If you’ve started to receive 2018 tax info from your financial institutions and can already feel a sense of dread building, let me try to put a more positive spin on this process. At Keen Wealth, we like to remind clients that, to some extent, taxes are a problem of prosperity. Sticking with disciplined savings and investment strategies, even during volatility, could help generate wealth and security for your family in the long run. Taxes are just part of the price tag that comes with achieving that dream retirement scenario.
However, there are mistakes that you could make when you’re filing taxes that can add up to a bigger bill than necessary, especially if you miss out on a particular strategy or deduction.
On today’s show, we discuss how to avoid four common tax preparation mistakes, possible ramifications of the new tax laws, and why meeting with a fiduciary advisor shouldn’t feel like spending time in a jail cell.
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Mistake 1: Failing to take your required minimum distributions (RMD).
When you reach age 70 ½, the IRS requires you to start taking distributions from your retirement accounts. If you fail to do so, you’ll face a stiff penalty from the IRS, that amounts to 50% of what your RMD should have been. Younger folks who inherit a retirement account also have to figure out the best way to take distributions and in most cases would prefer to stretch the withdrawals over their lifetime by taking the required minimum distributions. If the first required minimum distribution is missed, then the account may have to be fully withdrawn and taxed within five years after the original account holder has passed to avoid penalty.
Keen Wealth clients don’t have to worry too much about missing an RMD because making sure you take your RMDs every year is part of our checklist-driven process. However, if you’re handling things on your own and you’ve missed an RMD, the IRS is usually lenient about letting you catch up. You’ll have to file IRS form 5329, write a letter explaining that you missed your RMD, why you missed it, and then take the missed distribution ASAP.
The second or third time you miss your RMD? I wouldn’t expect the IRS to be quite as forgiving.
Mistake 2: Not making a qualified charitable distribution (QCD).
One significant factor to consider regarding the RMD requirement is that each calendar year, the IRS allows you to donate up to $100,000 of your RMD to a qualified 501(c)(3) charity. The advantage of doing this is that the portion of your RMD you donate won’t count as taxable income. You get a break on your taxes, and your charity of choice gets to benefit from your generosity.
Now if you’re still itemizing, you should be aware that you can’t additionally deduct your QCD on your schedule A as it wasn’t considered taxable income. You also have to make sure you tell your tax preparer or CPA that you made a QCD, because not all custodians will clearly note it on your 1099-R. But, if you’re taking the standard deduction and charitable giving is part of your financial plan, this is almost always a good idea.
Mistake 3: Not supplying your cost basis for investments.
If you have taxable brokerage accounts, your 1099 is going to include information regarding interest and dividends, as well as any applicable gains and losses. It’s important to note, that if you sold a security in the past year and don’t have cost basis information included, that sale is going to be reported as a gain even if you lost money on the original investment.
This isn’t as big a problem as it used to be, because in 2011 the government changed tax laws to require all custodians to include cost basis on 1099s. We have also taken steps to ensure this information is accurate for our all our clients. However, we do see folks inherit legacy stocks going back decades with no reported cost basis. In that case, you should work with your advisor to estimate a cost basis that satisfies the IRS.
Mistake 4: Filing too early.
If you’re a go-getter or you just want to get taxes out of the way, you can start filing as early as January 28th. But, once you’ve received all of your relevant financial statements, we recommend that you put everything in a file and wait until March before firing up Turbo Tax or meeting with your tax preparer. If you have trusts or brokerage accounts, there’s a chance you might receive an amended 1099. If you don’t have those types of accounts, and are living on Social Security and IRA distributions, we typically advise folks to go ahead and file as early as they like. Although, there’s always a chance that if you rush the process, you’re going to overlook something and send out incomplete information.
Of course, letting us help you coordinate your tax picture with a reputable CPA is one way to help you make sure mistakes don’t happen. While 2018 might be over, there’s still plenty of time to work with my team of fiduciary advisors at Keen Wealth to make sure you’re using every facet of the new tax laws to your advantage.
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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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