POST TAX SEASON TAX IDEAS - Preparing for 2018
May. 7, 2018 Article

Post Tax Season Tax Ideas: What To Think About in 2018

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After the 2017 tax season came to a tumultuous end with the IRS technical difficulties, we decided to get some insight from our tax professionals about the technical missteps they experienced with clients this past year. 

General Filing Issues

  1. Not bringing in all of your paperwork and documentation
  2. First and foremost, bring in all your financial and tax-related documentation, even if you’re not sure you need it. For example, even if you don’t believe your medical deductions are high enough to deduct, bring the details in. It’s important to have your tax professional review the paperwork because states can have different thresholds for deductibility. While you may not be able to deduct the expenses at the federal level, it may be deductible at the state level.

  3. Not evaluating your filing status
  4. When filing your returns each year, the first question you answer is your filing status. Your first inclination may be that this is an easy question to answer. However, evaluating your filing status should be looked at very closely. In some years, it may make sense to change your status from what you have used in prior years.

    Say you normally file “married, filing jointly” and for that particular year the lower earning spouse has very high medical expenses. In this case, it might be easier to meet the medical deduction threshold by filing “married, filing separately”. The key is to compare each filing method and select the option that works best for your situation.

  5. Not reporting your eligible dependents
  6. After your filing selection, the next important task is filling in all eligible dependents. Keep in mind, this may include adult family members living with you. Discuss this with your tax professional to understand how this could impact your return.

  7. Not completing a Form 114 if you have a foreign bank account
  8. If you’re an investor, you will undoubtedly complete Schedule B. When completing this form, you’ll need to look closely at the source of your interest and dividends. If the source happens to be a Foreign Bank Account Reporting (FBARs), you’ll need to acknowledge completion of Form 114 (found on the bottom of Schedule B). Form 114 is generally required if a foreign bank account exceeds $10,000 at any time during the year. This is information to be accompanied with the return. Unfortunately, a $10,000 nonwillfullness penalty is applied if the IRS discovers that one should have been filed and it wasn’t. If a taxpayer willfully does not file, the penalty is the greater of $100,000 or 50 percent of the account balance at the time of the violation. The IRS conveniently puts this on Schedule B, a commonly filed form, so that taxpayers can’t claim they weren’t aware of this filing requirement.

Potential Missteps for Self-Employed and Small Business Owners

  1. Not stating additional income correctly
  2. Income reporting, including income and losses from flow-through entities (partnerships/S-Corps), can lead to under or over reporting issues, which impacts your taxable income.

  3. Not utilizing retirement plan opportunities
  4. An additional area often overlooked is not utilizing the many available retirement planning opportunities. Using strategies like a Simplified Employer Pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) plan, or a solo 401(k), not only provide tax advantages, but also provides an opportunity to accumulate assets needed for your retirement. Each has it's own set of rules and advantages. It's important to discuss with your wealth advisor to see which one is appropriate for you.

  5. Not paying quarterly taxes properly
  6. Another common issue is not paying quarterly tax estimates properly. If you overpay, it could lead to an April surprise. If it leads to an overpayment, you may be due a large refund; however, you should also remember that you might have missed an opportunity to use those dollars elsewhere throughout the year.

  7. Not taking deductions for your home office
  8. Finally, don’t forget to take deductions for your home office when you’re eligible. Since January 2013, the IRS has had a simplified option for computing the home office deduction available. While the standard method requires complex calculations and substantiation, the simplified option allows the taxpayer to “multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.”1

Potential Missteps With Your Charitable Contributions

  1. Not using highly appreciated stock for charitable contributions
  2. Say you own $100,000 in ABC Stock, which you purchased for $10,000. If you sell the stock and donate the 100,000 to charity, you’ll incur capital gains tax on the $90,000 gain. However, if you donated the stock directly to a qualified charity, there would be no gain reported and no taxes to pay. In addition, the charity gets the entire $100,000.

  3. Not using the Qualified Charitable Distribution strategy from your IRA
  4. Another tax efficient opportunity is for those taxpayers now taking Required Minimum Distributions (RMD) from their IRAs. For example, if a retiree has a RMD of $50,000 and also decides to donate $50,000 to their favorite charity, it could be possible to direct the $50,000 RMD directly to the charity instead of taking the RMD as income and contributing separately. This approach is called a Qualified Charitable Distribution and it eliminates the RMD from being considered income. With the changes made to the standard deduction limits, this approach may be even more advantageous going forward.

Individual Retirement Account (IRA) Reporting Missteps

  1. Not filing a Form 8606 for nondeductible IRA contributions
  2. Making non-deductible contributions is common for individuals who exceed deductible contribution limits. If non-deductible contributions are made, taxpayers must file Form 8606. The Form 8606 must be filed every year, even during years when no contributions were made. While a vigilant tax preparer may catch this because they saw it in a previous return, if it’s missed one year, it could easily get overlooked in subsequent years.

  3. Not providing the proper paperwork when you’ve converted an IRA to a Roth IRA
  4. It isn’t uncommon for individuals to convert a non-deductible IRA to a Roth IRA. When the conversion takes place, you’ll receive a 1099-R. While it will reflect the conversion to the Roth appropriately, it will not reflect the correct basis. The basis has already been taxed; therefore, only the gain becomes taxable with the conversion. Often, on tax returns, the entire distribution is shown and the basis is taxed twice.

Let a Professional Help So Missteps Aren’t A Concern

Receiving the right help with your tax planning and strategy can make the difference with your tax returns. Great care is needed when selecting your tax preparer. Consider selecting a professional with relevant experience, not simply someone with a designation. A tax professional whose practice is focused on audits and preparing financial statements, or an attorney who handles real estate closings, might be really good at what they do, but they might not be aware of the lesser known (esoteric) rules often overlooked by those operating in it every day.

In addition to having someone with relevant experience, it’s also important to work with someone who can help create a tax plan and a proactive strategy as it relates to taxes. Good tax planning is a year-long exercise and not something to be done simply in April. This is even more important due to the tax law changes with the Tax Cuts and Jobs Act. A tax planning professional should be considered as part of your overall wealth advice team who are collaborating to help you accomplish what is most important to you.

1https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.

Mariner, LLC dba Mariner Wealth Advisors (“MWA”) is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment adviser does not imply a certain level of skill or training.  For additional information about MWA, including fees and services, please contact MWA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).