Every tax professional in the United States is now in the thick of tax season. They have in front of them a 45-day gauntlet of tireless tax analysis to complete their clients’ returns by April 15 (unless there is an imminent extension).
They are under pressure. Their eyes may be blurry. Their caffeine dosage may be unhealthy. This may even be you.
While we are not tax professionals, we see plenty of tax returns as part of our financial planning process and feel compelled to help you minimize missing tax information to help you and your tax professional.
There are two primary culprits that taxpayers accidentally forget to share with their tax professionals this time of year which can lead to an inaccurate filing and a future amended tax return.
Culprit number one is the elusive IRA contribution. IRA custodians typically do not provide documentation regarding IRA contributions (Form 5498) for a tax year until after the April 15 filing deadline has passed.
This is on purpose because taxpayers may still make last year’s contributions up through the tax filing deadline (without extensions). However, this also means that your Form 5498 is not in the pile of tax documents you provide to your tax professional.
Thus, your tax preparer has no paper trail that indicates whether you made deductible or nondeductible IRA contributions – even if they are part of a backdoor Roth IRA contribution strategy. Please be sure to provide a written note to your tax professional about any IRA contributions you made for the tax year.
Culprit number two is the evasive Qualified Charitable Distribution (QCD). QCDs are a strategy available to taxpayers over the age of 70.5 that allows them to make distributions directly from their IRA to a charity. QCDs are excluded from taxable income up to $100,000 per taxpayer in 2023.
Unfortunately, the official tax documents you share with your tax professional make absolutely no mention of QCDs. IRA custodians are required to report to the IRS the total amount of distributions you took from your retirement accounts whether you took them in cash or used a QCD. It all gets lumped together on one line on your Form 1099-R.
Thus, if you do not specifically inform your tax preparer how much you donated using a QCD, they will follow your tax forms and report your entire IRA distribution as taxable income – exactly what you attempted to avoid by using a QCD.
The only way your tax preparer will know that a portion (or all) of your IRA distribution is a QCD and not taxable is if you write them a note to alert them to this.
Please be sure to treat your tax professional kindly in their time of high stress by providing them with the information necessary to file your tax return accurately the first time. You will both be happier when tax season is over.
Quote of the week: Aaron Levie: “There is more upside in being an optimist that’s sometimes wrong than being a pessimist that’s always right.”
Graphic Credit: iStock #1680886384 Zhanna Hapanovich
