Episode 40

The Tax Return Treasure Hunt

May 1, 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.

In this episode our dynamic duo discusses what taxpayers can do now that their tax return is filed to prepare for the future. Ben and Steven share some of the things they regularly look for on their clients tax returns to help make sure they are not getting killed on taxes. The team discusses both mistakes and errors to look out for as well as potential planning opportunities that might be available for the future. Listen until the end as Ben and Steven answer a listener question about how and when taxes should get paid.


What You’ll Learn In Today’s Episode:

  • Common errors mistakes to be on the look out for on your 1040
  • Areas where you can identify potential tax savings for the future
  • Details about the upcoming live webinar Ben and Steven will be offering to the “Least Boring Tax Podcast” audience on May 24th
Ideas Worth Sharing:

“It’s all about consistent intentional efforts over time. And one, probably the single largest planning opportunity when it comes to taxes that fits right into the state conversation as well is being intentional about the timing of our income when we can have an influence on it.” – Steven Jarvis

“The IRS, they’re sort of like us, I suppose, where they want to get their money as soon as they would like to get it. So they give a preference to withholding cuz then they get the money now.. Now if you wait until the end of the year or even wait until March or April of the following year, it’s gonna be harder for you to write a check for $10,000 rather than $2,500 a quarter just, that’s human nature. It’s hard to write all those zeros all at once.” – Benjamin Brandt

“I think it can be better to spread that out over time. Especially if you’re paying the tax on a Roth conversion from cash reserves, you likely will need to make estimated payments since you don’t wanna withhold that money from the IRA distribution.” – Steven Jarvis

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

Ben (00:05):

Welcome back to the Retirement Tax Podcast. I am your humble co-host, as always, Benjamin Brandt, joining me today, as always, the lovely Steven Jarvis. Steven, welcome to the show.

Steven (00:14):

Ben’s so happy to be here on the Least Boring Tax podcast. 

Ben (00:18):

You know, I forgot the least Boring tax podcast, and that’s my most favorite part, I can’t believe I forgot that part. But we’ll leave it in just so the audience knows that I’m semi fallible. But what we’re talking about this week, you’re hearing this on May 1st, but we’re talking about finding tax planning opportunities from reviewing your tax return. So you’re listening to this in May. Hopefully you’ve already filed your income taxes and what my instinct is to do is to throw that in a dust deal drawer and never look at it again. But in reality, there’s a lot of really interesting things that we can use from that completed tax return. And especially as we round the corn in retirement, we can apply some of those lessons to reducing our lifetime tax bill, our retirement tax bill by a lot. So that’s what we’re discovering today. And there’s some low hanging fruit and there are some more complicated things. We’re gonna start with the low hanging fruit. So Steven, how can we use that 2022 tax return to find some low hanging fruit? What are some common mistakes or errors?

Steven (01:12):

Yeah, so there’s definitely a few that come to mind. And really, these are all things that come out of direct experience. This isn’t theoretical. These are things I see on tax returns that come across my desk, and at times they can be very, very costly. And Ben, like we’ve been talking about recently on the podcast, there’s only so much justice we can do this in a strictly audio setting. And so really excited that we’re gonna be able to go live and do a webinar, including a visual portion so we can really show where these things come through. That’s on May 24th at 9:00 AM Pacific. All of our listeners can go to retirementtaxpodcast.com and get signed up for that. That’s something we’re excited to bring to our audience. But for today, let’s talk about what a few of these things can look like.


So just some of the things I’ve seen recently, one that comes up all the time is form 8606. This is where we report backdoor Roth contributions, which backdoor Roth gets all sorts of attention in articles and headlines and in social media. But what I very rarely see get mentioned is the reporting form that goes along with that. And some things in particular that get done wrong forgetting to actually report that your non-deductible IRA contribution was in fact converted to Roth. That’s a really critical step that happens on page two of form 8606. Forgetting about the IRS’s pro rata rule and making sure that we really know did we have other IRA or SEP or simple Balances that need to go into this calculation. 

Ben (02:46):

Could we tack QCDs in there as well? I think I’ve seen in the past where someone takes a distribution, but it’s a QCD. So the taxable and the distribution and the non-taxable distribution don’t equal each other. So that gives some cause for concern, does that fit in there? Kind of the backdoor Roth IRAs?

Steven (03:03):

Actually, that’s a great example because that’s a common error where someone can end up getting double taxed where you make a QCD but then don’t report it correctly. And so it still gets included in taxable income. Similar to backdoor Roth contribution, the whole strategy here is that we’re paying tax on our income and then contributed to an IRA anyways, and unfortunately often see where that distribution from the IRA then get contributed to the Roth IRA still gets reported as taxable income. So these are things that we need to make sure we’ve got all our ducks in a row where all our, I’s dotted and T’s crossed, whatever analogy you’d like to use. This gets really important and we’re talking about thousands of dollars in additional tax that you are going to pay.

Ben (03:46):

Absolutely. And so what would be some other examples of some low hanging fruit that we can squeeze out of our 2022 return?

Steven (03:53):

It’s a couple of other things. One that for some of our listeners, you’re gonna think, how does that ever happen? It’s so simple, but I’m just telling you, I see it time and again where rollovers that should not be taxed get the 1099 gets issued incorrectly and someone’s just doing data entry. And so a non-taxable rollover ends up getting reported as taxable income. So that’s one that I’m always on the lookout for of, okay, was this a rollover? Should it have been taxed? Another one that I see pretty often, that’s not necessarily an error, but definitely a mistake is misunderstanding contribution limits. So two examples of this. One is for IRA contributions. A lot of people missed that. The 6,000 or $7,000 contribution limit, depending your age, which is actually now got up to sixty five hundred and seventy five hundred, those contribution limits are individual limits.


So if we have a married couple, Bob and Sue they each can contribute those amounts. And where people miss this a lot is when only one of the spouses is working. So if only Sue has income, a lot of people will think, oh, well then only Sue can contribute to an IRA. But the great news is that the IRS looks at a couple’s income together. And so as long as Sue has enough earned income to cover the contribution limits for both Bob and Sue, they can both contribute. And so again, this is a way we can get thousands of dollars into retirement accounts each year as long as we’re paying attention.

Ben (05:17):

And it’s been some years since I’ve encountered this, so maybe you could tell me if you’ve seen it more recently, but what about a husband and wife combination where he puts 7,000 in his IRA and then 7,000 in his Roth IRA, and then she does the same thing, 7,000 IRA, 7,000 Roth IRA. Do you ever run into any issues in that realm with over contributing?

Steven (05:35):

Not as often, but it certainly has happened a lot of times if taxpayer is trying to contribute with the same custodian that’ll get flagged as they’re trying to do it. But because Ben, I think the point you’re trying to reinforce here is that those aren’t separate and you have a separate contribution limit for each spouse, but not for each type. So as nice as it would be, I can’t put the 7,000 in my traditional and then the 7,000 in my Roth for in both of those in my name, I gotta pick one or the other, or a combination of the two that adds up to 7,000.

Ben (06:11):

Right. And, but if you used, well, even if you used one custodian, I think you might be able to do it, but if you had two separate custodians, so Fidelity and Schwab, they’re not talking to each other. So they would let you put 7,000 in your traditional and deduct it and 7,000 in your Roth. And, it could go years without getting caught. So that’s why I think a lot of times listening to this podcast, attending our webinar will show you how to look at it. Or having an advisor that, you know, will look at this kind of stuff could save you a headache 5, 6, 7 years down the road.

Steven (06:37):

The other one on contribution limits, I’ll point out is related to HSAs or health savings accounts. And of course the tax code creates lots of fun. I’ll use that very sarcastically opportunities for us because when we switch the HSA side and look at the contribution limits what the most common mistake I see is when a taxpayer has an employer that’s contributing to an HSA for them and not realizing that if the employer doesn’t fully max the contribution limit that the employee, that the taxpayer can come back and make up the difference. And so I see quite a few returns that come across my desk where there’s a gap there where the employer has said, I’m gonna contribute 5,000 and for a someone with family coverage for this last year that could have gotten up to 7,300 and it’s okay, we can make up that difference if they’ve got the cashflow to make those contributions. A lot of people just aren’t aware that that mechanism is even available to them.

Ben (07:35):

Okay. Now, beyond the low hanging fruit, we’ve got some opportunities for pre-retirees and retirees around some common topics, but let’s go through some of those.

Steven (07:44):

Yeah. So obviously a lot of our audiences either in the, hey, I’m into retirement, looking to make sure I don’t get killed on taxes, which we love to hear or it’s thankfully they’re thinking ahead to the future and saying, how do I plan for this? So that’s why we focus on some of these areas. One, even just in the last week, Ben, I saw several returns come across my desk of clients that are new to working with us. So this is the first time we’ve seen their returns. And one of the things I’m always looking at is schedule A to see if we’re really getting a tax benefit from our charitable giving. Now we say it on the show all the time, but of course you want to give to charity because you care about the cause and this is something important to you.


You’re never gonna get ahead by donating a dollar to save 30 cents in taxes. But if we’re already donating, we wanna make sure we’re doing it as tax efficiently as possible. And where this gets missed a lot is that for a lot of people, they kind of make this, it’s almost like this on off determination when they look at standard versus itemized deductions that if I’m itemizing, hey, great, then I must have got a benefit from all of my itemized deductions. But that’s just not the way it works. So for really simple math, if we have $15,000 in taxes and interest, we can deduct and then we give $10,000 to charity, then we’ve put ourselves right at about the standard deduction. And so we’re not really getting a tax benefit for any of those deductions because it’s covered by the standard deduction.


So if we take that $10,000 of charitable giving and increase it to $15,000, now we’re over the standard deduction and we are able to itemize. And so for a lot of people, they’ll think, Hey, I gave $15,000 to charity, I’m getting $15,000 of tax benefit, which we’ve gotta apply a tax rate to that anyways. But, still that’s not the right number because only the amount above and beyond the standard deduction actually counts for an additional tax benefit. So that’s where we have to say, when I see these situations where someone has a large chunk of charitable contributions that are below the standard deduction, say, okay, is there an opportunity here to give more tax efficiently? And really that’s not even the right question, Ben, cuz almost guaranteed there is an opportunity, it’s more of a, it doesn’t make sense in this situation because it might not make sense for different reasons, but between being able to donate multiple years at a time through a donor advised fund and still keeping control over how those funds get paid out or even just doing something as simple as bunching some of those contributions in a single year as opposed to spreading them over multiple years.


And you mentioned already the power of QCDs and what that does for us. So we have a few different options to say, if we’re given to charity already, can we do it in a tax efficient manner and save thousands and thousands of dollars in taxes over our lifetime?

Ben (10:27):

Yeah. When I review a client’s return and I’ll see something and they’re like, we give $1,200 to charity. You know, I’ll commend them on you know, putting your money where your mouth is and then supporting a charity that you care about. And then we leave it at that cuz you know, we would need to either have high medical or high interest or high taxes to like accumulate all of those things to beat the standard deduction, which is like, I dunno, 25,000 for a couple, whatever it is this year where I see something like an $8,000 contribution and we talk about it and they’ve been giving pretty much every year to their church or to a charity for 8,000. Then I start to think we need to get a little bit lumpy with this, right?


There’s kind of three ways to do it. Could we do an every other year kind of situation where I, I’m not gonna give 8,000 but give 16,000 and then with my mortgage interest state and local taxes, medical, whatever it is, I can get significantly higher than that 25. And then maybe I can pay my property taxes twice in one year. There’s all kinds of other things that could come up with that. Medical procedures that I could do six months from now or today, well if we’re itemizing this year, maybe we try to do that this year, just throw everything we have at it to get the most that we can outta itemizing and then we’re back to standard the next year. And the other way we get lumpy is donor advised fund. So maybe the every other year doesn’t quite get us there.


Maybe every third or fourth or fifth year. We do all of our giving at once. And then we gift out of the donor advised fund. So we create this middleman donor advised fund, but that would allow us to file standard deduction three, four years in the row and a big fund to the donor vice fund, get that big deduction, all the other itemized deductions that we can put along with that. So we’re almost double dipping in that we get our standard deduction, which is great. It stands in front, it holds the place of all of our itemizations cuz 90% of people don’t itemize. But then every so often we get this big itemized deduction year. So we’re actually able to, in a way deduct them because the itemized deduction stands for them, but then also count them when we’re really counting them with the donor advised one.


So, and again, it has to be clear that we’re giving away the same amount of money we’re gonna give away anyway. We’re just getting lumpy and being very particular on how we do it. And that’s, you know, doing those sort of small things over and over. That’s how you sand the rough edges off the biggest bill you’ll pay in your life, which is your retirement tax, your federal, state and local income tax x 30, which is over the course of your retirement, that’s your retirement tax. So it sounds a little bit complicated, but hopefully with us describing it this way, you’re just getting lumpy, you’re lumping all your different charitable into different years into different cadences.

Steven (12:59):

And for our visual learners out there, this is why we’re so excited for our webinar to actually put  some real examples to some of these things. Ben you mentioned right at the end there that it’s not just federal tax, is state tax. And so another potential planning opportunity, especially for people who are thinking about the long term, is being cognizant of what your intentions might be around where you live and really being kind of a little bit more savvy on state taxes. Now, again, just like charitable giving, we wanna make decisions that make sense for our life and our goals and then figure out the tax ramifications. It’s very hard to make arguments for, hey, you should move to a whole new state just for the tax benefit. If you look at friends and family and fun, the things that you want to be involved doing don’t just move because there’s a low tax state out there, but if it’s always been your intention to move to another state when you retire or you’ve got grandkids or family in another area, that you know that where you’re at now is not necessarily where you’re always going to be.


Taking a little bit of time to learn about how different states tax your income can be very impactful because not every state taxes, social security, not every state taxes, IRA distributions, we can get real intentional about accelerating or delaying income based on where we’re going to be living and potentially, again save thousands of dollars and sand off the rough edges of that retirement tax bill.

Ben (14:24):

Not to go off on too much of a tangent here, but can I play my favorite game? Stumped the CPA.

Steven (14:29):

Please play that favorite game.

Ben (14:30):

Okay, so it’s been a while since I’ve taken the CFP exam. I think it’s been also a while since you took this CPA exam. So we’ve got federal, state, and local. What are the local, so it stands out to me that it’s Los Angeles County and the city of New York, federal, state and local. Are those the two? Are there more? What have I forgotten in the last, I don’t know, dozen years since I’ve taken the CFP exam?

Steven (14:54):

Oh, Ben, there are a bunch. Yeah, New York definitely stands out at the top for me because they’re pretty aggressive with it, but they’re not only do you have like city taxes in a lot of areas of Ohio, but you also have school taxes school district taxes. It immediately comes to mind like Kansas City, Missouri Philadelphia are ones I’ve been looking at recently. So it’s not universal that you’re gonna have local taxes, but it’s certainly not just New York that comes to mind for me.

Ben (15:25):

So our audience will have to keep us honest, but we’ve done the stump the CPA at least once or twice and I think Steven has the belt of be undefeated, so I’m gonna keep trying to stump him. But so far it’s all the playing board is tilted in his direction.

Steven (15:39):

It might be.

Ben (15:40):

He doesn’t know what I’m asking. I just wanna be transparent. He has no idea. I was gonna ask him that. .

Steven (15:44):

It does turn out that I’d spend a lot of time doing taxes and I look at hundreds and hundreds of these, so I have just a few things to pull from.

Ben (15:51):

So, that’s just cheating

Steven (15:52):

Then, the other one I wanna highlight that’s gonna take us right into our listener question. And, again, there’s something we cover a lot on the show, but we keep bringing it back up because it’s all about consistent intentional efforts over time. And one, probably the single largest planning opportunity when it comes to taxes that fits right into the state conversation as well is being intentional about the timing of our income when we can have an influence on it. This is things like doing Roth conversions potentially, or capital gains harvesting things where we say, okay, I can make a choice about when my income’s gonna be recognized based on my expectation for what my tax rate looks like now and what it might look like in the future. And a lot of times this gets approached from hey, everybody’s tax rates are gonna be higher in the future.


So we have to recognize as much income as we can now. Now, personally, I think there’s a valid argument for why tax rates might go up in the future, but this does need to be a personal and specific decision cuz I’ve definitely come across times where it makes zero sense for someone to convert to Roth in the current year because of their facts and circumstances. And we happen to have a listener question that goes right into this. So, Ben, since you already tried to play Stump the CPA, I’ll read the question and let you go first on our listener questions brought to you by our upcoming webinar on May 24th. So Ben, here we go.

Ben (17:13):

Listener questions of course brought to you by our May 24th webinar that’s gonna start at 9:00 AM Pacific time. That would be 11:00 AM for those of us in the middle of the country heading over to retirementtaxpodcast.com. And the title of the webinar is Using Your 2022 Tax Return to Produce Your Lifetime Tax Bill. So we’re gonna go over something that you already have in your hand- your completed 2022 return. We’re gonna do something we can’t do on a podcast. We’re going to screen share and show that to you and show you line by line if this number means this, we can do this. If this number means this, we can’t do this, but we can do this. So you get to see a real tax return. And we’ll go through our 37 point tax checklist, I will help you learn what your lifetime tax bill might be so that you have some context into what we’re trying to reduce all the things that are hard to do on a podcast, but are a lot of fun to do on a webinar.


So again, May 24th 9:00 AM Pacific into your own time zone as appropriate. But we are super excited to share that with you. So listener question listener writes in, I will be in a lower tax bracket starting next year for about four to five years. I’m planning on doing Roth conversions to fill up my tax bucket. I live in New York City, so I have to pay federal, state, and local taxes. What’s the best way to figure out how much taxes are owed? If I’m a do yourselfer, is it better to pay estimated quarterly taxes or all at once I want to pay taxes, I will pay taxes for my cash reserve. Steven, I don’t remember if I’m supposed to answer this question or you, but since I read it, I’ll give it to you and say, what are your thoughts? Cause I have thoughts towards the end, but I’m curious what you have to say.

Steven (18:42):

Well, I’m gonna cherry pick a couple of things here cause we’ve actually touched on a lot of these in the episode today. These are real listener questions. I do pick them to go inside with topics, but we appreciate everybody reaching out and sending these questions in. So real quick on the, is it better to pay estimated quarterly taxes or all at once? We need to keep in mind that the IRS does expect you to pay as you go. And so depending on the timing of when the income happens, we need to make sure that our tax payments or our tax withholdings lineups that to some degree. So I, and also from a behavioral standpoint, I think it can be better to spread that out over time. Especially if you’re paying the tax on a Roth conversion from cash reserves, you likely will need to make estimated payments since you don’t wanna withhold that money from the IRA distribution.


But again, behaviorally and then making sure we don’t run afoul of the IRSs is under payment penalties paying quarterly estimated. It’s probably better than paying them all at once. But to this question of how do I estimate what the taxes are gonna be as a DIY, it kinda depends on how sophisticated we wanna get. We can start real simple with, okay, what was your income last year and what marginal tax bracket were you in? And then what, and we can just assume that we’re stacking all that income on top of there and we can go real simple and say, okay, 22%, 24%, whatever bracket I’m in, let’s take my total Roth conversion out and multiply by that. That’ll give us at least the right ballpark. I mean, we can certainly get a lot more sophisticated of that and download one of these online tools too. There’s an Excel version of a 1040 out there that you can populate the whole thing or you can use your tax prep software and get really dialed in. But the starting point is, what was my income last year? Do I expect everything else to be the same? And then, what am I put on top of that?

Ben (20:19):

Yeah, that’s where I was gonna go with that. You know, the IRS, they’re sort of like us, I suppose, where they want to get their money as soon as they would like to get it. So they give a preference to withholding cuz then they get the money now. Now if you wait until the end of the year or even wait until March or April of the following year, it’s gonna be harder for you to write a check for $10,000 rather than $2,500 a quarter just, that’s human nature. It’s hard to write all those zeros all at once. Your risk gets tired, well, hopefully you’re making electronic payments of course, but also there’s just, they give the preference so you’ll actually be better off penalties and interest wise if you just do that. So that’s why I would say most of our clients I can think of, if we have 80 households, one or two exceptions will just do withholdings for them off of the top of what comes out of their IRA.


You know, we’re hoping that they’re living their even better retirement with our help. And part of that includes we’re thinking of things on their behalf so that they’re not on a camping trip in Arizona, hiking the Superstition Mountains and thinking about, did I make that quarterly payment? Nope, Ben and his team are on top of it. So that’s what we’re hoping to provide. But for you do yourself investor, if you’re not doing withholding I would make it, you know, put an appointment in your calendar, Google Calendar l where you’re logging in and making sure that you are doing a 2023 quarterly estimate. Not somehow, you know, you can click the wrong dropdown and apply towards last year’s taxes which would probably take a long time to resort out. So don’t do that.

Steven (21:40):

Well, perfect, Ben, as always, it’s so much fun to get together and chat about these things and share the valuable information with our audience. Really excited for later this month to be able to do this live and to kind of show off some of these things that we’re doing.

Ben (21:54):

Oh, I can’t wait. As much fun as I love podcasting webinars when you can see how many people are in the room and you can see the chat questions populating just it brings my energy to even higher levels. So I love webinars. I hope to see you there. So with that being said, don’t let the tax man hit you or the good Lord split you. Stick with the least boring Retirement tax podcast and we’ll see you soon.

Steven (disclaimer) (22:17):

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.

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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