Tips to Survive Tax Season

Photo: Courtesy of Kelly Sikkema via Unsplash

By Jon Aldrich

Things to Consider When You are Filing Your Tax Return

As we get into the thick of “Tax Season”, I thought it would be a good idea to discuss several things to remember and consider as you prepare your paperwork to either give to your accountant or if you tackle this chore yourself. The tax preparer (whomever that is) is only as good as the information you provide them to help you file an accurate return without paying more in taxes than you are legally required to.

Tax laws and rules change every year and new tax credits and deductions come and go which means that many of us are really not all that aware of all the changes, so what follows could almost be considered a checklist of some sort that you may want to go through to make sure the preparer has all the proper information. Of course, if you want to give the government an extra donation, feel free to contribute more than you need to as they could use the money and I am sure would be used wisely.

What follows are some items to consider when preparing to file your 2023 taxes:

Don’t File Too Early

Some people like to get their returns done as soon as possible, but I caution people that have taxable accounts that generate interest, capital gains and dividends (think non IRA or 401k’s) to be patient and consider waiting until early March to file their taxes. This is because the large custodians such as Schwab, Vanguard and Fidelity often times issue corrected 1099’s late in February and occasionally in early March. This may be due to late tax law changes or updated tax treaties with other countries as well as re-classifying dividends as qualified or non-qualified or a myriad of reasons. The first 1099’s often come in the middle of February, but I have seen too many times over the years, that a corrected 1099 often comes in a couple of weeks after this and if you have already filed your return, you may have to file an amended return (which will cost you time and money). The IRS matches everything up on 1099’s and if you are off (sometimes even by a few dollars) you may get a “Love Letter” from the IRS asking you to explain or pay more taxes. However, If you don’t have any taxable brokerage accounts, then go ahead and file as soon as your tax statements are in as this only applies to taxable accounts.

Use the Organizer

If you utilize an accountant to do your taxes, I highly recommend that you fill out the organizer, as it should be a great memory jogger and help you remember tax related items that occurred during the year. Of course, if you don’t list it here, or give your tax person the relevant papers, they are not going to know about it, and you might end up missing some credits or deductions you were eligible for.

Energy Efficient Improvements or Electric Vehicles Purchases

There are several credits available for qualified energy efficient home improvements such as new windows, doors, skylights insulation, performing an energy audit, etc. Credits are also available for certain energy efficient central air conditioners, water heaters, furnaces, and heat pumps. If you did any of these types of improvements, make sure to get all your data together to determine how much credit you may be eligible for.

If you purchased a qualified electric vehicle (EV) or hybrid that meets the criteria to be eligible, you could be eligible for a tax credit up to $7,500. However, the rules are very particular about where the minerals and battery components are sourced from. Also note that starting January 1, 2024, EV tax credits must be initiated and approved at the time of sale, thus, buyers are advised to obtain a copy of the IRS’s confirmation that a “time-of-sale” report was submitted successfully by the dealer. Thus, in 2024, you have the option to take the EV tax credit at the time of sale and reduce your purchase price or just claim the credit when you file your 2024 tax return.

Qualified Charitable Donations (QCD)

If you are able to take advantage (over age 70 ½) of the ability to make qualified charitable donations (QCD) directly from your IRA, the 1099-R you receive for the year will not break out how much of your IRA distributions went to you and how much went to the charity, so you will need to have this documentation available so the tax preparer can identify on the tax return how much of this distribution will not be taxable on the return. Otherwise, you could lose the tax benefit of making this donation.

Back-Door Roth’s

If you make “Back-Door” Roth IRA contributions during the year, you will want to make sure a Form 8606 is filed with the return so that the tax basis of your IRA’s are properly tracked by the IRS. You also will want to make sure that the tax preparer is aware you did a Roth conversion for the year as this will also need to be noted in the tax return.

Don’t Sweat Looking for Itemized Deductions

Since the Trump tax cuts of 2017, almost all taxpayers now take the standard deduction, which means that you do not really have to spend a lot of time digging for deductions if you are not going to be close to getting over the standard deduction threshold amounts of $13,850 for singles, $27,700 for Married Filing Joint and $20,800 for Head of Household status. Also remember that there is an additional amount added to your standard deduction if you are over age 65 or blind of $1,850 for Single or Head of Household filers and $1,500 per person for Married Filing Jointly. Thus, you need quite a lot of deductions just to exceed what you can claim on the standard deduction. Also, things such as investment advisor fees have not been deductible since the 2017 tax cuts became law.

Capital Loss Carryforwards

Don’t forget to make sure that any capital loss carryforwards you have get correctly transferred from year to year on your tax return. You would hate to lose future deductions against capital gains by not having your loss carryforwards recorded.

If you do happen to itemize don’t forget:

Mileage of $0.14 per mile for driving to do volunteer work for a qualified charity.
Gambling losses – you can deduct to the extent of your gambling winnings. So, if you received a W-2 from a large win at the casino and you do itemize, you can offset this win with other gambling losses such as lottery tickets casino losses and online betting if amounts can be verified.
Deduction for Medical Expenses if they exceed 7.5% of your Adjusted Gross Income (AGI). Thus, if your AGI is $100,000, you need at least $7,500 of medical expenses before they even get over the threshold to take as an itemized deduction. But also remember that Medicare premiums and supplemental Medicare insurance will count towards this.
You can only deduct up to $10,000 total on State and Local Taxes (SALT), this includes property taxes and state income taxes. Those of us in Illinois see most of this number taken up just by property taxes. So, if you have $8,000 of property taxes and another $5,000 of state income taxes, you are only able to take a deduction of $10,000 if you itemize deductions.

Make Changes to Tax Withholding if Get a Large Refund or Owe a Lot

After your return is completed, if you have a large refund or owe a large amount, make sure you adjust tax withholdings or change your estimates as early as you can to get closer to where you want to be. It is also not a bad idea to have your accountant or Financial Advisor run a tax projection early in the year, so payroll or IRA withholding can be adjusted to get you closer and also to head off a nasty tax surprise when you file 2024 taxes next year.

Even though you may use a professional tax preparer, it is still a good idea to review your return or have your advisor review the return as our convoluted tax laws can make our tax returns look as complex as the equation for the theory of relativity. And if you are not careful, you could end up paying in more than you should or missing out on credits or deductions that you are entitled to. Sure, it is nice just handing off to someone to complete and forget about it, but it certainly is not a bad idea to take more of a proactive approach and make sure things are not falling through the cracks.

Happy Tax Season 2024!