Why Review Your Tax Return Every Year is Crucial

Even with a professional preparing your taxes, errors can still happen. Tax professionals work with many clients. Missed documents, incorrect assumptions, or simple oversights can lead to costly mistakes. By reviewing your return, you can potentially save money and avoid future issues. Plus, it’s always easier to fix a draft than to file an amendment later.

The First Page: Don’t Overlook the Basics

It’s easy to overlook the first page of your tax return. You might assume the information is correct. But this section is crucial for accuracy.

Don’t take for granted that the information on the first page of Form 1040 is correct. Review it carefully.

Name and Social Security Number

Verify the accuracy of your name and Social Security number. Even simple mistakes can cause issues down the line.

Filing Status

Ensure you’ve selected the correct filing status: Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Widow(er). The correct filing status can impact your tax liability.

Dependents

Make sure all eligible dependents are listed. Your accountant might not be aware of changes in your family situation, such as new children.

Backdoor Roth IRA: Common Errors and How to Spot Them

The Backdoor Roth IRA is a popular strategy. It allows high-income earners to contribute to a Roth IRA, even if they exceed the income limits. However, this strategy is prone to errors.

Understanding Form 8606

Form 8606 is crucial when executing a Backdoor Roth IRA. This form reports nondeductible contributions to a traditional IRA. Errors on Form 8606 are common and can be costly.

Line 4a and 4b: Your Quick Check

Use lines 4a and 4b (2024 Return) of Form 1040 as a quick check for Backdoor Roth accuracy. Line 4a shows the total IRA distributions. Line 4b shows the taxable amount. A correct entry should reflect only the earnings.

A 1099-R might be misleading. It shows the full conversion amount. It’s important to show the amount of money you put into your IRA and how much interest you earned.

Example Scenario

Let’s say you contribute $7,000 to your IRA via a non-deductible contribution. After 30 days, it earns $50 in interest. You then convert the entire amount to a Roth IRA.

Your 1099-R will show a distribution of $7,050. However, only the $50 in earnings should be taxable if completed correctly. Lines 4a and 4b should reflect this.

Reporting the full $7,050 as taxable would result in overpaying your taxes.

Qualified Charitable Distributions (QCDs): A Bonus Tip for Those 70.5+

A Qualified Charitable Distribution (QCD) is a strategy for those over 70.5. It involves donating directly from your IRA to a qualified charity. QCDs can reduce your taxable income.

Avoiding Double Taxation

A missed QCD can lead to double taxation. The 1099-R will show the full Required Minimum Distribution (RMD) amount, even if part was donated. It’s important to communicate QCDs to your accountant.

Example

Imagine your RMD is $100,000. You donate $50,000 to the Red Cross via QCD. Only $50,000 should be taxed.

Scenario	RMD Amount	QCD Amount	Taxable Amount
Correct Reporting	$100,000	$50,000	$50,000
Incorrect Reporting	$100,000	$0	$100,000

Incorrect reporting would result in paying taxes on the full $100,000.

Schedule B: Uncovering Missed Interest and Dividends

Schedule B reports interest and dividend income. A common mistake is missing 1099s from banks and investment accounts.

The Importance of Schedule B

Schedule B is where you report interest and dividend income. Missing a 1099 form here can lead to underreporting your income.

Line 2b: A Key Area to Check

Check line 2b (2024 Taxes) on Schedule B. This is where interest income is reported. Missed bank 1099s often surface here.

Online Banks and High-Yield Accounts

Online banks like Ally Bank, Marcus, and Laurel Road are likely to issue 1099s. This is because they often have higher interest rates. Check for 1099s from any bank where you had a high balance or a higher interest rate.

Investment Accounts

Brokerage accounts like Schwab, Vanguard, and Fidelity also issue 1099s for interest and dividends. The second part of Schedule B covers dividends.

Why These Are Often Missed

Accountants may not know about newly opened accounts. Financial advisors often have a more complete picture of your accounts.

Dependent Care FSA: Avoiding Accidental Taxable Income

A Dependent Care FSA is a tax-advantaged way to pay for childcare expenses. It’s a good benefit to use if you have children.

Understanding Dependent Care FSAs

A Dependent Care FSA allows you to set aside pre-tax money for childcare expenses. This reduces your taxable income.

Line 1e: The Warning Sign

Check line 1e on Form 1040 (2024). This report shows taxable dependent care benefits. A number on this line indicates potential taxable income.

The Mistake: Lack of Offsetting Qualified Expenses

The taxable amount on line 1e can be avoided if you have offsetting qualified dependent care expenses. Inform your accountant about these expenses.

The Fix: Upload Qualified Expenses

Provide documentation of qualified expenses to your accountant. This will resolve the issue. You could save hundreds or thousands of dollars by correcting this error.

Example

If line 1e shows $5,000 and you don’t have qualified dependent care expenses, this will be taxed.

If line 1e shows $5,000 but you have qualified dependent care expenses, you won’t be taxed.

Underpayment Penalties: Stop Giving the IRS a Tip!

Line 38 on Form 1040 (2024) indicates an underpayment penalty. This penalty arises from not withholding enough taxes throughout the year. Seeing a number here year after year is a problem.

Line 38: The Penalty Warning

Line 38 warns you if you haven’t paid enough taxes during the year. It’s like giving the IRS a tip they didn’t earn.

Why This Happens

High-income earners often struggle to withhold enough. Even marking “Single” and “No Dependents” on their W-4 might not be enough.

The Two Solutions

Here are two ways to avoid underpayment penalties:

• Adjust Your W-4: Update your W-4 form to increase withholding. This is the preferred method for W-2 employees.
• Make Quarterly Payments: Make estimated tax payments to the IRS. This is necessary for those with significant 1099 income. The four quarterly deadlines are January, April, June, and September.

W-4 vs. Quarterly Payments

Adjusting your W-4 is easier. The withholding is spread evenly throughout the year. Quarterly payments require you to calculate estimates and remember deadlines. It’s often easier to just update your W-4 form.

One-Off vs. Recurring Penalties

A one-time penalty due to a unique income spike is understandable. Recurring penalties due to inadequate withholding are not.

Student Loans and Tax Strategies: A Focus for Physicians

This section is for those with student loans pursuing Public Service Loan Forgiveness (PSLF) or other forgiveness programs. This is common for many physicians, especially those in academic positions.

This section is tailored for individuals dealing with student loans, particularly those aiming for Public Service Loan Forgiveness (PSLF) or similar programs. If you’re a physician navigating the complexities of student loan repayment, this information is especially relevant to you.

Married Filing Separately (MFS)

Married Filing Separately (MFS) can significantly reduce student loan payments under income-driven repayment plans. Run the numbers to compare MFS vs. Married Filing Jointly (MFJ). This decision requires careful analysis and isn’t right for everyone. Even though your student loan payment may be lower, you need to ensure your tax bill is not much higher than it offsets the benefit.

Filing an Extension

Filing an extension can be a strategic move. It allows you to lock in a lower income year for repayment plan calculations. It’s a common misconception that filing an extension is a negative thing. Extensions are common and allow you to file at a later date.

The 2023 Income Advantage

Filing an extension can delay the impact of the higher income on student loan repayments.

Example Scenario: Physician in Training

Consider a physician who earned $60,000 during training in 2023. Then they begin earning $250,000-$500,000, filing an extension will allow them to lock in lower payments based on the lower 2023 income. This could save them hundreds or even thousands of dollars per month.

A financial advisor can review a draft of your tax return. Financial advisors often have a more comprehensive understanding of your financial situation than accountants. They have access to information that your accountant might not. This allows them to spot errors. Reviewing a draft is much easier than amending a filed return.

Proactively reviewing your tax return is valuable. Check key areas like Backdoor Roths, Schedule B, Dependent Care FSA, Underpayment Penalties, and Student Loans. Use the information in this post to review your past tax returns. You got this!