Tax Time Tips
We have now entered the thick of it. Tax season is upon us.
It is not a season to which we look forward. It is sort of like winter – if you live in Wisconsin you know it is coming, there is nothing you can do about it, and you must just put your head down and plow through.
While we are not tax professionals and you should always rely on your tax professional for your tax advice, we have seen plenty of tax returns in the 40 years we have been serving families. Here are a few tips to surviving this tax season:
Tip 1: Timing. The good news is that most of your tax documents are likely in your hands at this point. The bad news is that a few may not be ready to share with you quite yet.
Due to excessive complications in the tax code, it takes time for investment companies to document, classify, and reclassify all of their sources of income during 2024. They must then relay this information to LPL Financial. LPL Financial cannot share what they do not have, and they prefer to report final accurate tax information rather than issuing amended tax documents that force you to amend your tax return.
For the simplest of investment accounts, you should have your 2024 tax forms already. LPL Financial issued retirement account distributions forms (1099-Rs) on January 17. For the simplest of investment accounts, they issued 1099 consolidated tax statements (1099-B, 1099-DIV, and 1099-INT) on January 17, January 24, January 31, and February 7.
For more complicated investment accounts, they will issue consolidated 1099s this week Friday, February 14. For the very rare extremely complicated investment accounts, they will issue consolidated 1099s on February 21, February 28, or March 7.
Your consolidated 1099 forms will be mailed to your address of record. If you prefer to obtain your tax forms more quickly, they are all available through LPL Financial’s AccountView program (link) on the release date.
Tip 2: Qualified Charitable Distributions (QCDs). If you made a Qualified Charitable Distribution from your IRA account in 2024, your Form 1099-R will not accurately reflect the taxable amount of your distribution. QCDs permit taxpayers age 70.5 or better to donate to qualifying charities directly from their IRA accounts without paying taxes on those distributions.
However, because the IRA custodian does not verify that each QCD goes to a valid charity, they are required to report 100% of the IRA distribution as taxable. It is up to the taxpayers to retain documentation for any IRA distributions that went directly to qualifying charities.
To harvest the tax-free benefits of QCDs, you must inform your tax preparer that all or a portion of your IRA distributions were QCDs. If you don’t, you will likely end up paying unnecessary income taxes as the 1099-R you provide to your tax preparer tells them your distributions were 100% taxable.
Tip 3: Backdoor Roth IRA contributions. Backdoor Roth IRA contributions permit eligible taxpayers to make annual Roth IRA contributions even though they do not meet income eligibility requirements. They accomplish this by making nondeductible IRA contributions and then immediately converting the IRA contribution to a Roth IRA.
The tax forms to report IRA contributions are not issued until May because taxpayers are permitted to make IRA and Roth IRA contributions up to April 15.
If you made nondeductible IRA contributions for tax year 2024, you need to tell your tax preparer so they can document your nondeductible IRA contribution. None of the tax documents you share with them at this time of year provide your tax preparer with this information.
When you convert an IRA to a Roth IRA, the custodian issues a form 1099-R which reports the conversion as taxable income. Failure to document nondeductible IRA contributions usually leads to taxpayers unnecessarily paying income taxes on an account for which they never received a tax deduction.
Hopefully these tips will help you and your tax preparer accurately navigate this tax season without paying unnecessary taxes.
Quote of the week: Albert Einstein: “The hardest thing to understand in the world is the income tax.”
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