Yup, it's that time of year again. What sort of errors do people commit in preparing their taxes, and what other issues need to be addressed?

The end of the current financial year is coming over the horizon, and faster than many readers may realize. (April 18 this year.) In this article, Megan Gorman, who is managing partner at Chequers Financial Management in San Francisco, goes through some of the main issues that tax filers confront. The editors here are pleased to share these insights; as always, in the case of such articles, we don’t necessarily endorse all opinions and invite readers to respond. Email tom.burroughes@wealthbriefing.com

What are the most common mistakes that people make when it comes to preparing their taxes?
I always hear people say that “my tax guy got me a refund”. No one gets you a refund. Rather, if you are in a refund, it means you are over withholding to the government through your paycheck and giving the government an interest fee loan.

Some taxpayers like getting a big refund.  But if your monthly cash flow would benefit from a little more cash, you might want to consider adjusting your withholding.
The other mistake people make is that underestimate the expertise necessary to complete certain returns. Tax return preparation is an art - especially with sophisticated returns. If you have oil wells, K-1s or foreign bank accounts, keep in mind that they are subject to complex reporting requirements. Finding a qualified preparer is key - and when your return is complex, you should be prepared to pay for quality work. It will be more cost effective than having to hire someone down the line to deal with notices and audit issues.

What makes this year different than other years in terms of tax preparation?
First, the tax filing deadline is not April 15th but rather the 18th. As a result, taxpayers have more time to file their tax returns. Further, the foreign bank account reporting requirement deadline has changed from June 30th to April 18th with your regular personal income tax return. 

Second, the IRS is better prepared to handle identity theft this year. For the 2015 tax year, the IRS was able to crack down on the filing of fraudulent returns by more than 50 per cent.  It appears that this is improving even more for the 2016 tax year. For instance, one taxpayer we work with had his W-2 stolen when thieves hacked into his employer’s server. He filed the Identity Theft Form 14039 and when a fraudulent return was filed early in tax season showing a refund, the IRS sent a letter to him - requesting the taxpayer come to the local IRS office to validate the fraudulent return. The taxpayer was able to speak with the IRS and show that the return filed was a fraud. This is a huge improvement from previous years. 

What are some of the disadvantages of waiting until the last minute to do your taxes? Are there any advantages?
The biggest disadvantage to waiting until the last minute is that it makes it harder to manage cash flow in the event a significant balance is due. For taxpayers who have an unexpected balance due that they cannot afford to pay, it is better to know the balance as soon as possible. This allows you to work with the IRS to create a payment plan.
One of the advantages to waiting to prepare your taxes is that many brokerage firms are issuing corrected 1099s. In general, if you have a brokerage account, you should wait until late March to file so that you don’t have to amend your return if a corrected 1099 is generated.

Should people who are doing their taxes now operate under the assumption that certain laws, like the estate tax, are going away?
At this point, no one knows if the estate tax is going away. As a result, it is best to wait to see how it plays out.  In the meantime, any major gifting should be postponed until there is more clarity.
 

How does your tax planning advice differ if your client is age 30, 50, or 70?
For taxpayers between 20 and 30 years old, there should be a focus on whether they are maximizing opportunities in the tax code.  For example, if a young taxpayer funded a retirement plan or IRA for tax year 2016, they should check to see if they are eligible for the Retirement Saver’s Credit. This is a credit is 50 per cent, 20 per cent or 10 per cent of your contribution up to $2,000 Single or $4,000 Married Filing Joint depending on your Adjusted Gross Income.

For the 50-year old taxpayer, they should review their deductions on an annual basis. Taxpayers know that there is a tax benefit for having a mortgage - but most cannot quantify how much of a benefit that they are really receiving. As taxpayers move closer to retirement, they need to be reassessing living expenses on an annual basis. If a mortgage deduction doesn’t provide a significant benefit, they might want to consider paying the mortgage off.

For the 70+ plus taxpayer, they might want to consider the medical deduction on Schedule A. Once you turn 65, you can deduct medical expenses in excess of 7.5 per cent of your adjusted gross income.  In retirement, income can be lower and this threshold can be easier to meet. These deductions can include insurance premiums, transportation costs to doctors, prescriptions, and medical aids like glasses, contact lenses and hearing aids. Also long term care premiums are deductible as well.  So this is one area worth looking at. 

What are some interesting trends you’ve seen this year with your clients?
We had a significant amount of clients who felt that their tax rate will be lower during the Trump administration. As a result, they chose to accelerate some of their deductions for the 2016 tax planning year. One example we saw consistently is clients setting up a Donor Advised Fund for charity and frontloading several years of donations into it. They were able to take the deduction in 2016 when rates were presumably higher.

In terms of 2017 planning, a lot of our clients are taking a wait and see approach. Whenever possible, they are waiting to exercise options or sell stock to see if rates will decrease. 

A number of our clients are also taking this time prior to the filing of their 2016 tax returns to help their college age children with planning. For example, many of these college students had part time jobs through the year. As a result, they had earned income and are eligible to fund a Roth IRA.  Roth IRAs can be funded with the lesser of $5,500 or earned income. Once the Roth is funded, the college student has the opportunity to invest - from individual stocks to target retirement funds. And the best part is the money grows tax-deferred and can be withdrawn penalty-free if used for a down payment for a first time homebuyer. It is a great educational tool.