5 Mistakes Clients Make on Their Taxes


It’s almost April, which means that it’s almost Tax Deadline Time. For most people, taxes aren’t something they look forward to, but it’s also not something they worry about that much. After all, you fill out a few forms and hope to get a return, right?

But in my work with my financial planning clients, I’ve found that there are a number of tax mistakes made every year — and some of them have nothing to do with how you file. That’s why I’m sharing these 5 mistakes, in the hopes that you can address these before you file for 2018, or so you can keep them in mind for 2019.

Tax Mistakes to Avoid in 2018 and Beyond

1. Not taking advantage of retirement accounts.

If you’re traditionally employed and not taking advantage of 401(k)s or IRAs, it’s something you might want to consider. Especially for those who are nearing retirement, maxing out your retirement accounts makes a lot of sense, especially as the number of years you have to contribute to these programs may be limited.

2. Not reviewing your 1099s

When you sell investment holdings that are not in a retirement account, you pay taxes based on what you originally bought the investment for. Prior to 2011, some custodians (the company that sends you your 1099) reported the original price at which you the purchased stock and others didn’t.

Now when I review 1099s for clients, I see often that most of their cost basis (what they’re paying taxes on) is reported, but sometimes part of investment holdings from before 2011 aren’t reported (they have the original sale at $0). This is often overlooked and can cause you to pay more taxes than needed.

3. Taking withdrawals from your retirement accounts without a plan.

Drawing on retirement accounts without a plan can cause you to pay a lot more in taxes than is necessary. At the end of the year, and depending on the type of account you draw from, you may owe taxes on that income. For other accounts, the income may be pre-taxed (meaning you paid taxes on it before you contributed to your account). With a financial planner on your side, you’ll be able lt make a plan for retirement income that saves you come tax time.

On top of that, if you took an early withdrawal from your retirement accounts (meaning you’re not of retirement age), you will have to pay taxes on that income. It’s important to understand how much you’ll need to set back for additional tax payments prior to this withdrawal, or you’ll be shocked when your taxes are calculated.

4. Not taking advantage of tax saving strategies.

For many soon-to-be retirees, there are strategies they can take advantage of knowing that their income may be lowered in the near future. For example, if you give to charity on a regular basis, it may make sense to start a Donor Advised Fund and contribute what you know you’ll want to give over several years. Then, you can take the tax benefit while you have a high income to limit the amount of taxes you pay during that time.

Other strategies may include doing a Roth Conversion, which involves taking a distribution out of your IRA account, paying taxes on it, and then putting the money into a Roth IRA. The Roth IRA allows the money to grow without paying taxes on the gains and you are able to pull the money out income tax-free. This is a great strategy to set up now so that you can pay fewer taxes when you retire.

5. Not having the right investment strategy to manage tax costs.

Individual accounts may involve frequent trading because that generates a lot of income. Unfortunately, that income is also taxable, even though you may not actually receive that income directly. In your non-retirement accounts and retirement accounts, do you have the right strategy that will limit how much you just pay out in taxes (rather than retain to build wealth)? When you recognize unnecessary income on your non-retirement accounts, you’ll be able to decrease taxes owed and have a better wealth-building strategy.

Bonus mistake: Not working with a CERTIFIED FINANCIAL PLANNER™

When it comes to both your working and retirement income, you’re going to have to pay taxes. But with the help of a CERTIFIED FINANCIAL PLANNER™, you’ll be able to make a plan that helps you save enough for retirement and know exactly what to draw on so that you don’t pay excessive taxes. For people who are still working, a CERTIFIED FINANCIAL PLANNER™ can also help you choose the accounts to contribute to so that your taxable income decreases, and help you understand variables like cost basis reporting and wealth conversions.

If you want the help of a CERTIFIED FINANCIAL PLANNER™ who can make the most of your income and wealth, contact Guiding Wealth.