What does your tax return say about your financial situation? The fact is, the paperwork you file each year offers excellent information about how you are managing your money—and about areas where it might be wise to make changes in your financial habits.
By taking the proper steps in advance, your tax return will be less about a bag of receipts and more about tax planning to help you reach your goals. As we prepare to file your taxes, we often identity common planning mistakes and missed opportunities. Below are five red flags that may present problems.
Mistake 1: Holding Title to Your Assets
One of the most common financial planning mistakes we see is a failure to make a transfer on death (TOD) designation. How you title your assets matters. Consider an asset held in joint name. In the event of your passing, this asset will automatically become owned by whomever the joint owner is through rights of survivorship. If you wish to appoint this asset to someone else, the asset may need to pass through probate before the transfer can be made. Probate, the courts process of gathering and distributing a deceased person’s assets, can take anywhere from 6 months to 2 years to complete. You can avoid this by making a transfer of death election. You can avoid probate by making a transfer on death election. We suggest speaking with an attorney to determine if your state has probate laws.
Mistake 2: Holding Too Many Accounts
We often accumulate lots of accounts as we do our financial planning. Changing jobs or advisors or just diversifying our portfolio can result in a multitude of different assets. If your pile of 1099’s is growing, it may be time to re-evaluate if this is still the best strategy. While this strategy may have worked in the past, holding too many accounts can lead to recordkeeping problems. Consolidating the accounts will not only reduce your bookkeeping but also make overseeing and monitoring your accounts more manageable.
Mistake 3: Capital Loss Carryforwards
Capital losses can be used to offset other gains, but only $3,000 of capital loss can be deducted against all other income per year. Losses exceeding that threshold can be carried forward, applied to future tax years. Your tax plan and investments should work together. When we see losses carried around for years it often indicates a lack of coordination between the tax plan and investments. One approach is to create gains to utilize your carried forward losses.
Mistake 4: Not Understanding Your Trust Benefits
Beneficiaries of trusts will receive a K-1 form to report their share of income and losses. If you are the beneficiary of a trust, find out who is in control of these assets and determine what authority, if any, you have to make changes. We encourage the beneficiary of any trusts to be proactive by asking questions and learning more about that they have control over, especially since it will ultimately impact their financial situation.
Mistake 5: Pass Through Income Considerations
Businesses with a pass-through income status don’t have to pay business taxes at the entity level. Rather, all income passes through the owners’ individual tax returns. This means the businesses income is taxed at the same rates that apply to personal tax returns. Under the new tax code, the owners, partners and shareholders of S-corporations, LLCs and partnerships will receive a tax break. Most who pay their share of the business’ taxes through their individual tax returns will have a 20 percent deduction starting in 2018 as long as they aren’t part of the carve out group. High-earning professionals that exceed the income threshold, such as physicians and attorneys, will likely not qualify.
Qualifying for the deduction depends on your income threshold and what field your business is in. Occupations that provide a personal service, except engineering and architecture, are prohibited from taking the deduction. These industries include health, law, accounting and financial and brokerage services. There are exceptions and other questions to consider. This deduction is a great financial planning opportunity. We can help you determine your eligibility.
It is also essential that businesses with a pass-through income structure have a formal succession plan and updated buy-sell agreement with partners. Is the business equipped to financially handle the death or disability of an owner?
If you have questions about your financial situation, remember that we can help. Our firm is made up of highly qualified and educated professionals who serve as trusted business advisors and we work with clients like you all year long.
We can review your financial situation and develop creative strategies to minimize your tax liability and help you meet your financial goals. Contact one of our professionals today.