Things to Learn From a Tax Return

 

With less than five months remaining in 2024, now is the time to begin serious tax planning for your 2024 income tax return. I recently attended a webinar with some tips for financial advisors about reviewing clients’ tax returns. The advice also applies to taxpayers themselves.

 

Below are my take-aways from this presentation:

 

Review a Draft Return- It is wise to review a draft of your annual tax return before it is submitted. My tax preparer provides me with a draft paper copy to take home and review before my taxes are submitted to the IRS. Not only does this provide an opportunity to catch possible errors and omissions, but it also provides valuable insights about household finances and a source of questions about tax calculations and future tax planning for my second visit.

 

Beware QCD Reporting Errors- The problem is that 1099-R forms for retirement plan withdrawals only show the gross distribution amount and not the amount that taxpayers age 70.5+ elect to donate to a qualified charity via a qualified charitable distribution (QCD). Tax rules state that the letters “QCD” should be placed on the 1040 form line (4b) for “IRA Distributions” to explain the difference between the gross amount and taxable amount, but some tax preparers forget to do this and then taxpayers have to file an amended return .

 

Stay Away From SALY- SALY is an acronym for “Same as Last Year.” When it comes to income taxes, rarely are household finances exactly the same from one year to the next. Tax laws change and people’s lives change (birth of a child, marriage, retirement, widowhood, the start of required minimum distributions [RMDs]), which necessitates future tax projections.

 

Know Your Effective Tax Rate- Effective tax rates are useful for calculating tax withholding and understanding the totality of your income tax payments. Simply look at your 2023 tax return and divide your total tax owed by taxable income. For example, if you pay $16,000 of tax on a $100,000 taxable income, the effective tax rate is 16%, even though single and married filing jointly tax filers would be in the 22% marginal tax bracket (the tax rate on your last dollar of income) in 2024.

 

Watch Out for State Tax Non-Conformities- I now live in a state (Florida) where there is no income tax but, for Money Talk readers who do, it is important to know where your state tax rules diverge from federal tax rules. Otherwise, you could overlook valuable tax deductions (e.g., medical expenses and write-offs for college savings plan contributions).

 

Accelerate Carefully- Consider accelerating income in early retirement years (before RMDs), during years with lower-than-normal income, and in the last year of filing a joint tax return (before single taxpayer status applies). Consider accelerating deductions (e.g., bunching itemized deductions in one year) when you realize large capital gains, have a high-earning year, or are near “tripwires” for tax on Social Security, IRMAA Medicare premiums, and the net investment income tax. IRMAA is not a tax, per se, but it is a drag on your bottom line.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.