Can I Deduct Expenses from Previous Years?

August, 11 2023 by Steve Banner, EA, MBA

Who among us has not asked themselves this question when they realized they had forgotten to claim a particular deductible expense on their last tax return? In our haste to get our tax return filed before the deadline, we sometimes forget to make sure we have gathered all the information we need. Although we have learned to make sure to wait for the arrival of all the W-2 and 1099 forms that we expect to receive to report our income, sometimes we tend to forget to gather all the details of our deductible expenses. Or perhaps we fail to report certain expenses because we were unaware that they were valid deductions.

An example of this might be for someone who forgot to include their property taxes when calculating whether they were entitled to itemize their deductions for the year. This happened to a friend of mine a few years ago when he bought a house in a new subdivision. Bob had never itemized his deductions in the past, and assumed things would be the same in his new home. He had paid his property tax for the new home by check, and although the amount was slightly higher than what he was used to, it still did not push him over the threshold for itemization. It was only in the following year that he realized he was liable for property taxes in two jurisdictions because his new home was in an area that bordered two cities. He had been unaware of this fact because the first year of property tax to the second city had been paid as part of his closing costs. Even though the tax code limited him to a total amount of $10,000 for the state and local taxes deduction, the total amount of his Schedule A expenses would have been enough to allow him to itemize his deductions for the previous year instead of taking the standard deduction. If he had filed his original return correctly, the amount of his refund would have been some $900 higher.

Fortunately for taxpayers like Bob, the IRS provides a way for us to dig ourselves out of the predicaments we sometimes get ourselves into. In answer to his immediate question about why he couldn’t just add the missing amount to his next year’s tax return, I informed him that he can only claim his expenses on the tax return of the year in which he paid them. In other words, the tax law does not allow us to claim last year’s expenses on this year’s return. But what the tax law does allow is for him to amend his return for last year to include the missing deduction. I told him that he would have to file Form 1040-X Amended U.S. Individual Income Tax Return, to make this change to the original Form 1040 that he had filed.

The rules that apply to filing Form 1040-X are as follows:

• Form 1040-X must be filed within 3 years from the date that the original 1040 return was filed, or within 2 years of the date that the tax due on the return was paid – whichever is the later of these two dates;
• 1040 returns filed before the due date (normally April 15th) are considered to have been filed on the due date;
• 1040 returns for which an extension was requested (normally to October 15th) are considered to have been filed on the date they were received by the IRS; and
• 1040 returns that were filed late are considered to have been filed on the date that the return was due (including extensions).

In Bob’s case, he had filed his Form 1040 in late March of the previous year, which was about 18 months before he discovered that he had left out part of the property tax deduction for which he was eligible. He had received a small refund from that return. According to the rules above, Bob’s 1040 was considered to have been filed on April 15th of last year, and he would have up to 3 years from that date to file his Form 1040-X to amend the original return.

By this point, Bob had become very excited that he was eligible to soon become $900 richer, but I did have to offer a couple of pieces of advice before we ended our conversation:

• Make sure you have good records of all your expenses just in case the IRS has questions, and
• Be prepared to wait up to 16 weeks for the IRS to process your 1040-X and issue your refund.

I also advised him to double-check his tax return each year from now on before he hits the “send” button!