Preparing for Tax Season
The onset of the year is marked by three things: New Year’s resolutions, ski season, and the commencement of tax season! While I’m not a fan of the first, I’m probably among the few who eagerly anticipate the second. However, the third applies to everyone. At this time of year, we often receive the question: What do I need to provide to my accountant for my tax return preparation? One advantage of collaborating with a fee-only financial planning firm like Stewardship Advisors is our continual evaluation of our clients’ situations to maximize various tax strategies. Although beneficial for your finances, it’s crucial to communicate these strategies with your tax preparer. We often work in tandem with CPAs to coordinate the tax strategy for our clients, however, it is never a bad thing to communicate or overcommunicate with your accountant about the tax strategies implemented in the last year.
Unfortunately, standard tax documents like 1099s, W-2s, and K-1s don’t always present the full picture to the tax preparer. Even if you’re a client of Stewardship Advisors, and we provide supplemental reports for your accountant and work with them throughout the year, it’s essential to ensure nothing gets overlooked during the crunch time of filing your tax return. Below are three common strategies we implement on behalf of our clients, but the 1099’s supplied by the investment companies do not show the whole picture.
Qualified Charitable Distributions: If you’re 70½ or older, you can direct up to $100,000 annually from your Individual Retirement Account (IRA) to qualified charities without it being considered taxable income. Why is this crucial? Well, not only does this satisfy your Required Minimum Distribution (RMD) but it also reduces your taxable income. It is imperative that you communicate to your tax preparer how much of your IRA distribution went to charity, as the form 1099-R from investment companies will not indicate this information. If you’re a client of Stewardship Advisors, we have a report to assist with record-keeping which you may give to your accountant.
529 Plan Contributions: 529 plans are an excellent way to save for your child’s education. While contributions are made with after-tax dollars, they grow tax-free and if they are disbursed for college expenses, they can be distributed tax-free. For 529 plan distributions, you will receive a 1099-Q, however, do not forget about contributions to 529, which have no official form. While you do not get a deduction on your federal tax return for contributions to 529 plans, in states like Pennsylvania, you can take a deduction on your state income tax return, regardless of your income. So don’t forget to communicate 529 plan contributions to your accountant.
Roth Conversions: While the amount distributed from an IRA for a Roth conversion will be shown on the 1099-R, important nuances need communication with your tax preparer. First, you need to communicate to your accountant that this was a Roth conversion so they can complete Form 8606, the 1099-R will not say anything about the conversion. Secondly, make sure to share details about the timing of the conversion, especially if you made an estimated tax payment to cover the one-time large transaction. Why is this important? Typically, the IRS requires estimated payments to be made in equal installments throughout the year, but if you only made one estimated payment in the fourth quarter to cover the conversion, the IRS may try to impose an underpayment penalty. However, by communicating the timing to your accountant, they can file Form 2210 showing the timing of everything and thus, minimizing or eliminating any underpayment penalties.
As a bonus tip from an accountant: don’t wait to get your information to your tax preparer until you receive what you think is the final 1099. Provide the information as soon as possible and wait to file the return until the final 1099 is issued. This allows the accountant time to prepare the rest of the return, assess the situation, and make any final adjustments with the last revised 1099. Often, the final revision benefits you, making it unnecessary to pay a fee for amending the return.
While I can’t control the weather to improve the ski season’s start, you can collaborate with one of our financial planners to implement and communicate these tax strategies to your accountant or CPA, leading to significant tax savings and a smoother tax-filing season.
Schedule an introductory phone call with Mark at this link: Mark Brinser – Introductory Phone Call
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