Unwanted Anxiety

 

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Not long ago, I wrote about my struggle to do taxes this year after sweeping tax changes in our state. I allowed several state tax form updates to roll through and then input my information and compared it to my previous year as best as I could to make sure it was in order. With my confidence high, and owing considerable more taxes than last year due to the changes, I electronically filed my taxes. The very next day they were accepted by the state.

A week later by the day, I get an official looking letter from our state's Department of Revenue saying that I severely underpaid them in taxes and now owe more plus am being penalized for owing as much as I do. The letter included the data that they had received in columns with labels across three pages of paper with a balance at the end. I panicked a bit.

The next day I pulled out my copy of my state tax form and started comparing values to see if I could decipher where "I had gone wrong." It had to be my fault right since theirs is automatically uploaded to software with no room for interpretation. Eventually I found a value for "Iowa Net Modifications" that was a lot different between their form and what was entered onto my tax form. That space in summary is where we report a federal tax refund from the previous year to be taxed as income, minus any deductions above and beyond the standard deduction which we are obligated to take this year. (One of the previously mentioned changes.) If the value is positive, it is added to our Adjusted Gross Income to be taxed. If it is negative, is is subtracted from our Adjusted Gross Income so we don't pay as much taxes. The key take away is that we are supposed to subtract one from the other.

According to the Department of Revenue's answer, they added both together. Normally this wouldn't be a problem but the previous tax year of 2022 wasn't normal for us. My wife had been underpaid for two years and they finally figured that out and paid her, all at once in a lump sum with the appropriate, albeit way to much, federal and state taxes taken out. Thus our refund last year was about 400% larger than we normally expect. Now, per the rules of our state, we have to pay income taxes on it again even though we did that back in 2022. Right or wrong, them are the rules and I am happy to abide by them. 

But those same rules say we can contribute a significant amount of money to our children's state 529 plans for college and deduct that amount from our income that gets taxed. We maxed that out in 2022 and since it is now the only thing we can deduct above and beyond the standard deduction these days, I took it. That amount nearly offset the large refund and the difference (that went into the space for Iowa Net Modifications) was very small. However, the Department of Revenue added those figures together. Why?

The included a phone number to call if I had questions so I took them up on the offer. After getting into the phone cue, I had around 80 minutes of waiting to do. While waiting, I pondered what I was going to say. Would the person be able to look at my taxes and say that despite it saying subtract, the state added and that I was right? Would they pass me from person to person with no real idea of what was wrong until I gave up in frustration and hired a tax lawyer to go over everything and prepare an appeal? Something in between those worries?

When the lady who helped me answered the phone, she took down my information and asked about my problem which I started explaining. She only responded in asking for details as she made notes. I was fairly certain things weren't going my way until I offhandedly commented something along the lines of, "it looks like the Department of Revenue is adding my 529 contributions to my income instead of deducting them." That rang the bell. Immediately she offered up that there was a known error that was causing issues for anyone who made 529 contributions and have already filed their taxes, i.e. me. They are in the process of correcting the error and will send out a corrected form for those who owe less in taxes or for those getting a small refund, me, they would just process my return as normal and electronically deposit my refund in a few weeks. 

Since I was flagged and sent this notice, I'm not optimistic but my refund was smaller than the fine they said I owed for not paying a lot of taxes so if I get zero, I'm probably coming out ahead. But it was a morning spent on a computer staring at tax form, on the phone waiting while dozens/hundreds of people before me also having the same issue were being helped and not being productive. I still haven't seen any mention of it on our state's Department of Revenue's website warning there might be issues and to hold on for a few weeks before getting anxiety. That would have been nice.