It is not uncommon for financial planners to discover errors in a client’s tax return.
Yes, most financial planners are not tax preparers. But often they review a client’s tax return when creating a financial plan and often find errors.
In this video, Dana Anspach discusses some of the most common errors she discovers in her clients’ tax returns.
I am still working
In some cases, Anspach said it’s easy for eligible people to overlook what’s called a deduction for qualifying business income (QBI). According to the IRS: “Many owners of sole proprietorships, partnerships, S corporations, and certain trusts and estates may be eligible for a qualified business income (QBI) deduction—also known as Section 199A—for tax years beginning after December 31, 2017. The deduction allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI), plus 20% of qualified real estate investment trust (REIT) dividends and qualified Publicly Traded Partnership (PTP) income.
In some cases, a worker may receive the 1099 type of form. In the case of their client, Anspach noticed that they received a 1099-NEC form instead of a 1099-INT form. The form 1099-NEC is used to report compensation for non-employees while Form 1099-INT is used by taxpayers to report interest income received.
Retirement Account Withdrawals and Roth Conversions
There’s a host of mistakes when it comes to retirement accounts, says Anspach
Taxpayers could, for example, forget to record a distribution from an IRA. Those who receive distributions from an IRA will receive a Form 1099-R. Form 1099-R is an IRS tax form used to report distributions from annuities, profit-sharing plans, retirement plans, or insurance contracts.
Taxpayers may also forget to exclude qualified charitable distributions (QCDs) from their taxable IRA withdrawal. According to the IRS: “To report a qualified charitable distribution on your Form 1040 tax return, you typically report the full amount of the charitable distribution on the IRA distributions line. On the taxable amount line, enter zero if the total amount was an eligible charitable distribution. Enter “QCD” next to this line. »
In other cases, a taxpayer may forget that part of an IRA withdrawal might not be taxable. According TurboTax: Any money you contribute to a traditional IRA that you don’t deduct on your tax return is a “non-deductible contribution.” You must still report these contributions on your return, and you use Form 8606 to do so. Reporting them saves you money down the road. This is because no individual’s money is supposed to be subject to federal income tax twice. Form 8606 indicates “on file” that some of the money in your IRA has already been taxed. Later, when you receive distributions, some of the money you get back will not be subject to income tax.
In still other cases, a taxpayer who owns an inherited IRA might not realize that a portion of the distributions is not taxable if there were non-deductible contributions. Again, having Form 8606 can help avoid this error.
Taxpayers who convert all or part of their IRA to a Roth IRA may also forget to account for any estimated tax payments on their return. Generally, depending on the IRS“An IRA distribution paid to you is subject to a 10% withholding, unless you choose not to withhold or choose to have a different amount.”
New homeowners might also forget to include what they paid in mortgage interest on their tax returns, Anspach said. According to IRS“In most cases, you can deduct all of your mortgage interest. The amount you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.
Sometimes taxpayers also forget that they have a carryforward for capital losses from a previous year, Anspach says. According to the IRS: “If your capital losses exceed your capital gains, the amount of excess loss you can claim to reduce your income is the lesser of $3,000 ($1,500 if you are married and filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040) Claim the loss on line 7 of your Form 1040 or Form 1040-SR If your net capital loss exceeds this limit, you may carry the loss forward to subsequent years.
And finally, some taxpayers may forget they applied a previous year’s refund to their current tax return, Anspach said. Lily Want to apply your tax refund to next year’s estimated tax? It’s possible.
You might also like…
Tax loss harvesting and health insurance premiums
Do you want to reduce your health insurance premiums? Tax-loss harvesting can be the key!
Tax tips for recently divorced people
We explain the tax implications for people over 50 and recently divorced.
Check your tax refund status
The tax refund is not a savings account. Here’s how to avoid overpaying (or underpaying) taxes during the year.