Even though the new year just start a few short weeks ago, it is the time of year where we are all going to start thinking about and preparing our taxes for 2020. By the time February rolls around, we will begin receiving statements and tax forms in the mail, as well as questionnaires from our accountants – all of which will need to be pulled together in preparation.
To help with this process, we decided to share the five most common mistakes, or oversights may be a better description, that we see with clients in gathering information for their accountants. These aren’t necessarily mistakes, but they are areas where often the forms become complicated, and it is easy to miss providing your accountant with the proper document or information. When there is an oversight or missing information, your accountant cannot report it correctly for you.
You will need to keep an eye out for two HSA tax forms to give to your accountant, specifically forms 5498-SA and 1099-SA. The 5498-SA tax form documents the amount you contributed on a pre-tax basis to the HSA and the 1099-SA tax form contains the amount paid from the HSA for qualifying expenses.
Not everyone will have an HSA, but if your employer, your practice, or your benefits program includes a health savings account, you will want to make sure you have both tax forms.
The second most common oversight affects those who participate in backdoor Roth IRA contributions or Roth conversions. A Roth conversion refers to taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA.
When you contribute money to an IRA and then convert it to a Roth IRA, there will be three tax forms for each person on the tax return. For example, if you and your spouse file a return jointly, there will be six tax forms. Again, you will have a form 5498 for the IRA showing the contribution, a 1099 document from the IRA showing the conversion over to a Roth IRA, and then another form 5498 for the Roth IRA showing that the money came in.
If you do not have these three tax forms for a Roth conversion, then your CPA can end up recording that distribution from the IRA as a taxable event.
The third area you may want to review is if you had any self-employment income in 2020. Self-employment income may come from moonlighting, giving a talk, or participating in some type of study or trial. It may even include the Airbnb apartment you have over your garage, not that there was much activity last year. Regardless of where it came from, if you have any self-employment income, there will be a separate schedule generated in your tax return and the opportunity for appropriate deductions to be claimed against that.
You will want to consider what expenses you incurred in generating that self-employment income. Did you have to purchase new technology? Were you required to make or take phone calls on your mobile phone? Do you have to drive or travel and add mileage to your vehicle? All those things are likely allowable deductions against that income. You will want to be compiling these receipts or documentation to provide to your accountant to take the appropriate deductions off that income and reduce the corresponding tax liability.
With that said, another thing to consider is if you have self-employment income, you are eligible to defer the taxation on some of that income by making a contribution to a SEP IRA. This type of IRA is the most common tax vehicle used for self-employment income, and you can make contributions after the year the income was generated. Follow up with your accountant or financial planner to see if this is an option for you.
The fourth area to contemplate is regarding the low-interest rates. We all know that interest rates have been historically low since the spring of 2020, and this has inspired many people not just to move homes but also to refinance their mortgage.
When you refinance your mortgage, a closing statement is generated and there are expenses as part of the closing that can be deducted. You will need to give your accountant that information. If you do not have a copy of the closing statement from either purchasing a new home or refinancing your current home, reach out to the closing attorney or the company that handled the closing and ask them for a copy of the closing settlement statement. When you receive the closing statement, be sure to provide it to your accountant.
Last year, with market volatility, many people thought about their own financial situation and made changes to their investment strategy. Suppose you moved investments, such as moving to a new investment company or setting up a new account to transfer money over. It is essential to be aware that each account with any balance in it through last year, or I should say, each taxable investment account, will likely generate a 1099.
For example, let’s say that you previously had money with Investment Company X and moved it to Investment Company Y at the end of the year. If that is the case, you should expect to need two tax forms. The first tax form is from Investment Company X for the amount of time the account was held there. And the second from Investment Company Y. Only having partial tax forms is one of the most significant areas where we see people misfile their tax returns.
You can rest assured the IRS gets all of the appropriate information, and then later they can come back and say that they think you owe a little more in taxes because we received forms that you did not include in your filing.
We hope you find this information helpful as preparation for tax season commences. Begin to watch your mailbox for tax forms 1099 through 5498 and everything in between.
As always, if you have any questions about your financial future, financial planning, or helping to collaborate with your accountant and CPA on developing a prudent tax strategy, Spaugh Dameron Tenny is happy to help in any way we can. Please contact us anytime.
In addition to tax preparation, you may need help dealing with your finances. Download the free "Financial Survival Guide" to start organizing your finances today!
Shane Tenny is the managing partner of Spaugh Dameron Tenny. Along with hosting the Prosperous Doc® podcast, Shane has a true passion for behavioral finance, helping clients and audiences understand how to develop successful strategies based on their unique temperaments. An accomplished and highly engaging speaker, Shane is regularly interviewed for television and podcasts, is actively involved in the Financial Planning Association®, and contributes to industry advisory boards.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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