Tax time: The most wonderful time of the year
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That’s right, it’s tax time once again! Before you start working on that filing, make sure you have everything you need. There’s nothing worse than getting a notice later in the year that you owe more money because of an error. Here are some common mistakes to avoid.
Social Security
Are you receiving Social Security? Be sure to report that income on your return! This is a common mistake, especially for those receiving benefits for the first time. You will receive a form SSA-1099 from Social Security in January. The form can also be retrieved online if you have a “My Social Security” account (www.ssa.gov/myaccount/). The income gets reported on lines 6a and 6b of your Form 1040.
IRA Distributions
Distributions from IRA accounts will result in your custodian generating a form 1099-R for you. It can get tricky if some (or all) of your distributions are qualified charitable distributions (QCDs). As you may recall, QCDs are gifts made directly from an IRA account to charities. As such, they are not subject to taxation. However, custodians do not track QCDs versus regular distributions – that is up to you and your tax preparer. Be sure to track any QCDs made throughout the year – no need to pay more than you legally owe, right?
Multiple Forms 1099 – Especially for TD Ameritrade clients
If you switched custodians during 2023, don’t forget that you will receive Form 1099 from both firms. Your prior custodian will report on all activity up until the time of transfer, and your new custodian will report everything after the move. This is also true for TD Ameritrade account holders who moved to Charles Schwab when their merger was finalized in September.
Signed up for electronic delivery
If you don’t receive any of the expected forms from your custodian, check to make sure that you are not signed up for electronic delivery of your tax forms. You may need to access those forms online. If you haven’t received them, be sure you didn’t get tricked into signing up for e-delivery.
Did you make a 529 contribution?
When Indiana taxpayers make a contribution to an Indiana 529 account, they get an Indiana state tax credit. Be sure to include it with your Indiana state tax filing. If you are a resident of another state, I’m sorry. Beyond the 529, be sure to claim any other credits or deductions to which you are entitled.
What if You Owe Too Much or Get Back Too Much?
Sometimes, the final tax number (amount you owe or overpaid) is an unpleasant surprise if it is large enough – either you are on the hook for a hefty additional payment, or you gave the government a sizable interest-free loan. It may make sense to adjust your tax withholding levels or to begin making estimated quarterly payments. Talk to your tax preparer or analyze your return if you self-prepare and formulate a plan to avoid a repeat.
Summary
Tax season can be a stressful time for many of us. Spending extra time on preparation can make the whole process run more smoothly and avoid the kind of errors that a slapdash approach can engender. It will never be a fun process, but at least it can be somewhat less painful. Sometimes, you have to take what you can get.
David Crossman, CFA, is a Senior Portfolio Manager with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email David at dcrossman@bedelfinancial.com.