Could it be that the dad is thinking about the gift tax? Like maybe he's thinking that since he didn't charge interest, it counts as a gift and he has to pay gift tax on it?

You're on the right track. In theory, the forgone interest on an interest-free loan can be considered a gift from the lender to the borrower. But there are two important points here: First, the annual gift tax exclusion is $17,000 per person (in 2023), so the imputed interest on a $9,500 loan would be well below that threshold. Second, even if it were above the threshold, it would just require reporting on a gift tax return - actual gift tax typically wouldn't be owed until someone gives away millions over their lifetime. So either way, there shouldn't be any actual tax payment required. The dad might be confused about these concepts or might be trying to retroactively charge interest and calling it a "tax" to make it seem official.

That's interesting! Which states have different rules? I'm in California and planning to loan money to my sister for her down payment, so now I'm worried!

8 You're right about the 3-year limit, but you're still within the window for 2020! The deadline for filing amendments to claim a refund is 3 years from the original due date of the return. For 2020 tax returns, the original filing deadline was May 17, 2021 (it was extended that year due to COVID). That means you have until May 17, 2024 to file an amended return and claim any additional refund. So you should act quickly, but you definitely still have time to file that amendment.

5 Thank you so much for clarifying this! I was worried I'd missed my window completely. I'll get on this amendment right away before the May deadline hits. Really appreciate the help!

10 Yes, the IRS definitely will send you a notice if they identify underreported income. They run an automated matching program where they compare the income reported on your tax return against what was reported to them by employers, banks, etc. The letter you received is probably a CP2000 Notice, which is not an audit but a proposed adjustment to your tax return based on this information matching.

Does that mean I should get an official appraisal when converting back to rental? My area has appreciated a lot since I bought, so I'm thinking the FMV is higher than my adjusted basis anyway and won't be the limiting factor. But should I document the FMV somehow?

Yes, getting an appraisal is highly recommended when converting property back to rental use. Even though in your case the FMV is likely higher than the adjusted basis (meaning you'll use the adjusted basis for depreciation), having that appraisal provides valuable documentation if you're ever audited. You don't necessarily need a formal appraisal in all cases. You could use comparable sales data, a real estate agent's comparative market analysis, or even property tax assessments - but the more official the documentation, the better protection you have. Since your area has appreciated significantly, your adjusted basis will likely be the value you use, but having the FMV documented creates a clear paper trail of compliance with tax regulations.

Good point! I always forget about suspended losses. How do you track those effectively between years? Is there a specific form or worksheet?

You know what, I didn't update my W-4 after having the baby! I just assumed the child tax credit would be applied when filing, didn't realize I needed to adjust my withholding throughout the year. The bonus was both paid and repaid in the same tax year (2024), so it sounds like it should have been completely excluded from my W-2 rather than shown as a deduction?

Exactly right! The child tax credit is applied when filing, but updating your W-4 would have reduced your withholding throughout the year, giving you more in each paycheck instead of waiting for a refund. Many people prefer this approach rather than giving the government an interest-free loan. For the bonus that was paid and repaid in the same tax year, yes - it should have been completely excluded from your W-2 as if it never happened. It shouldn't appear as income and then be offset by a deduction. This could definitely be causing part of your tax issue. I'd suggest asking your payroll department specifically about this - whether they excluded the bonus amount completely from your taxable wages or if they included it in income and then added a deduction. The former is correct; the latter could be causing your tax problem.

This is great advice. Last year I had correct federal withholding but the state withholding column on my W-2 was completely wrong. Turns out my employer had been withholding for the wrong state for three months after I moved! Double-check everything, especially if you've had any life changes.

So if I never got a 1095-B but my 1095-C has a blank Part 3, does that mean my employer or the insurance company messed up? Who should I contact to get the correct forms?

If your 1095-C has a blank Part 3 and you didn't receive a 1095-B, you should first contact your employer's HR or benefits department. They can confirm whether their plan is fully-insured (in which case you should have received a 1095-B from the insurance carrier) or if there's some other reason Part 3 is blank. If they confirm you should have received a 1095-B, then contact the insurance carrier directly to request your form. Sometimes these forms get lost in the mail or might be available electronically through your insurance portal.

I used TurboTax last year with a similar situation. It basically just asks if you had coverage for each month, but doesn't actually verify it against your 1095 forms. Since the federal penalty is $0 now, it didn't matter much for federal taxes, but I did have to be more careful for my state return since I'm in California where they still have a mandate.