It’s that time of year again and you have been collecting your documents for your tax return. Whether you prepare your own or have a tax preparer, here is a handy guide to make sure you have everything you need and common errors to look for on your return.
First we will review the documents to collect for your return.
Income
If you are still working, you will need your W2 and/or 1099 for any independent contractor work. You will also need a consolidated 1099 for every non-retirement brokerage account and a 1099-R for any withdrawals from a 401(k) or IRA.
Certain types of investments in real estate investment trusts (REITs) or publicly traded partnerships (PTPs) will receive a form K-1 for their income and expenses. Call your advisor at (858) 755-0909 if you are not sure if you have this type of investment.
For those receiving Social Security, you should have an SSA-1099. Pension recipients will receive a 1099R. Rental property owners will have their records of rents received. Interest-bearing accounts, like savings or money market, will have a 1099-INT.
If you would like our office to send any Schwab tax forms directly to your tax preparer, please give our office a call. For security purposes we will only honor requests with verbal confirmation from you.
Deductions and Expenses
Whether you itemize or take the standard deduction, there are certain deductions available to everyone. Collect records of any business use of your home or car, contributions to an IRA or HSA (health savings account), student loan interest paid and unreimbursed teachers’ expenses.
For those that itemize their deductions, make sure to collect your receipts for charitable donations, medical and dental expenses (if you spent more than 7.5% of your income), and losses related to disasters or theft.
If you made charitable donations out of your IRA (also known as a QCD) or a Donor-Advised Fund (DAF), make sure you know those amounts as they are not taxable. There are tax benefits to using these strategies so ask your advisor if you could benefit from either of these.
If you contributed to a Donor-Advised Fund, you may be able to deduct the full contribution. Collect your records for this contribution.
You will receive a form 1098 for mortgage interest paid and real estate taxes, if paid from escrow. If you pay your real estate taxes directly to your county treasurer, make sure you have records of your payments.
Taxpayers who itemize can deduct up to $10,000 of real estate, state, and local taxes paid during the tax year. Many homeowners will meet or exceed this limit with real estate and state income taxes.
Those investors receiving K-1s may be able to claim a deduction for a portion of the income called the QBI or Qualified Business Income deduction. Many of our clients are eligible for this deduction and need their Form K-1 to report the income and claim the deduction.
Credits
You may be able to claim certain credits on your return, though many of these are phased out once your income passes a certain level. The child tax credit, for minor dependent children, phases out above incomes of $200K for single filers or $400K for joint filers (2024).
Regardless of your income, you may be able to claim a credit for buying an electric vehicle or for making certain energy-efficient improvements to your home. Collect your receipts for a qualifying vehicle purchase or for improvements to windows, doors, water heaters, insulation, solar power, or HVAC systems.
Before You File
Review our article Tax Returns: What to Know BEFORE You Sign for an overview of common tax forms and their purpose.
One key recommendation from that article is to review your prior year’s tax return and compare the current year to prior year numbers to identify any large unexpected variances prior to filing your return. Make sure you understand any variances identified before you file.
Once Filed
Once you have filed your return, there are certain things to review to make changes for next year’s taxes. If you owed taxes, review your 1040 to make sure you did not pay a penalty for underpayment. These penalties may be assessed if you paid less than 90% of the taxes due during the tax year. You can increase your tax withholding or make estimated payments to avoid this in the future.
If you are getting a refund, consider reducing the amount of taxes you withhold throughout the year. Many people feel getting a refund is like a bonus, but that is money the government holds onto without paying you interest. Reducing your withholding throughout the year will give you the flexibility to use those funds in your own interest.
While we do not prepare taxes at American Money Management, our team of financial planners are happy to review your prior year tax returns as part of our financial planning process.