full investment amount, all future payments become fully taxable.

I used TurboTax last year for my mom's taxes with an annuity. It asks you for the 1099-R information, then it has a section where you can enter the exclusion amount or indicate that it was purchased with after-tax dollars. It then walks you through the simplified method calculation. Worked fine for us.