91 days left of 2024; what’s on your tax to-do list?

Read The Transcript Below:

Steven (00:07):

Hello everyone, and welcome to the next episode of the Retirement Tax Podcast, AKA the least boring tax podcast. I am one of your co-host, Steven Jarvis, CPA, and of course with me is the incredible,I’m happy to be here, as always, and I’m my favorite, Benjamin Brandt.

Ben (00:21):

Happy to be here, as always excited to talk about what we’re talking about.

Steven (00:24):

Yeah, Ben, as this episode airs, it’ll be October 1st. We’ll have 91 days left until the end of the year, and it kind of makes a difference how you phrase that, how far away the end of the year feels like because 91 days, oh geez, that’s going to come in no time. But we have a whole quarter of the year left really as the CPA in the room, w, in our office, we’re thinking about year-, in a perfect world, we would do all of our year-, we’re doing our year-hat I already started thinking about is, man, it’s not that far from tax filing season.

Ben (00:47):

So in our office, we’re thinking about year end tax planning. And so in a perfect world, we would do all of our year end tax planning on December 29th or December 30th because we want to be as close to the end of the year as possible, but with something along the lines of 75 or 80 households, we really can’t do that. So we’re doing our year end planning as close to the end of the calendar as we can. So for us, it’s usually between Halloween and Thanksgiving because that gives us time to dummy up a year-end income report for all of our clients, and then calculate what we think the total withholding should be, and then also look at if there’s any friendly places in either our marginal or what have you, Irma brackets for taxes and if we need to do Roth conversions or harvest gains or harvest losses or pre-fund, future years, charitable contributions, things like that. So that takes us about five or six weeks to meet with all of our clients and kind of measure that out. And then it gives us the month of December to trade rebalance, journal pay, the withholding estimates, things like that. So kind of a long list of things that we do. But if you’re a do yourself investor, you could probably start a little bit later than us since we’re doing it for 80 other people, but that’s what we’re thinking about when we’re entering the month of October and then sprinkle in and if there’s been any legislative changes or if there’s been any changes to the plan. But every single client gets a year-end tax review. So if you’re doing this for yourself like a DIY investor, this would be your time to be looking at those things for yourself. And the reason that the end of the year is important, why aren’t we doing it in June? Because the closer we get to the end of the year, the more accurate our numbers are. So we know our IRA distributions, we know social security, we know pension. If we’ve done any buying or selling in the account or if capital gains have been distributed, we’re going to have either the exact information or the closest that we can to have exact information. So our numbers will just be that much more known and then our projections can just be that much more accurate.

Steven (02:45):

Yeah, absolutely. I think I work with a little bit wider range of clients than you do, and so I’d also include in there, a lot of times bonuses have happened, equity compensation has vested, we know what our year-to-date earnings are on our most recent pay stub. And so yeah, depending on the specific situation of the client that we’re talking to, I like dealing with as much real data as possible. So I’m totally with you that as we lead into the end of the year, this is a great time to be looking at what our tax situation is for the year. We certainly want to do it before the calendar year turns over because our options become much more limited once 2025 hits us. And so we want to be looking at these things of is there action I need to take? And then it’s a great reminder as much as it sounds nice to wait until the last minute. Sometimes, we all have that little part of us that would prefer to procrastinate and do the more fun things sooner. But we’ve got to remember that some of these things do take work. It takes time to execute. It takes time to process paperwork, whether we’re doing it ourselves or working through an advisor. And so we want to make sure we’re allowing ourselves time for that. And then, I mean, selfishly, I want to be able to focus on my family at the end of the year, so I’d rather not be messing with Roth conversions or withholding adjustments or estimated payments. I’d rather not be messing with any of that kind of stuff the second half of December. So we start pushing that up a little bit further a little bit. In fact, as we’re recording this, I was just sitting out quite a few reminders to clients that I work with on, Hey, help get us that year to date information on earnings on pensions, things like that so that we can take a look and say, Hey, do we need to make any adjustments here? Because the earlier we can do this, keeping that balance. Of course, we don’t want to do it in January, necessarily even June, but looking for these things of are we on track for the end of the calendar year before we get into the next tax filing season?

Ben (04:25):

And the more times you do this, the more reps that you have either doing it yourself or with your advisor, just the better you’ll get at it. So then we can do advanced things like if the market does misbehave mid-year, we can look back and say, okay, we’ve converted $20,000 a year for the past three years. Can we do that conversion now? Can we do part of that conversion now? And so the more times you do this, just the better we get it at forecast its information. So the further you get from retirement to the more numbers when you’re still working, there’s bonuses, there’s all kinds of things that you may or may not know in totality, but when you’re retired, you’ve got a lot much more control over those numbers. So it becomes easier, I think the longer you retired.

Steven (05:04):

Absolutely. And for our listeners who are still building into retirement, if we’re still in those phases where we’re contributing to different tax qualified accounts, I also can find it to be very helpful to be thinking about these things before the end of the year so that we give ourselves a little bit more time to finish funding different types of accounts. Again, if that’s still something that’s relevant to us, because for things like IRAs or HSAs, we have technically through the tax filing deadline in some of these cases to fund these accounts. But if we haven’t been doing anything about it throughout the year, or if we have a large margin to make up, if we look at it now, we might have several months to fund those accounts as opposed to if we forget about it until March or April, we might have to come up with that money all at once. And so we want to be looking at those things of, okay, what goes into my tax plan for the year, whether that’s we’re retired or we’re looking at distributions, Ben, we’ve talked about this on the podcast before, especially as we look ahead, if we know that there are life events coming up where we might have a year that’s a higher or lower relative tax year, we might want to take an extra distribution before the end of the year so that it’s not in our 2025 tax year, or we might want to wait and hold off on a distribution until next year. And so we’ve got to make sure we’ve got those intentional times to sit down if we’re DIYers or sit down with ourselves and say, Hey, what does this look like? Or if we do work with a professional that we’re taking the time to sit down with them and say, okay, before 2024 is up and we’ve missed our chance to do things this year, is this a year we want to accelerate?

(06:30):

Is this a year we want to defer? We also have to kind of step back and ask that question of, well, what do I expect my income to be in the future? What do I expect tax rates to be in the future? And as this episode releases, we’re coming up pretty close on another election, in the next episode, we always want you to come back and learn more. We’ll talk a little bit more about how we should think about the tax code and the fact that it’s written in pencil and that it can change and what an election year might mean for that. So come back next time so that Ben and I can pontificate and theorize about what may or may not happen.

Ben (07:02):

And Steven will tell you who to vote for.

Steven (07:05):

Yeah, we’ll just take a completely different direction with the podcast entirely. Yeah.

Ben (07:09):

Yeah. And I think it’s good to…you mentioned HSA and IRA, things we can reach back a year, give yourself some time. We do have time with some of those things where we can reach back into the previous calendar year up until April 15th or whatever it was, reaching backwards for some of these things. Give yourself kind of an artificial deadline like December 1st to have some of these decisions made, because I’d hate to have you in a position where you’re doing something December 23rd and then the Christmas holiday is upon us and something gets lost or doesn’t get turned in properly, or there’s no time to fix it. So for a lot of these things that we’re talking about, the year end is it locks the year in place, and we can’t go back and change that. So give yourself an artificial deadline of December 1st to get some of these things done unless there’s something hyper-specific we’re waiting for information-wise or what have you. But some of these things are with technology, they are extremely simple and they get done almost perfectly almost all the time. But every once in a while, and especially when we’re talking about Roth conversions, bigger pieces of money moving bigger tax consequence. I was just reading something where there was a lawsuit from a, maybe we can cover this story, I’ll find it, but there was a person was suing their financial advisor because they had talked about Roth conversions and had done them every year and then for whatever reason, didn’t meet that year and didn’t do the Roth conversion. And the client sued the advisor for a significant amount of money because she recognized the impact that these were going either something either forgotten or miscommunicated. But yeah, these are really important things that we can’t, once the year’s locked down, we can’t go back. So give yourself that artificial deadline of December 1st or December 15th and get those things done just in case, because some of these things we can’t go back and fix.

Steven (08:48):

Yeah, it’s a great reminder, Ben. There are things that once the calendar turns over, our opportunity has passed. But of course, we’re really big fans of multi-year tax planning. We like to look at how do we minimize taxes over our lifetime? And so that’s a balance of both. How do we get through this year and what makes sense over time. On the topic of getting through this year, one of the questions that I’ll get from taxpayers, especially DIYers, is how do I know how much I need to have paid in during the year? Because tax math gets really complicated. There’s nowhere on your tax return that just conveniently says income times tax rate, and here’s my tax bill. Of course, line 24 is one of my favorites to point people towards, which is the total amount of your hard-eof share what that looks like. At the end of the year, when we do our year–arned money that the IRS kept for the year. But that still doesn’t give us the clear math on how this was calculated. So this is one area where the IRS at least somewhat recognizes that they haven’t made this easy for us. And so we have what are called safe harbor provisions when it comes to how much tax we need to pay in during the year. So usually to err on the side of caution, if we look at what our tax rate, what our marginal tax rate was last year, that’s the highest rate we paid for a lot of the clients that Ben that you and I worked with, that tends to be in the 22 to 24% range depending on the year to take a really simplistic approach. We can say, okay, great. If I was in the 24% bracket last year, if I’m going to do a Roth conversion, if I’m going to have an extra distribution, I’m going to withhold 24% in federal taxes. But the way the safe harbor provisions work is that there’s basically three potential ways to calculate this. The IRS says that, Hey, regardless of how much you owe in total, if you get two 90% of the current year tax liability, we won’t charge you penalties or interest because that’s really what we’re trying to get to by paying our taxes throughout the year, is that we won’t have extra penalties or interest. So we get to 90% of the current year or owe less than a thousand dollars, which can get tricky depending on your level of income or especially in years where our income is going up. The IRS says, Hey, if you get to a hundred percent of what was last year’s tax liability, we won’t have any penalties or interest with the one exception that if you make over $150,000 of income, that goes to 110% instead of a hundred percent. So those are the different ways that we can think about how much we need to get paid in. But we also need to think about mechanically, how are we either going to have the withholdings done or make the estimated payments to get to that 90 a hundred or 110% of the tax bill? So Ben, how do you work on this with clients?

Ben (11:19):

So this is something that’s changed for us in the past, probably year or two in that money markets are actually paying some interest right now. They’re actually paying some return when money markets weren’t paying much, there wasn’t a lot of juice worth the squeeze, but now that they are paying it, it’s kind of changed how we’ve looked at some of our tax calculations. So I’ll sort share what that looks like At the end of the year when we do our year end tax meeting, we go into our tax software for any advisors listing. We use holistic plan and we bring in all their income sources and tells us what their taxes owed are going to be, and then we look at all their withholding from social security pension, IRA withdrawals, what have you, and then we see if there’s a difference. So if there’s a difference, let’s say they owe 10,000, what we’ll do is we’ll do a special distribution from their IRA. We’ll withhold as much as we can. We’ll withhold all $10,000. Now, sometimes they let us do a 98 or 99% withholding, but just to make the math easy, a hundred percent withholding. Now, the reason that we do this is because in this example, that $10,000 that got to sit in their money market or in their investments, but let’s just say in their money market for an entire year earning interest, we had actually had a client that bought a house last year, and she took the entire amount out of her IRA because she didn’t want to pay any interest, she didn’t want to get a mortgage, she wanted to pay cash. And so we did the math. We got to keep, I think it was almost $200,000 back and then send that in as it withholding. So it’s looked as equally distributed throughout the year. And so her $200,000 got to sit in a money market earning a good amount of interest. So this is worth several thousand dollars to her to do this one extra step and do it that way. So we haven’t gone to the point where none of our clients are doing any withholding. Everybody has a different tolerance to taking extra steps. But if you haven’t a higher income and you’re paying 10,000, 25,000, 50,000 a year in taxes, having this one extra step of sending it all in at the year end, it has to be through withholding, can allow the money to sit in your account and earning several thousand dollars. So it again, didn’t make a ton of sense when money markets weren’t paying any interest, but now that they’re paying four or 5%, we can actually make some money by taking this extra step. So if you are a do it yourself investor or you work with an advisor, take that idea to them, and I think you can make some relatively risk-free money.

Steven (13:36):

Yeah, Ben, this great point that with so many tax planning strategies, we talk about the really the key pieces that you have an intentional strategy for how it’s going to get addressed. I mean, it’s similar to the conversation around do we make a payment a tax time or get a refund? Okay, well, what outcome are we going to be happy with? What is our plan? How are we going to get this executed? And yeah, absolutely. I’m seeing more advisors. I’m seeing more taxpayers raise their hand and say, Hey, wait, what if we did hold off a little bit further and still make sure we didn’t have penalties, so make sure we didn’t have interest, but what would this look like if we thought about it a little bit differently? And withholdings is one way to go about that. Ben, the other thing I wanted to cover as we talk about getting ready for the end of the year, I know we have a lot of DIYers from a tax prep standpoint that listen to our podcast as well. And so I wanted to cover a couple of things that I typically see on DIY tax returns that immediately tell me, Hey, this is a DIYer that might save some of our listeners some time this next year. So this may seem silly, but I’ll tell you why it’s important. One of the first things that tells me that it’s a DIYer is if there are pennies on the tax return.

Ben (14:37):

Pennies in the tax return. Okay, I’m picturing scotch tape to the actual return and then it snail mailed in. Is that what we’re talking about? A payment when people pay their parking tickets with pennies as a form of protest? Is that what this is?

Steven (14:48):

I do love the visualization there. No, what I haven’t seen that personally. What I’m talking about is, for example, we’ve talking about Roth conversions. Well, maybe that’s a bad example because why would you ever have pennies in your Roth conversion? Let’s take interest income. That’s one where if you get your 1099 from the bank, from your savings account, from your money markets, you were just talking about, and it says you had $5,328 and 62 cents of interest. Now, totally understandable. A lot of people would say, okay, well, I need to type that exact dollar amount into the tax software so that we report every penny to the IRS. This is one area where the IRS has said, do you know what? You don’t actually need to report pennies. You can round. And so I’m a huge advocate of that because it gives us one less place to make a typo. I mean, some of, I listen to this thinking it’s pennies, who cares? Why is Steven talking about this? Where this becomes an issue, and I’ve seen this happen, is where people inadvertently get the decimal in the wrong place. They add extra zeros at the end. And so instead of a 62 cent problem, we now have a $6,200 problem. I’ve literally seen that where zeros get added in the wrong place. And so personally, I like taking out anywhere I can for transcription errors, for data entry errors. So for most people, it probably is the little thing, but for our DIYers, that’s one less thing you have to worry about typing. That’s one less error, potential error we have to run across.

Ben (16:03):

That’s interesting. So that could be a surefire way to make sure that that number has been double check. If you see anything to the right of the decimal, that’s not a zero. That number hasn’t been double checked, if you’re manually changing them all to zeros, then that number’s been looked at at least twice.

Steven (16:19):

And a lot of tax prep softwares anymore will automatically round it for you. But that’s one that for DIY software isn’t as common. And so that’s an immediate indication for me that, oh, I’m dealing with somebody who has DIY, their tax return, which can be fine, but that’s one thing to keep a lookout for. One that will potentially save you a lot more time is when it comes to reporting capital gains from investment accounts. And this is typically just a misunderstanding from taxpayers of what is getting reported to the IRS. Because what happens is when you get a 1099 or a W2 or really most tax forms, a copy also goes to the IRS, which might beg the question, why do I need to report any of this on a tax return? And that’s a discussion for a different day, but we’ve got to deal with the rules that we have. So you do still have to report it on your tax return, but one where we can save a little bit of time is specifically for stock security purchases and sales that are reported on a 1099 for the most part. And the 1099 is going to tell you this. Those transactions are also reported to the IRS and we can report them in bulk instead of individually. And so I reviewed tax returns for taxpayers that now work with us who used to do on their own, where they had dozens of pages where they’re going through and individually entering every stock purchase and sale. And in general, if you are doing your stock purchases and sales, your mutual funds, your ETFs, whatever it is, through a large custodian, most of those are getting reported to the IRS as well. And it’ll tell you on the 10 99, Hey, this has also been reported to the IRS, so you do not need to individually report these. You’re going to report ’em in total for short term and for long term, and you’re going to move on. And now tax prep just started taking a lot less time. So that’s what I would definitely be on the lookout for.

Ben (18:01):

You’re grouping them together, is that what you’re saying? Yep.

Steven (18:03):

So yep. Buy custodian. So if I get a report from Fidelity that’s 37 pages long because it individually lists every time I bought or sold a security, there’s going to be a summary in there where it says, here’s your total short-term and here’s your total long-term. And it’s going to tell you, here’s the short-term transactions that were already reported to the IRS. So now I don’t have to type in that 37 pages. I get to type in the summary and I get to move on with my life.

Ben (18:26):

Are you netting out? So for the example, let’s say you’ve got money at Fidelity and Charles Schwab and Vanguard. Are you netting out short-term gains and losses and long-term at fidelity, or is it like four different numbers, short-term gains and loss, long-term gains and loss, or is just one number?

Steven (18:41):

So technically what you’re reporting to the IRS is the net of those proceeds or those gains or losses that were short-term and that were long-term, if they were all reported to the IRS. To your point before of making sure we had everything entered, I’m going to take at least the steps just to make sure that when I review it, I got everything. I know I got everything in there. I’m going to put a line for, here’s my Schwab short and long-term. Here’s my fidelity short and long-term. Just so I know I got them all in there, but I’m not going to type in those 37 pages.

Ben (19:08):

Got it. Yeah. So you’re simplifying, but there’s a limit to how far we can simplify. So if you have three custodians, yeah, you could look at a hundred different transactions. Every dividend that’s invested every month that you take out I a withdrawals, whatever it is, consolidating that down to three custodians and then probably two numbers for each custodian.

Steven (19:26):

Yep. Yeah. This is going to save a ton of time. And again, it’s going to reduce the risk of data entry, error of transposition error of these different things. And just to be real clear that this isn’t a shortcut, this isn’t a cheat sheet, this isn’t hoping, the IRS doesn’t notice, all of those transactions have already been reported to the IRS. That’s why we get to summarize it. So we’re really just saving ourselves a lot of time.

Ben (19:47):

I love it. Saving time.

Steven (19:49):

Ben. Always love having these conversations. And then we of course want to make sure that our listeners get through this in the time they expect on their commute as they’re mowing their lawn, smoking a cigar. Not that we know anyone who would do that. So any parting words before we come back next time and talk about how to think about taxes and elections?

Ben (20:06):

No, I’m excited to ignore the pennies from here forward.

Steven (20:08):

Awesome. Well, Ben, as always, it’s a pleasure doing these with you and for everyone listening. Until next time, remember to not let the tax man hit you or the good Lord split you. Hi, everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.