Are you making a $28,000 tax mistake?

Can you believe back the in the day, I'd fill out a tax return with a No.#2 pencil first and snail mail it back to the IRS?   Okay, I'm not ancient but I have a little gray hair and that's a good thing because I've seen a couple of decades worth of financial planning do's and don'ts.  I'm Andy Keeler and I lead Keeler and Nadler Family Wealth and we're really excited to launch this episode 1!  I say *we* because you, our listeners, will to get to know the incredible expertise we have in our office and it begins with guest #1 - Abby Rose.  She's a CFP and Certified Public Accountant and we discuss a lot in this episode from planning for retirement, social security and Medicare changes to yes - Abby helped one of our clients to avoid a $28,000 tax mistake!   Welcome to 'Financial Opportunities Uncovered!    

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Transcript

Speaker Names

Andy Keeler- Host

00:03
Welcome everyone to Episode 1 of Financial Opportunities Uncovered, brought to you by Keller and Nadler Family Wealth. So this is a pretty exciting day for us to be launching this podcast series. Maybe a little nerve-wracking too, but we'll get through it together. 

00:20
I'm very excited, I'm very nervous, but I'm pumped and jacked. 

00:26
The title of today's episode. Is there a $28,500 mistake on your tax return? I promise listeners we will get to that, but there's a little background information that I think you need to know first. I started in this business about 30 years ago or so. I would joke with clients that the tax return was like a math quiz, ultimately graded by the IRS. Much of what we do in financial planning isn't really graded by anyone, so the projections that are made are only checked by reality and time. But the tax return is indeed graded. It's perhaps the most black and white aspect of financial planning, but the ultimate grade may not be known for two years because it often takes about that long for the IRS to catch mistakes. Back in the day you would use a pencil to fill in the boxes on the tax return and once you felt confident with the result, you'd use a pen and then you'd mail it on to the IRS and then you'd mail it on to the IRS. 

Abby Rose Co-host
01:23
For fellow millennials like myself, that indeed makes you seem a little bit old, Andy, that you would mail your tax return in, but I ain't that old, come on. Pre-turbo tax days maybe. 

Andy Keeler- Host
01:37
Yeah, I didn't even have a computer at that time. I think I had a boom box. That was the extent of my electronics at that time. So after you would mail it onto the IRS, a few weeks later they'd cash your check if you owed, or a couple months later they'd mail you a refund. The amount of the check was based solely on the math calculations that you made on your quiz, but the final grade might not have been known for two years or so when a letter arrived in the mail saying you had either overpaid or underpaid. Today we'll discuss how this works in present day, with the advent of tax preparation software. In particular, we'll explore the types of mistakes made and how to avoid them. So to help us understand how this all works is our very own Abby Rose. Abby is a team member here at Keeler Nadler. She's a certified public accountant. So to help us understand how this all works is our very own Abby Rose. Abby is a team member here at Keeler Nadler. 

She's a certified public accountant as well as a certified financial planner.  Makes me feel like a big old nerd over here. 

Maybe a little bit more qualified on paper than I am. So, Abby, we're recording episode number one. You should feel privileged that you are my very first guest here. 

Abby Rose Co-host
02:46
I'm very humbled and very, like I said, nervous and excited but very humbled. 

Andy Keeler - Host
2:51
That makes two of us. I'm humbled to be in your company, Abby. So April 15th, it's a blur. When even was that, a few weeks ago? 

Abby Rose Co-host
03:01
A month ago. Whatever. How are you feeling? Some of the above? Yeah, it definitely goes fast. Once February comes around, it's just a jump right away into April 15th and I don't really know what happens in the meantime. 

Andy Keeler
03:16
Nose to  the grindstone? Yes, right. 

Abby Rose Co-host
03:19
Yeah, feeling a little bit better now. Catching up have a little bit of PTSD from a couple items, but it's what we're here for. 

Andy Keeler
03:30
We're peers here. We work as a team with our clients and it's very helpful to have a CPA on the team. Help us understand tax prep and how the process has changed over the years. As I said, when I was, I think, in college and I was doing my own tax returns, I would get out a number two pencil. Fill in the blanks. How is it different now and how is, would you say, tax preparation software has changed the game? 

Abby Rose Co-host
03:58
Surprisingly, some people still fill out their tax returns by paper. Really, you can do that, I think one of our clients actually sent us one one time the last couple of years, and so it still happens. 

Andy Keeler
04:08
Can you file it that way? 

Abby Rose Co-host
04:09
You can. You just fill it out, you send it in the mail. There's probably more mistakes, obviously, which is where the tax software certainly helps, because the tax software will catch a lot of those just clerical errors, and it's obviously just faster If you file your return by paper. It takes weeks for this IRS to even do anything about it, let alone issue your refund. So you know, filing electronically, it's a day or two, you're approved and within a week you get your refund. 

Andy Keeler-Host
04:37
Okay, so it's a lot faster. Yeah, is it safe to say that you are either using TurboTax or some other? You're using the software, you're using a CPA or tax preparer.   It doesn't have to be a CPA or you're doing yourself by hand? 

Abby Rose Co-host
04:59
Right,  I mean I'd say it's a pretty low number, it's probably like under 10% of people are still doing that. 

Andy Keeler - Host
05:06
What would you say? What's the breakdown of people that hire a CPA versus doing it themselves? 

Abby Rose Co-host
05:10
It's about 50-50 still, I think, especially with all the tax changes they made in 2018, their idea was to make it like a postcard and make it super easy to file your own return. I don't know if that's proven itself completely, because it's still complicated taxes, but it's about 50-50. And I think we see that with our clients too. 

Andy Keeler-Host
05:32
Yeah, it seems like a safe number to me. One of the benefits of having a CPA on our staff here is that we can review a return either before the client files it or before the CPA files it. We can also look at the return after the fact. If, let's say, it's a new client that's coming in the door, we'll take a look to see if we can find it mistakes and things like that. But take me through the different kinds of mistakes.  common ones that people make. 

Abby Rose Co-host
05:59
 There's the IRS catchable mistakes and there's like the IRS non-catchable, that if you don't input it on your return the IRS won't know about it. So, for example, the catchable ones are I didn't claim a 1099. You know that's a very easy one for the IRS to catch because they get a copy of the 1099. So not claiming income is a big one. The opposite of that would be like a QCD, a qualified charitable donation. You know the IRS doesn't really know if you did those. So if you don't put that on your return, the IRS isn't going to turn around and say, hey, we know that you actually didn't have this income. Let me issue you a refund check. 

Andy Keeler-Host
06:38
I see. 

Abby Rose Co-host
06:39
Another big one is federal estimates that are paid. The IRS would eventually, like you said, catch it after a little bit, but it's surely a pain if you don't input it on your return right away. 

Andy Keeler-Host
06:52
Because you could end up writing a check. 

Abby Rose Co-host
06:54
Exactly. 

Andy Keeler-Host
06:55
You wouldn't have needed to, because you had already paid an estimate. 

Abby Rose Co-host
06:58
Yeah, and that one tends to fall through the cracks a good amount. 

Andy Keeler-Host
07:01
Really? People forget that? 

Abby Rose Co-host
07:03
It's over a year, you pay them over the last year and you're filing. You're worried about this year's estimates, not last year's estimates, so it's a fairly common one, unfortunately. 

Andy Keeler-Host
07:14
You would think. I assume that the software asks the question did you pay estimates?  

Abby Rose Co-host
07:21
You're going through things like TurboTax. It certainly walks you through those things to say did you pay any estimates? But for example, if you're using a tax preparer and you never told them you paid estimates, they might ask you. 

Andy Keeler-Host
07:35
But they might not. 

Abby Rose Co-host
07:37
Right, and it's up to you to give your CPA and tax preparer the documents, and if you don't do that, there's only so much due diligence that the CPAs can do. 

Andy Keeler-Host
07:46
Okay, you mentioned QCD qualified. What is that? 

Abby Rose Co-host
07:52
So that's writing a check to charity from your IRA. So if you're over 70 and a half which used to be the old RMD age as we know, now 73. But if you're 70 and a half, you can actually write a charitable donation check out of your IRA and it counts against your required minimum distributions. The problem with it is that places like Schwab, Fidelity you know the places that hold these IRAs they're not reporting qualified charitable donations. So it's on the tax preparer to tell the CPA or tell the software -- hey, this 1099 shows $10,000, but I actually wrote 5,000 of a QCD check. So it's very much on the tax preparer or us who keep record of it, of course. 

Andy Keeler-Host
08:34
I see, and I would imagine because some folks write really small checks to a lot of different charities that it would be pretty common for them to miss a few dollars that they're paying taxes on. But they shouldn't be. 

Abby Rose Co-host
08:47
Right, exactly. 

Andy Keeler-Host
08:49
When we think about the difference between a self-prepared return and those working with a CPA. Talk a little bit about the mistakes that are made on either one. 

Abby Rose Co-host
09:00
So I would say it's definitely easier for them to make a mistake if you're doing it yourself, unless you're using sources like TurboTax, that kind of walk you through it. But you know it's very easy to miss a 1099 or if something changes from last year to this year and you don't remember or the CPA doesn't know, especially when you're using a CPA. 

09:23
A CPA only knows what they know. So if you don't tell them -- hey, I started taking money from this account or I started my social security, you know they're not going to know to ask you, that they can't ask every little question, but it's, you know, certainly easier for them to see opportunities of hey, I saw that you had income from this 1099 last year. Did you have it this year? Sure, that makes sense, they're doing a little bit more due diligence on that. So lots of mistakes kind of either way, but similar mistakes. 

Andy Keeler-Host
09:52
I see TurboTax has been around what? 20 years, something like that. Yeah, and I've heard and I have a hard time understanding this, but I heard that TurboTax, when it was first introduced, was free. Right, that's right. Yes, I wonder back in the day 20 years ago, how companies like that could make any money, but I guess they were kind of getting people hooked. 

Abby Rose Co-host
10:15
Yeah, and it was free until you needed help. So it was hey, file for free, if you know what you're doing. 

Andy Keeler-Host
10:21
Okay. 

Abby Rose Co-host
!0:21
But if you need a tax expert or you need a help desk here, pay a little bit of money. 

Andy Keeler-Host
10:29
And I guess, going back 20 years ago, it wouldn't be that uncommon for a CPA to only charge maybe $200, $250 for a tax return. Now what we're finding when we're talking with CPAs is some of them say we aren't taking any clients, or our minimum fee is, say, 700 or 800. So it's kind of, in a way, Turbotax has caught up with inflation, so have the CPAs. So I guess, to help taxpayers, the IRS has apparently launched some new tax preparation software? 

Abby Rose Co-host
11:10
From an app on their site. How? How does that work? Yeah, it's a software through the IRS site called direct pay. 

11:14
And it's, I think, still kind of like in a beta form. So they, they were trying to sample it out to, I think, 100,00 people, and they met that goal and from what I've seen.  People liked it, but just not very many people used it. So they met the 100,000. But obviously when you look at 100,000 tax returns to the millions and millions that are filed, it's a pretty small percentage. I don't know about you, but I might be a little bit leery. 

Andy Keeler-Host
11:39
I don't know about you, but I might be a little bit leery having the company or agency that I'm writing a check to do the math for me or help me with the math.   

Abby Rose Co-host
11:51
Personally, I kind of want Second set of eyes. Second set of eyes absolutely. Yes. 

Andy Keeler-Host
11:56
There's a lot of acronyms in our business. We talked about the QCD. You mentioned RMD. I've heard about this thing called IRMA. 

Abby Rose Co-host
12:05
Yes. 

Andy Keeler-Host
12:06
That sounds like my grandma. What exactly is IRMAA, and where does it come into play? What are the considerations around that? 

Abby Rose Co-host
12:13
Yeah, so IRMAA is Medicare Part B and D related, so it's income-related Medicare adjustment and that is, if your income gets to be above a certain level, then Medicare increases your premiums. 

Andy Keeler-Host
12:31
Gotcha. 

Abby Rose Co-host
12:45
So that plays a huge role when we talk about things like IRA distributions, qualified charitable donations, even charitable donations outside of your IRA. How do we keep you in a bracket within the Medicare premiums so that you're not spending more on Medicare later by taking these distributions? So it's something that a lot of people aren't even aware of. A lot of people don't know what IRMAA is and how that's affected by your income distributions and how you can stay below those IRMA brackets. I think when we talked to folks about it, they didn't even know what that IRMAA was a thing. They didn't know that Medicare adjusted for income. So it's one thing to worry about the tax brackets. That's kind of what most people are afraid of is. I don't want to get into the 24% tax bracket or the 32% tax bracket, but then there's this other bracket on top of it being the Medicare bracket. 

Andy Keeler-Host
13:23
You know, it seems to me that I think most people would think it is what it is. Social Security is going to pay me a certain amount and I'll take it at 62 or 65. But I'll take it based on when I want the money. Sure, and the IRS is going to require me to take money out of IRAs and I don't have any choice in that. So it would seem to me that most people might have the idea that there's really no planning opportunity around it. The income that we're going to get we're going to get. 

14:01
So I think it's important that folks understand that a team of advisors the financial planner, the accountant, state planning attorney are all kind of working together to make sure that clients aren't making decisions that are going to adversely affect them. In this particular case, it's paying too much in tax. So you talked about this notion that if folks are conscious of anything, they're conscious of this tax bracket. How do all of those things affect each other? And, in your experience, how do you explain to a client the value of having someone really look at that big picture? 

Abby Rose Co-host
14:41
There's a couple things obviously, and I think a lot of folks are worried mostly about how do I just pay the least amount of taxes? So that's a big concern, obviously is paying less taxes. The thing that we look at is, yes, we want to minimize your taxes now, but we also want to minimize your taxes throughout all of retirement. So sometimes that means taking IRA income early when you're retired and delaying social security, and actually sometimes we take Roth conversions, which is taking the money out of the IRA, converting it to Roth and it's permanently tax free. It's very counterintuitive to what people are used to, because you're asking somebody to pay income tax on just income that they didn't think they were going to take out that year, and sometimes it's pretty significant dollar amounts because we want to lower your required minimum distributions later in life, Because some folks have built up these big buckets of 401k money, IRA money and their required minimum distributions are actually going to be more than they need to live off of. 

Andy Keeler-Host
15:43
Back when I started in this business, the conventional wisdom was always take money from taxable investments, that's, non-retirement accounts first.   Let the IRAs grow tax deferred forever and then, after you've exhausted the taxable money, you would then take the IRAs money, you would then take the IRAs. But it sounds like what you're saying here and we're finding with clients that we're coaching through this that sometimes it actually makes sense to pay the tax on the IRAs and other retirement accounts Because, for example, somebody that retires at 60, and the earliest they could take Social Security is 62. But if they're not working at all from 60 to 62, they have more or less no income. And the lowest bracket is what? 

Abby Rose Co-host
16:33
10%. 

Andy Keeler-Host
16:34
So if you could take money out of an IRA and pay only 10%, that's better than letting this thing balloon out of control to the point where, when you're 75, you have income of $250,000. Not only are you going to be in a higher tax bracket, but you're also going to end up having a higher Medicare premium. Right, and that's in theory. That could be for the rest of your retirement days, and if it's $5,000 or $7,000 a year, that adds up. 

Abby Rose Co-host
17:07
Yeah. So it's certainly a lot of planning around it because if we take these Roth conversions now it could still affect your Medicare premium because they do the two-year look back. So starting at age 63 is when Medicare IRMAA comes into play because it'll start affecting you Once you're 63, they look back at that tax return for when you turn 65. So it's actually a lot of pre-planning because some folks think, well, I'm not 65 yet, why does it matter? And it's the two-year look back. So we start planning for Medicare IRMAA around 62, 63, and even before that for folks that retire early, like you mentioned. But sometimes it makes sense to have maybe three or four years of these higher IRMA brackets to do these conversions or take this income, because then in retirement long term we're keeping you out of those higher IRMA brackets. 

17:58
So it's a lot of pre-planning for now and in the future. And I would also say we think that the tax brackets are probably some of the lowest we'll ever see nowadays. They could change their minds on that, I guess, but they're a lot lower than when we've been before. So we've brought that into our planning too. It's probably less tax than you would pay 10 years from now just from the pure tax bracket standpoint. 

Andy Keeler-Host
18:23
Right, that makes sense you just said we start planning for Medicare surcharges and IRMA two years before 65. I would argue most people especially those, obviously, those that aren't working with us don't give Medicare surcharges any thought until they're maybe 64 and nine months. 

Abby Rose Co-host
18:47
Maybe even that. There you go. 

Andy Keeler-Host
18:49
So I think you know we talk with prospective clients that are what we call do-it-yourselfers. We talk with prospective clients that work with other advisors that have never even asked for a tax return, and it's it becomes very clear that there are a lot of opportunities that are right there in front of the client, but they just don't think about it because they don't know, and that's why we're a business. The title of today's episode is -- is there a $28,500 mistake on your tax return? 

Abby Rose Co-host
19:24
Yes. 

Andy Keeler-Host
19:24
So this is about the time in the podcast where we have to figure out or discuss what exactly happened. 

Abby Rose Co-host
19:30
Yeah. 

Andy Keeler-Host
19:31
What did you find for that client? 

Abby Rose Co-host
19:33
Well, it's a little bit of everything we've talked about, which is nice. So we had a client that sent us an email a little late in the year. They had done an extension and they said I need $24,000. And this is a client that we had done planning so much throughout the year because we were doing Roth conversions, we were doing donor advised fund contributions for charitable donations. So when I saw the email, I thought why would you owe $24,000? We've done all this planning. 

20:07
 can figure out what what happened there. But twenty four thousand dollars is a pretty big swing from from doing the tax planning. So I said can I see a copy of your tax return? I just want to double check that everything was was there. So she sent me a copy and it in fact turned out that they had the Roth conversion on there but they did not have any of the donor advised fund contributions that were $25,000. So that alone is a big savings. 

20:33
And then we had paid a fourth quarter estimate for her because we did the conversion. So typically with the conversions you would either withhold the taxes or pay a tax estimate so that you didn't owe any penalties and taxes at the end. So I knew something was off. So when I looked at it and I saw those two things, I reached out to the cpa who did her return and I said here's some documentation. You know we did this fourth quarter estimate, we did these donor advised fund contributions, and she said we had none of that information. So, going from owing 24K, I got an email about a week later from the client saying hey, just kidding, I got a $4,500 refund after they edited that tax return. 

Andy Keeler-Host
21:15
That's amazing. 

Abby Rose Co-host
21:17
So she would have had to write a $24,000 federal payment and, like we said earlier, the IRS would have eventually caught it and given that money back to her. But it would have been a pretty decent timeframe and especially with this client. She doesn't have other income outside of her investments, so she would have been hit with a double whammy of having to sell investments, pay current year taxes to cover last year's taxes. So it was quite a mess but she was very happy. 

Andy Keeler-Host
21:45
You said the IRS would have caught it. They certainly would have caught the fact that she had paid an estimate. 

Abby Rose Co-host
21:50
But not the donor advised fund. 

Andy Keeler-Host
21:51
But not the donor advised fund, because when you make a contribution to a donor advised fund, you might get a letter from them saying you made a contribution, but it's not reported.   Gotcha. 

Abby Rose Co-host
22:01
It's not reported to the IRS. 

Andy Keeler-Host
22:02
Yeah, wow, that is a good catch Abby. I call that money in the bank. So much of what folks think financial advisors do is asset allocation and choosing various investments, and the idea is gosh, maybe this financial advisor is some genius and they can time the market or whatever. Well, that's nonsense in my opinion. But it's very difficult to get what we call alpha or outperformance by just investments alone. It's these kinds of things where you uncover $28,500. That's cash on the barrel head and that's a car for a teenager or something. 

Abby Rose Co-host
22:44
And to us it's very second nature. I mean, like I said, I hadn't looked at her tax stuff in months because it was later in the year, and the second I looked at it I said I know something's wrong. So to us it's very second nature. But to clients and other folks who have advisors, they don't want to be dealing with this stuff every day. They want to be, you know, corresponding with their CPAs on this stuff, want to be, you know, corresponding with their CPAs on this stuff. So that's where we come in. 

Andy Keeler-Host
23:07
Right. What's clear to me is that the taxes you pay, you have a good bit of control over. 

Abby Rose Co-host
23:14
Definitely. 

Andy Keeler-Host
23:15
Whereas the investments that you have your money in, you have very little control over. Yeah, you can choose what investments you're in, right, but you can't control the direction of the stock market or the bond market. Yep, investments you're in, but you can't control the direction of the stock market or the bond market. So I always like to tell clients and prospective clients let's take control of the things we can and button that up and some of the other ancillary things that we do. We'll do the best we can and be diligent about it, but if you're making mistakes and leaving $28,500 on the table, that's easy money for us to get. Hey, abby, I think we just knocked out episode one. What do you think? 

Abby Rose Co-host
23:55
I liked that you let me nerd out for about 30 minutes, so thank you for that and it was a lot of fun. 

Andy Keeler-Host
24:01
I liked it. You can nerd out with us any day. 

Abby Rose Co-host
24:03
Perfect. 

Andy Keeler-Host
24:04
Also thank you to our listeners. I'm Andy Keeler and this is Financial Opportunities Uncovered brought to you by Keeler and Nadler Family Wealth. If you have questions on anything you heard in this episode, find out more on our website -- keelernadlercom.