Preparing Required Documents for Filing Taxes and Avoiding Common Mistakes
Filing your taxes can be overwhelming, especially when your income comes from a combination of sources such as annuities, retirement savings accounts, pensions, or other assets. Maximizing the benefits of all available deductions and credits adds another layer of complexity to the process.
Having the necessary documentation and avoiding common mistakes can save you time, money, and potential penalties. Partnering with an experienced financial advisor and tax planner can streamline tax preparation by ensuring proper documentation, implementing tax-efficient strategies, and reducing the likelihood of errors.
Gather Essential Documents Early
Income Documents
- W-2s for employment income
- 1099 forms (e.g., 1099-INT for interest income, 1099-DIV for dividends, or 1099-R for retirement account distributions)
- SSA-1099 for Social Security benefits
Retirement Account Documents
- Form 5498 for IRA contributions
- Form 1099-R for distributions from IRAs, 401(k)s, pensions, or annuities
Investment and Savings Documentation
- Year-end statements for brokerage accounts
- Form 1099-B for capital gains and losses
Expense-Related Receipts and Records
- Medical and dental expenses exceeding 7.5 percent of AGI
- Records of charitable contributions, including cash and non-cash donations
- Property tax statements and mortgage interest statements (Form 1098)
Retirement-Specific Tax Considerations
Required Minimum Distributions (RMDs)
- Ensure Form 1099-R accurately reflects your RMDs
- Double-check calculations to avoid a 50 percent excise tax on missed or insufficient RMDs
Qualified Charitable Distributions (QCDs)
- Keep records of QCDs made directly to charities to exclude them from taxable income
Working With a Professional Tax Preparer
Handling tax preparation on your own can be precarious, especially if you have complex assets and retirement income from many sources. Collaborating with a financial advisor and tax preparer is typically the best way to avoid major issues. Your advisor ensures your finances are well-organized and employs strategies to make tax preparation smoother and more accurate.
However, mistakes can still happen when you work with a professional, especially if they don’t have a complete picture of your finances. You can reduce this risk by being proactive and avoiding some of the common tax preparation missteps.
Tax Preparation Mistakes to Avoid
Forgetting to Provide Complete Documentation
- Income Sources: Omitting less obvious income streams, like rental income or dividends.
- Investment Activity: Failing to include brokerage statements or records of capital gains and losses.
- Retirement Account Activity: Overlooking forms like 1099-R for distributions or Form 5498 for IRA contributions.
Not Informing the Preparer of Life Changes
- Failing to inform your tax preparer of significant events that occurred during the past tax year, such as selling a primary residence, downsizing, or taking on caregiving responsibilities for a dependent. These events can have major tax implications.
Missing Documentation for Credits and Deductions
- Failing to keep receipts or certifications for charitable donations, energy-efficient home improvements, or medical expenses exceeding 7.5 percent of AGI.
- Overlooking records for state and local taxes (SALT) paid throughout the year, such as property tax bills and state estimated tax payments.
Assuming the Preparer Has All Relevant Details
- Tax preparers rely on the information provided by clients. Retirees might mistakenly assume their preparer knows about past tax planning strategies or carryover deductions (e.g., charitable contribution carryovers).
Not Reviewing the Final Tax Return
- Retirees may neglect to double-check their tax return for errors or omissions before filing. Even professionals can make mistakes if provided with incomplete or incorrect information.
Failing to Discuss Tax Planning Strategies
- Many retirees focus only on the current tax year, neglecting to discuss strategies with their preparer for minimizing taxes in future years, such as Roth IRA conversions, charitable giving, or spreading out RMDs to avoid tax spikes.
Underestimating Tax Implications of New Investments
- Forgetting to discuss the tax treatment of new investment vehicles like annuities, DSTs, or real estate investments made during the year.
Having Your Own Financial Team Can Simplify Your Life
One of the benefits of working with a financial advisor that integrates retirement planning, investment management, tax planning and preparation, and estate planning all under one roof is a streamlined process that ensures all relevant documentation and strategies are aligned for simplified tax preparation.
Fullerton Financial Planning provides a comprehensive approach to ensure nothing in your financial life is overlooked. Our tax planners and preparers possess a clear picture of your portfolio and tax strategy, making it easier to complete an accurate return.
You can learn more about our tax planning and preparation capabilities and our other financial services by calling us at (623) 974-0300 to schedule a meeting.
