Episode 9: Getting Ready For Tax Time

Steven Jarvis:     Hello everyone, and welcome to the next episode of The Retirement Tax Podcast. I one of your hosts, Steven Jarvis, CPA, and here with me of course, is the much more informed and wise Benjamin Brandt.

Benjamin Brandt:         Thank you. Thank you for that wonderful introduction. I can’t wait to share some retirement tax wisdom with our audience today.

Steven Jarvis:     Yeah. So here we are, as this releases, it’ll be the middle of January and we’re off and running into the 2022 year, but we’re still, of course, a little bit stuck in 2021 because taxes haven’t been filed yet. We haven’t really closed out the year and that’s what we want to talk about today, it’s about how do we make sure we get ready for the tax-filing season?

Benjamin Brandt:         Absolutely. So, the year has ended and now everything is with our banks and our custodians and potentially our employer. And we’re going to start getting some stuff in the mail. Let’s talk about what we might expect. What’s going to be on different forms. What do we need? What don’t we need? Let’s talk about it.

Steven Jarvis:     Yeah. So before we get into the actual forms, the first thing I always recommend to people is making sure that you have a dedicated place or a dedicated envelope somewhere that you’re putting all of your tax documents in, because what can have at times is these aren’t all going to come on the same day. They’re not all going to come from the same source. And if you start telling yourself, oh, I’ll remember this one is in this place. I promise that you’ll forget, because I know I would forget, it’s nothing personal. So make sure you start with here’s where I’m putting all my tax documents.

Benjamin Brandt:         And the bungalow can just be in a Manila envelope that says 2021 tax info and as it comes in the mailbox, you shove it in there. It could be a little higher-tech solution. You know, if you’re going to self-prepare where everything gets scanned and uploaded into a Google drive or something like that. But yeah, Steven’s right. You’re not going to remember that I set this on the corner of the dining room table and I set this in my office and I put this one already in the file cabinet. Get that one place where everything gets stashed.

Steven Jarvis:     Yeah. So then we got to talk about, okay, what is getting stashed? So this is going to depend a little bit on your current situation and where your income is coming from and what types of expenses you have, but typically, things that we’re going to be on the lookout for? For employed we’re looking for a W-2 that’s going to come from our employer, make sure especially if you change jobs during the year that you’re looking for that multiple W-2’s and anywhere that you got a paycheck from, if you’re not necessarily an employee, but you’re doing side work or you’ve got a hustle going on, you’re going to get a 1099 that’s for that income.

                           We’re going to talk more about 1099 as relates to different retirement accounts, but sometimes you’ll get those just for work you’re doing as well as a contractor. You want to make sure that you know what accounts you had during the year, and not just which accounts were still open at the end of the year because at tax time, we’re looking at what was the activity. And so you want to have an idea of where should I be getting these tax documents from? And Ben, I know you have a process in your office with your clients to help them with which documents should I be expecting specifically?

Benjamin Brandt:         Yeah, so we do what’s called a tax letter and it’s really just a summary of what we did last year. And then what form that might be reported on with a date as to when they might expect it. And we got there because of messing that up in the past, where clients would get three forms, not knowing that they’re actually going to get four, because custodians sometimes can take their sweet time on sending these out and they go and file all their income taxes.

                           One thing that I’m thinking of in particular is a client was in a hurry to file their income tax because they were filling out a FAFSA financial aid college form for one of their kids and so they were in a big hurry to file, and then that final 1099 or whatever it was, came through. So we wanted to prep clients for this in advance and say, actually you need to wait for these four items or whatever they would be. Here’s the timeline. Don’t go do your taxes until you have all of these. So I know the earlier bird gets the worm, but we don’t want to file our taxes and pay our accountants twice and go through that headache. So that’s what we do with the tax letter. Now, it started out as something really simple.

                           Here’s the forms you can expect. As we’ve done a couple of years and a couple of alterations of this, we’ve now added that you did this Roth conversion, you did this qualified charitable distribution, potentially you did this rollover, things that may or may not be reported correctly or things that if we did a Roth conversion on November 12th, you might not remember exactly what that was or the reason for that or what the withholding was when you’re in your accountant’s office on April 1st, because a lot of time can transpire the holidays, too much eggnog or whatever that is and we forget about it. So then the first part of January, we’re sending that out to all of our 80 clients and reminding them of all the stuff we did so that they can either process that themselves, or take that letter to their accountant, and say here this is the stuff that we did. So just based on errors or confusion in the past, we created this thing, not unique to me, many other advisors do it, but that’s been really helpful in our office.

Steven Jarvis:     Yeah. And for everyone listening, I mean, you can use this template, even though you probably don’t work with Ben. If you work with another financial advisor, go and ask for this, this is a perfectly reasonable request to say, hey, I want to make sure I collect everything to provide to my tax repair or when I do my taxes myself, can you let me know which accounts I should be expecting a 1099 from, and if there’s anything else I should know of? Or if you’re a DIY or the whole way around, just go back and take a look at what accounts do I have investments in and do I have balances in? And was there any significant action I took during the year that I need to be on the lookout for. The better we can set ourselves up for what to expect, the more successful and experience that we’re going to have as we go through the tax preparation process.

Benjamin Brandt:         Yeah, I agree. If you’re working with an advisor and you are in a hurry to file your income taxes, for some reason, a simple email that is just outlining like I have to fill out the FAFSA form or I’m trying to get a loan for a house and I need the completed income tax done. I want to get that done as soon as possible. When is the earliest you think I could file based on my accounts and the reporting that’s going to come off of those. So just keeping an open line of communication is another great way to potentially avoid mistakes.

Steven Jarvis:     Yeah. And there’s some great examples of reasons you might be in a hurry and some people just like to get it done and over with, but it’s just a good reminder that other than if you’re getting a refund, getting that money in your bank account sooner, we always talk about no patriotic awards for tipping the IRS, there are also no patriotic awards for getting your taxes filed sooner.

Benjamin Brandt:         Yeah. There’s no ribbon for the first return filing of the year.

Steven Jarvis:     No, there isn’t. And even if you’re really excited and you want to draft your return late January, mid-February, and then just hold onto it and wait and make sure you’ve got all the documents that there aren’t any changes to a 1099, sometimes a custodian will realize they made a mistake and send you a new one and then wait until it’s close to the deadline to actually file it. Your life’s going to be so much better by having to go back through and tweak that draft as opposed to finding out in June, oh no, this got messed up and now I have to amend a return, which either, I mean, if you do your taxes yourself, that I might now put it to a point where you don’t feel comfortable doing it, you might be paying a professional to go back and do it for you.

                           And the IRS is pretty back clogged when it comes to this stuff. I was talking to an advisor recently, who it took a full 18 months to get a client’s return amended, everything processed and the refund that they were owed actually back to the client. So I would say unless you’ve got a major life event like you’re talking about Ben, that you’re really pushing to get that loan application file or faster completed, you’re probably better off just being a little bit patient and saying, okay, do I really have everything before I hit send on this?

Benjamin Brandt:         And we’re not trying to tell you to be procrastinators, but especially in 2022, there’s legislation pending, as of recording the show has not passed yet. We don’t know if it’ll ever pass. I think it’s passed the house, not the Senate, the President hasn’t signed it, but the last thing I would want is for you to go and file taxes and legislation passes and then you want to change something. So this is really a measure twice cut once kind of a situation.

Steven Jarvis:     Yeah, definitely. Okay. Let’s talk about a couple of nuances, maybe some landmines to look out for specific to the IRS form and a 1099. There’s a lot of different versions of 1099. A lot of times we just generically say 1099, but really when you get them there’s 1099-R, 1099-INT. I mean, the list goes on and on. So let’s talk about some things to look out for to make sure again, this is going to be a successful experience. So the first thing that I always like to remind people of is that just because something is on a fancy and official-looking form, doesn’t automatically mean it’s correct. So when you get those forms, I mean, take a minute and make sure that it makes sense to you of what you are seeing. A good example of this is that at times when you have IRA rollovers, maybe you’ve stopped working and so you’ve rolled your 401k balance into a separate IRA account.

                           Because it’s in one account with a custodian, you roll it out, let’s say it’s $500,000 into another account. What can happen is that $500,000 gets reported as a distribution and it can get reported as a taxable distribution, which is incorrect. You shouldn’t have to pay tax on that, but if it doesn’t get reported correctly on that 1099 which we see happen, and we see people pay the tax on it and have to go back and amend their returns. So we want to take a look at that and say, okay, does this make sense? There’s a whole bunch of different boxes on that form. But the two that I always start with are the gross distribution and the taxable distribution. And so for a rollover, $0 should be taxable. We’re rolling the full amount into what is still a tax-qualified account. So we want to take a look at these and make sure they make sense. Don’t just take it for granted because it’s on this official-looking form that it’s automatically correct.

Benjamin Brandt:         Absolutely. Yeah. And does it pass the smell test? You did a $500,000 rollover, you only took 25,000 as income. If 500,000 is showing up in your total income at the end of the year 500,000 plus, that doesn’t pass the smell test. So we got to look at those and make sure everything sort of passes that smell test income wise. You should know what approximately what your income was, what activities you did throughout the year like a role over and like selling a property like something else. They taught us how to estimate math in high school and to get the general round number, we want to apply that same wisdom to our income tax. Does it look right?

Steven Jarvis:     Yeah. Yeah. So you got to figure that whatever custodian you’re using, they are processing millions of these each year. And so just statistically, there are going to be errors sometimes, not many, but it’s going to happen, so let’s take that extra look. There’s also unfortunately situations where there just isn’t a good system for reporting things correctly and qualified terrible distributions are a great example of this. The IRS really hasn’t provided a great way for custodians to report that and so often what happens is that QCD, the qualified charitable distribution, simply gets reported as a taxable distribution. And that has to be specifically marked on your tax return to make sure that it gets credited appropriately and that you get the intended tax benefit. So again, just because it comes in on a 1099, doesn’t necessarily mean it’s going to be indicated, and most likely it won’t be indicated that, hey, this was a QCD and we need to report it a little bit differently.

Benjamin Brandt:         Right. There’s some technology or some communication meeting with virtual clients so we’ll have clients that say, I’m doing this in TurboTax and the columns aren’t equal and TurboTax doesn’t like that. So how do I say I took $10,000 out of my IRA, but only $8,000 was taxable because I did a $2,000 QCD. Sometimes we have to just sort of force the issue or force the softer to do what we want because like Steven said, there’s not a great way to report it quite yet, which again is the benefit of the tax letter, and that you can take that to your calendar or you have some documentation that this is what I did and here’s how it’s showing up on my fidelity or my Charles Schwab statement and then you’ve got that documentation. If this ever comes up seven years from now then we’ve got to remember what we did way back in 2021. Now, we’ve got some documentation to remind ourselves and to prove that this is actually what we did.

Steven Jarvis:     Yeah. A great reminder to keep documentation with these things. That’s always a good step. Okay. Let’s move past the 1099’s and let’s talk about some other things we need to be thinking about as we get ready for tax time of year. I alluded to it a little bit, but you also want to be mindful of any big life events that have happened, making sure that we’re not just taking for granted that what was in the tax software last year is still true this year. And that’s going to apply whether you do your taxes yourself, or you have a tax professional. Most people are using some sort of electronic software, we’re not doing this by hand. And so a lot of that information is just going to pre-populate of your filing status, your address, number of kids, things like that. And so if there were life events during the year, we want to make sure that those are getting reflected because they’ll have a big impact on the outcome of our return.

Benjamin Brandt:         Absolutely.

Steven Jarvis:     Along with big life events, if there were out of the ordinary sources of income for us during the year like we sold a property that we had inherited and there’re things that we don’t typically have, we want to make sure that we’re accumulating that information as well, that we’re holding onto account statements or that we’re holding onto purchase or sale agreements, whatever it might be? But we have that documentation again, whether we’re doing our tax ourselves or working with someone else, some of those aren’t going to automatically with an IRS form, but we’ve got to be thinking about those kinds of things as we are getting into January and February into our tax time.

Benjamin Brandt:         Absolutely.

Steven Jarvis:     So another question I get quite often during the tax prep process from taxpayers is, okay, if I take the standard deduction so do I really need to keep track of some of these other things that might of contributed towards being able to itemize? Which at this point about 90% of the country takes the standard deduction so the question’s applicable to a lot of people and my general recommendation is that yes, we should still keep track of this even though ultimately for many of us end up with the standard deduction, there’s different planning opportunities that might apply in different years and honestly, we don’t know how life is going to change.

                           So some of the ones that might fluctuate from year to year, medical expenses’ comes to mind for sure, there’re some limitations on how much you can take, but if you’re not tracking any of your itemized deductions, and then you have a year with a lot of medical expenses now and maybe you forget about them and haven’t tracked them at all or now you’re scrambling to say, okay, how much did I pay in state and local tax? Or how much did I pay in mortgage interest, whatever it might be. So keeping that information in that same tax folder, even if it’s not going to benefit you this year, to me, it’s still a best practice. Let’s keep track of that stuff. Let’s make sure that we’re at least considering whether there’s a chance this year that might present a different opportunity.

Benjamin Brandt:         Yeah, I agree. And I think the closer that you are to that standard deduction, the more accurately you want to track that because life happens throughout the year. I think it’s important to quantify that at the end of the year and say, okay, I actually did have $6,300 in medical expenses, or I did pay $2,700 in mortgage interest and as I’m getting closer to that standard deduction, I can start to think about, okay, well, what if I double paid my charitable this year or next year?

                           Or what if I waited on some medical thing until next year and try to double up on that? Or what if I do three years worth of charity and give it all at once? The closer you are to that standard deduction, looking at that at the end of the year and quantifying that and saying, actually I’m kind of close in this area. What could I do maybe that’s outside of the box to get the jump over that standard deduction and then itemized? So quantifying those at the end of the year can be valuable just in what wires get connected in your brain, what wheels start to turn and say, actually, I think there’s something here, I need to investigate this further.

Steven Jarvis:     And as a reminder for 2021, Congress extended the opportunity for people taking the standard deduction to still get an additional deduction for charitable contributions. So for a married filing jointly couple for 2021, it’s up to $600 in cash charitable contributions that can still be deducted in addition to the standard deduction.

Benjamin Brandt:         It’s a great reminder.

Steven Jarvis:     That’s an important reminder for 2021 at least.

Benjamin Brandt:         Well, that’s dead beyond this year, right? It was 300. Now it’s 600. Now it’s nothing.

Steven Jarvis:     Yes. Based on the laws they currently have, and we’ll keep you posted on that, whether that changes again, but another great reason to keep track of these things because we don’t know how things will change.

Benjamin Brandt:         Excellent. Steven, should we move on to our listener questions?

Steven Jarvis:     Yeah, let’s do it.

Benjamin Brandt:         Excellent. So from our listener survey at retirement starts today, the question is how do I find a CPA who might be willing to do tax preparation, but will most importantly advise on tax retirement strategizing? It seems any providers I find for tax retirement planning are also financial advisors and wealth managers, which I don’t need. Does it make sense to have two providers or should I find a firm that integrates all of these services under one roof? Great question. Now, in my experience, most financial advisors that I know, myself included, will give tax advice based on your return, but don’t do tax prep.

                           Now, we’re changing that in our office for some select clients this year, but in my experience, most advisors don’t do the tax filing, the tax prep and the tax filing. That’s two separate services. Your CPA is doing the filing and giving you advice on your reductions, things like that, and making sure all the forms are in order while the CFP or the financial advisor is maybe giving you ideas on Roth conversions or funding donor-advised funds and things like that. So for most advisors that I talk to, those are two separate items, but what are your thoughts, Steven?

Steven Jarvis:     Yeah. I would agree that’s still kind of the norm. I’m seeing more and more accounting firms that are adding financial planning as a service. A lot of times though, it’s kind of two separate pieces under the same umbrella and it’s a little hit or miss how collaboratively they work and how well that intermixes. So I would say it’s much more common that if you need help in both areas that you are going to have two service providers and hopefully they will work effectively together. A part of the way I read this question, it sounds like this is very much a DIY type person of they’re looking for tax help, but not necessarily financial planning help. So I think that’s something that you can definitely find. It is difficult to find tax repairs who will have that forward-looking at that planning mindset.

                           And so I would make sure that you’re asking some pretty specific questions in your initial screening of is this somebody I want to work with? And you can’t just say, hey, do you do tax planning? That’s a very generic question. And honestly, a lot of times they’re going to say, well, of course, we do, because in their minds, they’re thinking, yes, we do the planning. We’re going to plan on what your estimated payment is next year, therefore, we did tax planning. Some of the questions that I would probably recommend you ask is once you filed my return, what else are we going to work on together during the year? You know, what are things outside of March and April that you proactively do for your other clients? So I would ask those kinds of questions to try to make sure that their setting aside tax preparation for a second and you’re finding out, are there other things that you’re doing for me as part of this service?

Benjamin Brandt:         Mm-hmm (affirmative). Yeah. So if you want to keep your DIY investment status, your do yourself investment status, you’re probably interviewing CPAs that aren’t part of a wealth management firm or have a wealth management arm, but then also asking some of those open-ended questions of is our relationship done on April 15th until next April 15th, or are there things other than estimated taxes that we’re going to periodically talk about? It’s a great question.

Steven Jarvis:     Yeah. And if you’ve got specific things that you’re looking at, hey, I would love for somebody to review the amount I want to do as a Roth conversion, or I’m thinking about tax-efficient ways to give to charity. Come with those specific examples and ask during the screening process. I will tell you that that is not the typical mindset for a tax preparer. And so it probably is going to take some work on your part if it’s not going to be the first person you interview. So know that going in, but that doesn’t mean it’s not worth your effort.

Benjamin Brandt:         You know, you mentioned the listener, I’m talking to the listener here, you’re doing your investments, but you’re looking for a CPA. Maybe we could change a little bit. What if we look at a financial advisor that doesn’t manage investments, they are like an hourly or retainer-based advisor, project-based, not assets or management-based or project-based, then you could work with them under that agreement. Then they could take those recommendations and you could take that potentially to an account, or if you do it yourself, investors self file those as well. So maybe a financial advisor is a potential place that you could work with.

                           Again, they don’t need to manage all of your investments, if this is how their business is set up. There are many like those, or there are many different places where you can find hourly based advisors. So hourly based advisors that focus on taxes, then you could continue to do it yourself with their one-time consultation. So that could potentially be a resource to check out.

Steven Jarvis:     Yeah. And I think that’s really a growing emphasis within the planning industry of advisors who are really focused on that hourly project-based.

Benjamin Brandt:         Yep. Excellent. Well, I think that’s about all the time we have for today, Steven. A fascinating topic as always, but until next time don’t let the taxmen hit you where the good Lord split you.