This time last year, the big story in finance was gearing up for our first go around with the new tax laws that were passed at the end of 2017. Hopefully as we head into April, you’re a little more comfortable with the relevant changes to things like your deductions, tax rates, and how you handle charitable giving.
My bigger concern is that the coronavirus outbreak and market volatility are dominating financial discourse so much that Tax Day is going to sneak up on some folks, especially those who prepare their own taxes.
To reiterate what we discussed on our last podcast: while we’re optimistic about the strength of the economy, we’re keeping a close eye on what is still a very fluid situation. But this is a perfect example of how good financial planning distinguishes between things we can’t control and things we can. Fretting about every market blip or cable news headline isn’t going to do you or your money much good. And if you are a Keen Wealth client and there is a move you should think about making, you’re going to hear about it straight from us.
On the other hand, effective tax preparation is something you can control and something you should be thinking about right now. Once you’ve finished gathering all your relevant documents from your financial institutions, take a look at these five tips that could save you some money and some headaches in the coming weeks.
1. Calculate capital gains the right way.
If you sold any securities in a taxable account during the past year, the IRS is going to consider that sale as income subject to capital gains tax. But what if you lost money on that sale?
The IRS won’t know unless you provide the original purchase price of the investment, which we call the cost basis. Otherwise you could end up paying higher taxes on those investments and dividends than you should be.
By law, your custodians have to include cost basis on your 1099. It’s still worth double-checking that your cost basis is being reported correctly, as this used to be a problem for some folks before changes to tax laws in 2011. But if you recently inherited older stocks purchased many years ago, it’s important that you and your fiduciary advisor get together to figure out an appropriate cost basis estimate.
2. Report your Qualified Charitable Distributions.
If you’re charitably inclined, you and your fiduciary advisor should have already discussed how the SECURE Act is going to affect your giving plan.
QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met.
In addition to the benefits of giving to charity, a QCD excludes the amount donated from taxable income, which is unlike regular withdrawals from an IRA. Keeping your taxable income lower may reduce the impact to certain tax credits and deductions, including Social Security and Medicare.
Also, QCDs don't require that you itemize, which due to the recent tax law changes, means you may decide to take advantage of the higher standard deduction, but still use a QCD for charitable giving.
Even more importantly, make sure you tell your CPA you made QCD’s, or if you are preparing your taxes yourself, make sure to include the various contributions (which reduces your adjusted gross income) in your tax return.
3. Send your most current 1099.
If you’re a real go-getter, you might have sent in your complete tax documentation weeks ago.
So what happens if you open your mailbox tomorrow and find an amended 1099 from your brokerage firm or trust?
That’s why, generally, we don’t recommend folks file their taxes until the middle of March. There’s always a chance that one of your custodians finds an update that needs to be corrected while they’re closing their books on the year. And that means more paperwork for you or your CPA: specifically form 1096, which will amend your original 1099 with the correct information.
4. Watch out for tax scams.
Any time there’s a large amount of sensitive data moving from point A to point B, there will be hackers and scammers trying to steal it. At tax time, these crooks try to play off the heightened anxiety that many folks feel about what the IRS might do if you don’t file on time or make a mistake with your paperwork.
The IRS has a really useful list of Tax Scams and Consumer Alerts you can review, but here are a couple to look out for as we head towards Tax Day:
- Phone calls claiming that your Social Security number has been “suspended.”
- Phone calls or emails from fishy “charitable organizations” asking for money to help the Nashville tornado victims or aid with other disasters.
- Phone calls or emails from “the IRS” asking for sensitive information or demanding past-due payments.
- “Ghost” tax preparers who don’t work for a reputable firm and who promise a huge tax refund while charging large up-front fees.
A little common sense goes a long way when it comes to avoiding these scams. Anyone calling you out of the blue asking for your Social Security or credit card number is probably a fraudster. Don’t click on suspicious email or social media links. Only donate money to reputable charity organizations you know and trust. Only work with a CPA. And if you’re worried the IRS might really be trying to contact you, hang up the phone, delete the email, and contact the IRS yourself.
5. Have a productive plan for your tax refund.
I know it can be fun to get a check from the government in the spring. But a tax refund is really just the government’s way of balancing excess taxes you paid during the course of last year. It’s almost like you loaned the government money and now they’re paying it back -- without any interest.
In 2019, the average US tax refund was around $2800, which is nothing to sneeze at. If you want to treat that money as a bit of a windfall and splurge on a new TV, I’m not stopping you. But again, your refund isn’t free money. It’s money you earned. Imagine you’d had that additional $200 or so when you were budgeting every month. What would you have done with it then? Paid down debt? Ramped up your IRA catch-up contributions? Added it to your investment account? Put it into a savings account so you had a little extra cash to … help pay your taxes next year?
Remember our number one mantra here at Keen Wealth: control the controllable. No matter what else is happening in the world, Tax Day will still be here in about a month. Our meeting calendars between now and then are filling up fast, so if you have questions you need answered call us up today.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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