It’s April 21st, and even if you waited until this year’s extended deadline to take care of business, hopefully your taxes are filed and your refund is on its way.
If you’re like most people, your tax-induced anxiety is fading quickly, and you’ll happily forget about taxes until next spring.
But if you’re one of the smarter few, you’ll do the exact opposite and celebrate the end of tax season by doing the unexpected: taking a closer look at your 2015 return.
While I’m not a CPA, our team reviews about 300 client tax returns annually. In that process, we find that whether they’ve been self-prepared or done by a professional, 50% include errors that can result in expensive repercussions—and not just when the IRS comes knocking at your door. It’s why we include tax return reviews as part of the financial planning process, and it’s why I urge you to do the same. Here are some specific examples of why looking backward to your 2015 taxes should be at the top of your to-do list:
Using the IRS as a savings tool offers no real savings at all.
No one will deny that it feels great to get a refund, but planning for that “spring bonus” to pay down credit cards is a mistake. Melinda was receiving a $3,600 refund each year, so we recommended that she decrease her withholding by filing a new W-4 with her employer and increase her 401(k) contributions by an extra $300 a month. Because her $300 contribution is tax deductible, her actual out-of-pocket cost is just $200 a month. And 10 years from now, she’ll be much better off than if she’d kept overpaying throughout the year to receive that superficial bonus in April.
Understating your income can cost you—a lot.
Missing a 1099Div or 1099B (Schwab’s year-end summary)? Track it down, and fast. The IRS gets a copy of these documents, so their computers will nearly always catch missing dividend income before three years is up. When Timothy sent us a copy of his 2015 tax return in March, we saw that he’d missed $4,000 in dividends and capital gains. Because we caught the error early, he filed an amended return before April 18 and paid the $1,300 tax before the deadline. If he hadn’t asked us to review his return, he would have faced an underpayment penalty plus interest for up to three years, totaling about $500.
Miscalculating your Schedule D tax basis can increase your taxes.
Richard sent us his 2015 tax return before he filed. Smart man. According to our records, he had sold 100 shares of AT&T for $3,800, but his return reported 35 shares were sold for $3,800, and his tax basis reported was $35. In reality, his tax basis was closer to $2,500, so the capital gain was reduced from $3,755 to $1,300. If the mistake hadn’t been corrected, Richard would have also been taxed on more of his social security income. So the mistake had legs. A revised return saves Richard about $500, plus the penalties and interest he would have faced in an audit.
Your tax documents can expose important planning mistakes—and opportunities.
When we reviewed Tammy and Jack’s return, we investigated some oddly reported dividend income on Schedule B of their 2015 tax return. Although they thought all their stocks were now at Schwab in their joint account and listed as JTWROS (joint tenants with right of survivorship), we discovered that these stocks were with a transfer agent, and they were only in Tammy’s maiden name. The stocks were worth $20,000, but if Tammy died, it would cost as much as $5,000 in legal fees to have the assets transferred to Jack. By discovering the oversight, we were able to transfer the shares to their joint Schwab account and avoid a costly mistake in the future. In another example, my client, Tom, asked us to review his father’s return after his father passed away. Our review revealed royalty income from oil wells in North Dakota—a piece of Tom’s inherited estate for which there was no other trace. What a nice surprise!
Of course, revisiting your taxes is just about the last thing you want to think about at the moment.
But I promise that some diligence today has the potential to bring rewards down the road. All it takes is some attention to detail. Read your return carefully, review it with your CPA, and send us a copy. Ask questions and discuss any life changes that may impact your taxes next year. By digging deeper, you just might put more money in your pocket—and even reduce your tax-season anxiety altogether.