Colin Gerrety, CFP®, CIMA®

Colin Gerrety, CFP®, CIMA®

Colin equates success with helping others make good decisions. A DC-area native, Colin works closely with our client families to navigate the complexity of today's financial world.

There are few things more nerve-racking than receiving a letter from the IRS about a prior tax filing. You know the letter, stating you owe more in tax than you thought with barely any explanation as to why? In our experience at Glassman Wealth, there are a few ways to avoid this.

Every spring, taxpayers go through the perennial process of collecting information for our tax returns. Most of us know the basics: pile up your 1099s and W-2s, perhaps review the tax organizer sent by your CPA, and send off the information or enter it into your tax software.

However, now more than ever, it’s important to understand the common items that are missed that can result in that pesky letter from the IRS.

Commonly Missed Items

Accounts Not in Your Name: We operate in a digital world, which means you should be familiar with where to find all your tax information online. Gone are the days when you know all your 1099s will come in the mail. Don’t forget to check web logins for your spouse and other family members. Keep in mind, the websites of many financial firms only display your own personal accounts. That means you may miss your spouse’s IRA, child’s UTMA, or trust account where someone else is trustee. Review each account on your family’s balance sheet to make sure none are missed. Odds are there is a tax form or some information to file for each account.

Closed Accounts: Remember that Robinhood or E*Trade account you closed in January of last year? Yes, that probably has a tax form to download too.

New Accounts and Private Investments: If you invested in any new accounts or investments, be aware of how it may change your tax reporting. Many private investments issue K-1s, which often don’t arrive until after Tax Day. Even some publicly traded investments like Master Limited Partners (MLPs) issue K-1s. These aren’t included on your standard 1099, and your tax preparer won’t know about any new investments you’ve made in these types of vehicles unless you or your financial advisor tell them.

Charitable Contributions: Did you make donations of cash or perhaps appreciated stocks? Did you open a donor-advised fund or make charitable distributions from your IRA? These are items that frequently are overlooked or forgotten but can save you real money. Most financial firms don’t include IRA Qualified Charitable Distributions on your 1099-R, so for them to be reported properly, you will need to notify your tax preparer of these donations and where they came from.

Cryptocurrency: This is a newer issue that the IRS is focused on. Be sure to report the sale of any cryptocurrency on your tax return. Track your cost basis (purchase dates and amount paid) to keep track of when gains are realized.

Self-Employment Income: If you earned income from any kind of self-employment, whether you are a consultant, gig worker, or operate a small business, chances are you will need to report this income and may even owe extra self-employment taxes. In most cases, you should be paying tax throughout the year through quarterly estimated payments.

Estimated Payment Records: Another commonly missed item when transmitting information to your tax preparer is a record of tax payments you made during the year. Don’t assume they already know this, and be sure to note the date paid and the tax year for which the payments apply. Otherwise, you may not get credit for your payments.

Household Employees: If an independent contractor, like a housekeeper, babysitter, or nanny works at your home on a regular basis, they could be considered household employees and require additional tax filings. This usually doesn’t apply in situations where you hire a business or contractor to work on your home, but the situation is more common than you may think. This can require filing Schedule H with your tax return and paying employment taxes.

Copies of Tax Letters or Notices: It is common for the IRS and states to issue notices based on prior state income tax refunds, identity PINs, and other special items. In 2022, many taxpayers can expect a letter about Advance Child Tax Credit payments. Be sure to include this in your filing.

Items Not Shown on Tax Forms

There are plenty of other items than can make a big difference in your annual taxes that may not be shown on the tax forms you receive from your brokerage firm or employer, such as:

  • Contributions made to IRAs, 529 college savings accounts, or HSAs
  • Gifts made to individuals above the current $16,000 annual exclusion limit
  • Interest paid on margin borrowing
  • Missing cost basis for investments sold
  • IRA recharacterizations or rollovers
  • Income distributed from trust accounts
  • Investments made into Qualified Opportunity Zone Funds
  • Medical expenses paid
  • Rental property income
  • Settlement statements for the sale/purchase of real estate

This is by no means an exhaustive list or how-to guide, and we recommend you consult a qualified tax professional to review your situation. But being aware of these commonly missed items can help you avoid a tax audit and save money.