Episode 36

It’s March 1st, do you know where your tax return is?

March 3, 2023

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Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.

The least boring tax podcast hosts are back to talk about where we find ourselves in the annual tax filing season. Steven shares a recent example of a “love letter” he is helping a client with from the IRS and shares best practices for taxpayers who end up getting their own letter from the IRS. As always Ben and Steven dive into a listener question and this time it’s all about required minimum distributions and what taxpayers should be doing with the potential delay in RMDs starting that came out of SECURE Act 2.0


What You’ll Learn In Today’s Episode:

  • Important things to remember when it comes to filing your incomes.
  • How to respond if you get an IRS “love letter”.
  • Steven’s thoughts on what might prompt a letter from the IRS.
Ideas Worth Sharing:

”If you file an extension you are still required to pay any taxes that are due, and if you don’t you will incur interest and penalties” – Steven Jarvis

”Don’t always default to the Roth conversion. Maybe you should just spend the money on yourself.” – Benjamin Brandt

“Employers can now make their contributions as Roth dollars.” – Steven Jarvis

Resources In Today’s Episode:
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Read The Transcript Below:

Welcome back to the Least Boring Tax Podcast, also known as the Retirement Tax Podcast. I’m your humble co-host, as always, Benjamin Brandt joining me as always, Steven Jarvis, welcome to the podcast.

Steven (00:21):

Well, thanks for having me, Ben. If we’re gonna keep making the claim that this is the least boring tax podcast, I mean, we’re gonna start having to make a list of the other tax podcasts and rank their boredom levels.

Ben (00:30):

Well, just by default, they would be more boring since we’re the least boring

Steven (00:34):

Perfect. I love it.

Ben (00:36):

Well, Stephen, today as this publishes it is March 1st. We are right in the middle of tax season. What are some of the things we should be thinking about?

Steven (00:45):

Yeah, that’s a great question. So we might have some listeners who are super proactive and have already filed their taxes. Congratulations. I’m sure it feels nice to be done. We wanna make sure, sure. That

Ben (00:55):

If your 1099s aren’t on the way.

Steven (00:57):

Yeah. I don’t know if we’ve talked about it recently on this show, but it’s certainly a conversation I have quite often with people ofwhile that’s great if you’ve gotten donein general, there are no awards for finishing first. The IRS doesn’t get to treat you special or send you a medal. And there is kinda this concern of corrected 1099s amended, 1099s or just 1099s you maybe weren’t expecting. I had that happen one year, a random 1099 I’d forgotten about. And so it can be it. So if you’re listening to this on March 1st and you were about to hit the button to submit your return, you might just pause and say, you know, do I wait a couple of weeks to see if any other information comes up?


But we probably also have a lot of listeners, because a lot of us are deadline driven, who it’s March 1st and they might still have some room to go to get this done by April 18th is the deadline this year just because of weekends and holidays. But I would, for those people, I would certainly strongly encourage you that as soon as you get done listening to this episode, you take a step back and say, okay, where am I? And how do I get this done? Cuz whether you’re doing it yourself or you’re working with a tax professional, you want to make sure you’re creating a buffer between when you think you have all the documents and when you’re gonna be ready to file. Just allow yourself a little bit of grace in case something comes up. You weren’t expecting something goes wrong, you lose internet, who knows what it might be. But I’m just, I’m a big proponent of let’s not leave it so close to the last minute that we’re gonna rush things through and we’re gonna lose out on the quality.

Ben (02:27):

Oh, I love it. The, so the metaphor that, that makes me think of, I was teaching my son how to make microwaveand make popcorn in the microwave. I was teaching my son how to make mic. I was teaching my son how to make popcorn in the microwave. And I told him, if you wait too long and you try to get every single kernel popped, you’re gonna burn the popcorn. But if you pull it out too soon, you can have a whole bunch of kernels at the bottom and then you missed out on some popcorn. Goodness. So I said, you wait, and if you go, you know, two or three seconds before you hear a pop, that’s the perfect time that it’s signed. Sometimes it’s two minutes, sometimes it’s three Well, taxes are kind of like that, right? You don’t wanna file it too soon because you can get a 1099, then you gotta go back and do more work. But if you wait too long, then we’re up against the deadline and we’re rushing and we’re sliding our packet under the door at the post office and hoping that that counts on April 18th. Which it probably won’t, but that’s the metaphor that popped into my head. Is that in any way accurate, Steven?

Steven (03:14):

No, I like that a lot, Ben. The other thing I’ll throw out there is that some of our listeners might be saying to themselves, well, April 18th’s not really the deadline, cuz I can extend and I can do this in October. And that is technically true, and every now and then there’s a situation where I am all for that. A very, very small percentage of the clients we work with. We do end up extending normally for one of two reasons. The only one that I just kind of accept and move on is, Hey, there’s a K1 we’re waiting for. We have some kind of investment in another company that we just don’t have all the information. The other one that we make sure only happens one year for a client is if they just got signed up with us really late in the game, then we might extend them so that we make sure we have time to do a quality job because quality is more important than forcing it through on the 18th.


The comment I always make along with that is that if you are going to extend, please don’t just punt this to October, let’s get this done in May, let’s get this done in June. And a big part of the reason for that, and Ben I’m sure this resonates with you, is that for most of us, just mentally, we really need to put the bookend on last year before we’re totally engaged in planning for the future. And so if we want to be doing proactive tax planning, if we wanna make sure we’re not getting killed on taxes, we need to make sure that we’re tying up last year and can really think about, okay, what do we do different this next year or these next five or 10 years to make sure that we’re moving the needle on how much we’re paying over our lifetime in taxes.

Ben (04:46):

Yeah, absolutely. You know, I really would want to close the books mentally with a client on 2022 before I really start looking at 2023. And if October’s the, the deadline for an extension, you we’re probably talking, you know, late October, early November, about year end tax planning. So I’d wanna kind of mentally close the books in one year before I flip to the next year. But if I do file extension, Steven, do I get to wait to make that 2022 payment until October of 2023? That sounds like a great deal.

Steven (05:13):

No, that’s a great reminder, Ben. The IRS’s general philosophy is we want your money. Now they phrase it a little bit differently, but that’s why they expect estimated payments in some cases throughout the year. Your taxes technically were due on January 15th, not April 15th or whatever the deadline is. But yes, to your point, Ben, if you file an extension, you are still expected to pay any taxes due. And if you don’t, you will incur interest and penalties. Even if new information or new to you information comes to light after you filed your extension, the IRS is still gonna go back and say, yep, we’re gonna go ahead and apply some interest here.

Ben (05:49):

Fantastic. Yeah, so just because you can wait a couple months on the paperwork, don’t wait on the paperwork that involves you writing a check to the IRS and in fact, don’t write a check. Do it digitally electronically. Yes,

Steven (06:00):

Yes, please do it electronically. Ben, the other thing we wanted to talk about today is we talked about this before on the show, but we wanna talk about getting letters from the IRS love letters, nasty grams, whatever you wanna call them. And before we have any listeners that say, hold on a second, it’s the tax deadline’s coming up, just, just leave this alone for a little while. I would love to, but the IRS doesn’t leave it alone, so I kind of feel obligated to talk about it because as we’re recording this episode, we’re currently working through a massive issue with a client because of a letter they got from the IRS

Ben (06:32):

I’m intrigued. Tell me more. Where there a lot of zeros in that letter.

Steven (06:35):

There are a lot more zeroes than the client was expecting. We use round numbers to protect the innocent here, but essentially client gets a letter from the IRS that says, oh, by the way, for 2020, going back a couple years for 2020, we just decided that we think you owe an extra $900,000 in taxes and interest. And that your gut reaction might be, oh, well that’s probably a taxpayer who’s paying $2 million in taxes. Nope, this was several multiples of what they originally had paid that the IRS is saying, great, go ahead and pay us all these taxes and penalties and interest. Oh, and of that $900,000 over 150,000 was interest in penalties. The IRS does not mess around with that. They love to find these situations where they can say, let’s just really hit you with it. And so as we’re going into tax filing season, client gets this letter from a year that we hadn’t previously worked with them on. Thankfully we’re able to dive in and start looking into this. But yeah, the initial shock value isMr and Mrs. Client, you owe $900,000 of taxes.

Ben (07:40):

That’s an incredible amount of money. I can’t imagine getting that letter. I would not I would not sleep very well that night, I don’t think.

Steven (07:46):

No. Getting a letter like that is definitely gonna reinforce the value of having someone on your team who can help you with taxes. This, this client was very relieved that they could pick up the phone and immediately reach out to us and say, Hey, what do we do here? And this is a great example of several things I like to bring up for taxpayers when we’re dealing with correspondence from the IRS. And the first thing is don’t automatically assume that it’s accuratebecause as we started diving into this situation, really where that number was coming from was a mismatch of information the IRS had received. And we’re gonna be able to clear a lot of it up and get, we’re not gonna be able to completely eliminate it because the IRS had a couple of fair points, but it’s not going to be anywhere close to $900,000.


So we’re not just gonna assume by default that it’s right and that we’re just gonna start paying that amount. We also need to make sure we stay away from the sine of the spectrum of just disregarding or assuming that the IRS can’t possibly be right or whatever you think your explanation for why you don’t owe those taxes are we can’t just ignore this. We need to make sure that we are being responsive. This is the one time I do really encourage that we do things, through the mail with the IRS because it gives us kind of a, a history of what’s actually gone on. It can take several times back and forth before these things get straightened out. And so I like to make sure that we do this to the mail, we send it certified mail that we’re including any details that support where we’re coming from or what our argument is, but we wanna make sure that we’re really be paying attention to what the IRS is telling us and the timing that we have to respond to it.

Ben (09:22):

Well, I sure hope I never get a letter from the IRS like that, but if I doI’ll be glad that I have someone on the team that has seen a couple letters like this before and it’s not their first first rodeo.

Steven (09:34):

Yeah, and it certainly is intimidating when you get these, whether it says $900,000 or $900 it looks like it was typed on a typewriter like in the 1970s. It’s not a fun feeling getting a letter from the IRS. So definitely want to kind of take a step back, take a deep breath. If you have somebody that’s on your team that you can work with on addressing these letters, I highly, highly recommend it because it’s never as simple as you want it to be.

Ben (10:03):

Excellent. Well, we’ve got a listener question as we always do, but before that, we have kind of a financial advisor question. So someone was requesting some clarification on employer Roth contributions. Now, we recently did an episode on secure Act 2.0 and there’s all sorts of new tax and financial planning and retirement planning goodies that we talked about. And one of those was the employer Roth contributions. So this listener writes in and says, quote, I was recently doing a presentation for financial advisors and many of them were surprised that this counts as earned income to the employees. So tell us more about that, Stephen.

Steven (10:36):

Yeah, so referring to employer Roth contributions, and Ben, as you know, I spent a lot of time working with financial advisors as well, and this is one right outta the gate. I thought this would be an area of confusion and it has certainly proved to be that. And so the important or couple of important things here, but one of the important things out of this is one, I mean, you and I talk about Roth all the time. We’re big fans of Roth when it makes sense for our client. And so it can be easy when we see, hey, here’s a new option for getting things into Roth, to just dive into it, you know, kind of full steam ahead and not take that moment to say, okay, what are the other impacts? And when we’re talking about re contributing to a retirement plan, the new option available, this has never been the case before.


Employers can now make their contributions as Roth dollars. And what that meansbecause the IRS isn’t stupid at least we’re not gonna talk about it on this show. The IRS is not stupid. They try to do these things intentionally. Roth is meant to be after tax dollars. And so for the employer contribution to be after tax dollars, the taxpayer the employee is the one who gets to pay those taxes. So just to use a nice round number, say that the employer makes their matching contribution of $10,000 to an employee’s account. So now if I’m that employee, the $10,000 win to my retirement account, I don’t get the $10,000, but at the end of the year, that’s gonna show up on my W2 is taxable income, and now I’m responsible for federal and state taxes if they’re applicable for that $10,000.


So I think of this as phantom income because you are getting additional income you have to pay taxes on, but no cash flow associated with it. And if we plan ahead, this might still absolutely be the right decision for someone to say, yes, please. I want those contributions as Roth. But what I’ve, one of the things I’ve found working with taxpayers is that surprises at tax time do not go over well. And so we wanna make sure we’re anticipating this, that we’re planning ahead, that we’re adjusting our withholdings if we need to, but that we’re not getting caught off guard by this when that we balance our excitement of, hey, my employer can now contribute Roth with, okay, let’s just remember we’ve gotta pay some taxes on that.

Ben (12:55):

Yeah, when I first saw this new rule, I thought, there’s no way that this is possible because what company on earth would wouldn’t want the tax deduction of contributing to your employer sponsored plan? They’re not gonna want to give money to an employee and not get the deduction. So it didn’t make any sense in my mind until I saw that it’s going to be income. So any salary that you pay to an employee is going to be deductible from the business and the employee pays taxes on it. That makes all the sense in the world. So when I saw that, okay, that makes sense that originally I was like, that’s never gonna work and employee’s gonna do that cuz they would, you’re losing money. But that does make a lot of sense. So it’s still deductible in the same way they made the 401K contributions or a similar way. Now it’s just income rather than that. That makes a lot of sense. So

Steven (13:41):

Moving on. Related to that Ben, the other thing I’ve heard from a few people is well, wait, why would an employee ever do that if they’re gonna get taxed on the Roth contribution, but they’re not gonna get taxed on the traditional contribution. I said, okay, wait, we, we gotta think about this for a second because the employees not taxed on the traditional contribution when it’s made, but they are taxed on it when it comes out. Say this same timing with traditional versus Roth in general. It’s still the same conversation, it’s just that before this wasn’t even an available option and now it is.

Ben (14:14):

Excellent, excellent. Well, moving on to our listener question, Steven. We got a question from Jim and Jim writes, and he says the new RMD ages are being presented as a good thing for retirees, but won’t delaying RMDs just mean getting killed in taxes later when account balances are higher? Is there something we should be doing along with those extra years? Now, I don’t know if Jim meant to do this, but he gave you a pretty specific shout out to your new book in his question.

Steven (14:38):

So Jim, Jim is someone I know and so he probably did do that on purpose. But just for context for our listeners, we’re talking about the new RMD ages. We’re again referring back to secure 2.0 that for a lot of people over the coming years, RMDs will start at 73 instead of 72. And then in about 10 years the RMD age will go up to 75. And so it’s, I I’m right there with Jim that a lot of the kind of presentation of this initially is, Hey, here’s this great thing you can wait longer to pay taxes. And really the other complicating factor, cuz Jim correctly points out here that hey, wait a second, most likely our balances will be higher, therefore our RMDs will be higher if we just wait. Also we already know that tax rates are going up in 2026 when the tax cuts and jobs act expires. So not only were your balance be bigger, but tax rates most likely will be higher as well. So yes, Jim, you are absolutely right that if we just let this happen to us, there’s a good chance that that delay will just mean we end up paying more in taxes.

Ben (15:43):

Yeah, I don’t wanna say the IRS is diabolical by or evil, but I wanna say that they’re very intentional, I think. Yes. So what this is, and in addition to that, we have the death of the stretch IRA. So when you leave your IRA to your kids, they only have 10 years to cash it out. Plus they have to take out a little bit every year. So we almost have a death of the stretch IRA on the other side of the grave before you die. So you, you’re not taking payments over 22 years anymore from you know, age 70 and a half to, to 90 or whatever it is now you’re taking it over 15 years, right? So you’re taking your distributions over a shorter amount of time during your life on a bigger balance after the tax cuts are lapsed likely.


And then your beneficiaries are inheriting a bigger balance and they have a shorter amount of time to take the distributions and likely pay taxes in their fifties or sixties, their highest earning income years. So again, it is probably too much of a coincidence for it to be an accident, but if you defer yourIRA distributions until RMD age, you’re gonna pay a lot more in taxes. Just like anything else in tax planning and retirement planning, financial planning, being proactive, doing things intentionally rather than reactive and kind of waiting until the last minute, you’re gonna save a fortune by doing things proactively ahead of time. It’s just like a diving board. The longer the diving board, the bigger the vibrations we can make by making proactive movement, right? Short diving board, you can’t move very much long diving board. You can make a move an awful lot. Let’s make your tax bill movement awful lot by being proactive with when we’re paying these taxes. Don’t wait till the last minute, Jim.

Steven (17:12):

Yeah. So I like that diving board analogy, Ben. That’s a new one for me. The other thing I’ll throw out there because you know, Jim asked is there’s something we should be doing in those extra years and like so many things we talk about on this show, those are gonna be situations specific. I mean, for some people that’s gonna mean Roth conversions end of the spectrum for some people that might be not doing anything. And in, in my mind that would be, hey, if we’ve done a really great job saving for retirement and we don’t have heirs, we want to leave our investments to, we plan to give them to charity. Well the, hey, great news then we don’t need to go rush out and pay all of our taxes ahead of time. Maybe, we’re okay with letting some of that just be left there and be able to be passed tax advantage to a charity of our choosing. But the important part is that we understand what our lifetime and legacy goals are and that we have a proactive plan.

Ben (18:05):

Yeah, I think that bears repeating as well and we, we visit with this, you know, in October, November, we do year end tax planning for clients and, and we always as, cuz we’re advisors, you know, we always sort of go towards the Roth conversion. Oh, Mr. And Mrs. Client, based on your marginal bracket and the Irma brackets, you should do a $60,000 conversion this year and we’ll hold X percent. But then we have to pause and kind of rewind a bit and say, you know what, a Roth conversion really, that’s just the last thing to catch. You know, what we’re trying to do, we’ll get the exact same place tax-wise if you just take this money out and spend it. You know, if you’ve got nothing, if you wanna take another trip, great. If you want to live a little larger, that’s wonderful that you mean you saved up this money for you.


If you wanna give it to a charity now or you wanna give it to your kids nowyou know, once we’ve established your financial independence, you don’t have to save any more money for retirement. And when we do a Roth conversion, we’re kind of essentially doing that. And so as advisors, that’s sort of my knee-jerk reaction as to do a conversion. But I’ve gotta remind myself, will spending this money get us the same place tax-wise? Yes, it will, will it allow us to tap more of our potential, of our full retirement? It will do that too. So it’s just a conversation you should have. Don’t always default to the Roths conversion. Maybe you should just spend the money on yourself.

Steven (19:13):

I I like spending money on myself. That’s a great reminder of don’t just let the default happen.

Ben (19:17):

Yep. Yep. You only live once.

Steven (19:21):

Awesome. Well Ben, as always, it’s been great fun talking to you about taxes. Hopefully, we’ve had an impact on our listeners and for everyone listening good luck out there. And 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.

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