The Krilogy® Tax team is gearing up for another successful tax season, and we want to help you feel as confident and prepared as possible. As we kick off the season, we wanted to share a few common tax mistakes that we have come across recently to help you avoid doing the same before you file your 2021 tax return.
- Not staying up to date on the latest tax news:
Given the current political environment, there has been a constant stream of new proposals regarding tax laws and regulations. Due to the pace of change, it’s more important than ever to keep up with how these proposals may affect your current tax situation. Krilogy® Tax CPAs maintain a minimum of forty hours a year on professional development, continuously enhancing our knowledge and staying up to date with the current laws. The Krilogy® Tax team takes this very seriously. We strive to always be current in our overall tax knowledge, allowing us to be advocates for our clients at the highest level. While it might seem more economical to prepare your own tax return, you could be missing out on numerous tax saving opportunities, or worse, making reporting mistakes that potentially lead to an audit.
- Not keeping a copy of your prior year return and documents:
The current period of limitations for keeping tax returns and source documents is three years from either the due date of the return, the date the original return was filed, or two years from the date the tax was paid, whichever comes later. However, if a fraudulent return was filed or income was significantly under reported, the period of limitations could be longer. Krilogy® Tax typically recommends keeping all tax records for a minimum of seven years to ensure you have the documentation needed in the event of an audit.
- Selecting the wrong filing status:
The IRS applies different standard deductions and tax rates for different filing statuses. Selecting the incorrect filing status can have a big impact on the overall tax liability. For some taxpayers, determining the filing status can be complicated. Careful consideration should be made when choosing the correct filing status. If you are uncertain for which filing status you qualify, you can visit the IRS website or consult with your tax advisor.
- Missing information:
One of the biggest reasons taxpayers receive IRS and/or state notices is that a tax document was not reported on the tax return. Before submitting a tax return, it is important to confirm that you’ve considered all pertinent tax documents that might need to be included on the return. Krilogy® Tax provides our clients with an annual Tax Organizer that lists all of the client’s prior year information along with a questionnaire that helps call attention to potentially important tax issues for that tax year. The Tax Organizer is extremely helpful when gathering current year documents and makes the tax preparation experience as smooth and efficient as possible. In our experience, the most commonly missed items are usually: forgotten W2 forms from transitioning to a new employer mid-year, unemployment income, investment income from a brokerage account, and a new 1098 form if you refinanced or purchased a home during the year.
Krilogy® Tax professionals encounter several tax returns each year that have distributions from an HSA improperly reported. Distributions from an HSA that are used for qualified medical expenses should not be subject to income tax and/or penalties. It is important to verify that these qualified distributions are not increasing your tax bill.
- Incorrect bank information for refund:
Having the incorrect bank account or routing number reported on the tax return leads to a major delay in receiving refunds from the IRS. Also, in cases where the typo is another person’s actual bank account, it could lead to a huge inconvenience rectifying the matter. It is critical to double and triple check the bank information reported on the tax return before it is submitted to the IRS.
- Incorrect IP PINS:
For victims of identity theft who have received an identity theft pin from the IRS in the past, it is very important to note that the IRS will send a new pin every year. The IRS requires this pin to electronically file tax returns from former identity theft victims. Without it, the return cannot be filed electronically. The IRS typically mails these PIN numbers in mid to late January each year.
- Incorrect dependents listed:
One of the larger delays we have recently seen among incorrectly filed tax returns involves the taxpayers’ dependents. If a dependent works and files a tax return, they should consult with a tax advisor to make sure they are correctly filling out their tax return. Dependents who file a return on their own, while failing to include that they are a dependent on another return, will slow the processing of the parent’s return and could delay their refund.
- 529 Plan:
The Tax Cuts and Jobs Act expanded the use of 529 plans to include up to $10,000 per year for students enrolled in grades K-12. Some states allow for a deduction on their return for contributions to 529 plans that can offer tax savings for taxpayers. Missouri currently offers a deduction of $8,000 for single taxpayers and $16,000 for married taxpayers on their contributions to qualified 529 plans. Taxpayers with dependents who are paying tuition for K-12 ($10,000 limit per beneficiary), or in college, can contribute to a 529 plan and then pay the institution directly from their 529 while getting the state tax deduction, if applicable in their state. Distributions from 529 plans are not subject to penalty or tax if they are used for a qualified educational expense. Remember, you are now allowed up to $10,000 per dependent per year for grades K-12. Conversely, there is no limit for qualified college or university expenses.
- Not Using or Not Reporting Qualified Charitable Distributions (QCDs):
When the Tax Cuts and Jobs Act was passed, it increased the standard deduction. This left many taxpayers unable to itemize their deductions, which meant they missed out on a deduction for their charitable contributions. Krilogy® wealth advisors have been using the QCD to help their charitably inclined clients, over the age of 70 ½, to still receive a tax benefit from their donations. If a taxpayer donates directly from their IRA to a qualified charitable organization, they are allowed to reduce the taxable amount of their IRA distribution. Please note it is imperative to report your QCD to your tax advisor so it can be properly reported on the tax return. Krilogy® Tax will seamlessly coordinate with Krilogy® wealth advisors to make sure these important deductions are included correctly.
The Krilogy® Tax team looks forward to supporting you through tax season. Please feel free to reach out to your Krilogy® team with any questions you may have. We’re here to help you avoid the common mistakes listed above, and feel confident about your tax preparation. You’re Ready.
Krilogy® does not provide tax and legal advice. Krilogy® is affiliated with Krilogy Tax Services, LLC. Krilogy® Tax Services provides tax planning and preparation services for an additional cost to Krilogy® clients. You should consult your attorney or qualified tax advisor regarding your situation.
- Not staying up to date on the latest tax news: