10 Common Year-End Tax Planning Mistakes

 Are you making the most of your year-end tax planning strategy? In this episode, the guys share the top 10 tax mistakes that could be costing you more than you realize. From the importance of filing away crucial documents to understanding the nuances between Traditional IRAs, Roth IRAs, and 401(k)s, each mistake presents a unique opportunity for improvement. Tune in as they dive into often-overlooked tax deductions, credits, and strategies to optimize your financial plan. Don’t miss out on essential insights that could help you save money and navigate the complexities of the tax system!

For show notes, links, and the full transcript, visit theinvesteddads.com/224

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Chapters

• 1:51 Mistake #1: Not Filing Away Documents & Records
• 4:33 Mistake #2: Not Taking Advantage of Tax Deductions
• 6:00 Mistake #3: Ignoring Tax Credits
• 6:51 Mistake #4: Not Knowing Traditional IRA, Roth IRA, and 401(k) Differences
• 8:45 Mistake #5: Missing Out On HSA Contributions
• 10:41 Dad Joke of the Week
• 11:03 Mistake #6: Withholding Too Little Tax
• 12:13 Mistake #7: Withholding Too Much
• 13:16 Mistake #8: Not Trying to Reduce, Eliminate, or Offset Taxes
• 16:30 Mistake #9: Underestimating Tax Payments & Triggering Penalties
• 18:00 Mistake #10: Neglecting to Get Help From CPAs or Tax Professionals

Transcript

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

All right. Hey, welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. I'm Austin Wilson Co-Portfolio Manager at Hixon Zuercher Capital Management.

Josh Robb:

I'm Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us grow our podcast?

Austin Wilson:

Subscribe, if you're not subscribed. Hit that plus or that follow, whatever the icon is on your podcast player, so you get new episodes when they come out on Thursdays. We would love it if you'd leave us a review on whatever podcast platform you're listening to us on. That helps us help more people. So today we are going to be talking about some common things that we see people doing, or rather not doing, when it really pertains to their taxes. Taxes are one of the two certainties in life, right?

Josh Robb:

Yes. Death and taxes.

Austin Wilson:

Death and taxes. It's a very common thing to talk about, but we're going to hit on it today.

Josh Robb:

Yeah. First, we are not tax professionals. So what we're talking about today are just some thoughts, ideas, tips that we think are helpful, but always, always seek the advice of a professional before making any decisions on your situation.

Austin Wilson:

So you know how we have that disclaimer.

Josh Robb:

Always.

Austin Wilson:

This is not a recommendation, but if you have any questions about your financial situation, feel free to give us a call. Well, now we'll say we're not tax experts, but if you have any questions about-

Josh Robb:

Talk to a tax professional.

Austin Wilson:

... your tax situation, talk to your CPA or tax professional and they'll be able to help you out.

Josh Robb:

Yes. So we got 10 things here. We're going to talk about. Five, we'll take a dad joke break, and then the last five. I'm going to bring these up and we're going to talk through some reasons why we think it's a good or bad thing that people are or are not doing these things.

Austin Wilson:

Absolutely.

[1:51] - Mistake #1: Not Filing Away Documents & Records 

Josh Robb:

So the first one is a mistake that we see is people not keeping good records. Yes.

Austin Wilson:

That's not good.

Josh Robb:

The reason why that is important is you file your taxes once a year. You have until April to file for the prior year.

Austin Wilson:

April 15th.

Josh Robb:

Remembering in April what you did the January 14 months before is just hard to do. So keeping track, because there are a lot of complexities when it comes to tax filing to know what you have to show as income, what you can deduct from your income, and keeping good records. So being organized and keeping those records are important because you can tell the IRS something, but if they audit you, you have to prove it and you need that proof, whether it's a receipt or whatever it is, that shows why I put it on my tax return.

Austin Wilson:

Yeah, this is somewhat tricky. So sometimes some things, they automatically send you a statement for a given year. Maybe it's a charitable place that you've given money to. They can send you a statement of what you've given from your church or whatever, easy to file away. But things like cash donations, write those down, when and-

Josh Robb:

Date. What it was.

Austin Wilson:

Because those are deductible, but you have no record of them, you don't get credit for them. So that's one thing. Just keep track of as those papers come in, especially at the beginning of the year, you're getting in the mail a mortgage interest statement, statement from your gains and losses on your investment accounts, and all these things. Make sure your W2, put them somewhere safe. Keep electronic copies if you can. So my wife and I share iCloud account. Obviously, we're Apple people.

Josh Robb:

Okay, iCloud. Yeah.

Austin Wilson:

Maybe some people have a box or a Google Drive.

Josh Robb:

You get emails saying it's almost full and to buy more all the time?

Austin Wilson:

See, no, I've already bought more.

Josh Robb:

Okay, they already got you.

Austin Wilson:

They already got me.

Josh Robb:

Got you.

Austin Wilson:

But anyway, so keep track, scan those things in, date them.

Josh Robb:

Receipts.

Austin Wilson:

They're there. Receipts, absolutely.

Josh Robb:

Anything that you're going to use or claim as a deductible... So, if you're a business owner especially.

Austin Wilson:

Oh my goodness, this is-

Josh Robb:

Your business has a lot of income, and then they can offset it with a lot of expenses. There are expenses in your business that reduce your taxable income because if that's part of your normal business, you get to reduce that income because it's no longer there.

Austin Wilson:

You're only taxed on the profit.

Josh Robb:

Yes. Right. That's really where we're getting to. So, in order to get to that profit level, you got to prove those expenses. So, keep those receipts. Using software like QuickBooks or something like that is very helpful to put it all in there. But you're going to need those records.

Austin Wilson:

Especially the larger your business or self-employment situation is, the more software like Quicken or whatever makes a lot of sense, because you can link things and automatically pull transactions in and it's so much easier. As much as you can automate it, automate it.

[4:33] - Mistake #2: Not Taking Advantage of Tax Deductions 

Josh Robb:

Yes. So, speaking of keeping track of things, deductions. So, number two is people not taking advantage of deductions.

Austin Wilson:

I like deductions.

Josh Robb:

Deductions are what they sound like. You get to deduct or reduce that income. So, these are all across the thing. But an example of itemized deductions are there's some healthcare deductions you can take.

Austin Wilson:

Very hard to get, actually.

Josh Robb:

Yes, you have to be over a certain amount of percentage. But those are available. There is charitable giving, which is always a big one. Interest deductions, so if you have a mortgage, things like that, you can deduct the interest you pay and goes in there. Now, most people take the standard deduction because it's so large, their itemization doesn't get there. But there are other deductions that are not in there that you can still take. We're going to get to that and talk about that in number five, so I want to hold off on it. But there are things that are outside of that standard deduction or itemized that you get to reduce your income by.

Austin Wilson:

Deduct what you can. Everything you can.

Josh Robb:

Everything you can.

Austin Wilson:

This is just an overarching thought for this topic. I know some people that are very, we'll call it gray area with taxes. Watch that because if you get audited and you're doing things that may or may not be allowed to be deducted or you're rounding or not keeping track, that is an audit nightmare. You could end up with penalties.

Josh Robb:

I've always said-

Austin Wilson:

Conservative.

Josh Robb:

... pay what you owe but do a good job to know you're only paying what you owe.

Austin Wilson:

Absolutely.

[6:00] - Mistake #3: Ignoring Tax Credits 

Josh Robb:

So along with deductions, number three is ignoring credits. So deductions are one way of reducing your income. Credits are actually a more efficient way because it straight takes your income right off of there. So, a good example of a credit would be the child tax credit, which for 2023 last year was up to $4,000 per kid if you met income limitations. So it's a great way of straight reducing your taxable income because every dollar, those just subtracts off your taxable income. Great way.

So, you got to file for these things and you got to mark it in there. It's not automatically going to get it. You have got to make sure you take those credits that are available. Do your research, find out what credits are out there, which ones you qualify for. Make sure you grab those.

Austin Wilson:

Yep. We love paying less taxes.

[6:51] - Mistake #4: Not Knowing Traditional IRA, Roth IRA, and 401(k) Differences 

Josh Robb:

Yes. So, number four. Okay, so those are some mistakes or things that we were talking about missing. This one is more of an understanding. So number four is knowing the difference between a Roth IRA or Roth 401k and a pre-tax IRA or 401k.

Austin Wilson:

Yeah, because taxes are very different depending on how you look at it.

Josh Robb:

Yeah. So, remember, this topic is tax mistakes. The mistake is whether you're taking a deduction this year or in a future year of a tax-free withdrawal. So if your goal or you're trying to reduce current taxable income, you'd want to go with the pre-tax option because every dollar you put in to, we're going to use a 401k as an example, every dollar you put of your money into a 401k, if you put it in pre-tax, you get to deduct that from your income in this year. So if you're in a high tax bracket this year, pre-tax, traditional 401k money is a great bucket.

Austin Wilson:

Because you get taxed when you take it out at the other end, which the thinking is the debate is always, is my tax percentage effective rate going to be now higher today or higher in the future? Most people would anticipate that their income will be less when they retire.

However, that's not always the case. This is where it gets a little bit hairy when you start factoring in Roth's because we're off, like you're about to get to post-tax, right? Yep. So this is money I already paid taxes on. I took this money home. Now I'm putting money in and it's going to grow tax-free because I already paid taxes on it, so I'm paying taxes today in anticipation that taxes will be different in the future.

Josh Robb:

So, the mistake that we see here is someone not thinking through which taxes the better tax to pay now or future tax. So, for people in a low tax bracket, the Roth makes more sense. So that's just what we wanted to point out. The difference between those two is when do you want to reduce that tax liability? Is it current or future? So that was number four.

[8:45] - Mistake #5: Missing Out on HSA Contributions 

Josh Robb:

Now, number five, this is coming back to what I talked about for deductions. This one is in particular a unique one because it doesn't have to be grouped with all those other itemized ones. HSA contributions, that's health savings account contributions. If you are in an eligible health insurance plan and you're eligible being a high deductible plan that meets all the criteria to be HSA compatible, putting money into an HSA, you get a deduct on your tax return that year. Even if you plan on using all that money for healthcare, instead of writing your check straight to the doctor's office, put it into an HSA and then pull it back out to pay it-

Austin Wilson:

You get the deduction.

Josh Robb:

... you get to deduct it.

Austin Wilson:

You're still spending it anyway. So if you're going to spend it anyway, you might as well get the deduction.

Josh Robb:

It's amazing how often we see that as a missed opportunity. When you're in an eligible plan, you have to be an eligible plan.

Austin Wilson:

A high deductible.

Josh Robb:

High deductible plan. Plus, there are rules on how much the out-of-pockets are and all that stuff. Just make sure your plan is eligible.

Austin Wilson:

Well, there are limits on how much you can put into your HSA and it's different for an individual versus a family.

Josh Robb:

So, all that to say though, any kind of contribution if you're eligible, that straight deduction on your tax return, even if you're going to use that money. If you don't use that money, gross tax-free if you're going to use healthcare expenses, triple tax savings, tax deduction, tax-free growth, tax-free withdrawal if you're using it for healthcare expenses. Great way. But we see that one, to me, as one of those missed opportunities is, hey, did you spend some money at the doctor's office? Yep. Did you run it through an HSA? Nope. Oh, maybe you should have, if you're an eligible plan, it's a great way.

Austin Wilson:

Or you can reimburse yourself from your HSA too.

Josh Robb:

Yes. So talk about saving receipts. There is no time limit.

Austin Wilson:

Any time.

Josh Robb:

No time limit.

Austin Wilson:

You could have an expense today as the law is written now, and 20 years from now, if you kept that receipt, you can reimburse yourself after the money grew.

Josh Robb:

As long as you have proof.

Austin Wilson:

As long as you have proof. It's interesting.

Josh Robb:

It's crazy.

[10:41] - Dad Joke of the Week

Austin Wilson:

All right, we're going to take a break. Dad joke of the week. Josh, why aren't tax forms very popular at the party?

Josh Robb:

Ooh, man, why not? I think they would be popular. Why not?

Austin Wilson:

You'd think they would. They're kind of fun. They're fun guys, right? Yes. No, they're actually, it's very taxing to talk to them.

Josh Robb:

Oh, it's taxing to talk to them.

Austin Wilson:

It's taxing to talk to them.

Josh Robb:

Yes, I get it.

Austin Wilson:

Tax joke.

Josh Robb:

Tax joke.

Austin Wilson:

CPAs love it.

Josh Robb:

Oh, good times.

Austin Wilson:

All right, we got five more. Josh hit us with six.

[11:03] - Mistake #6: Withholding Too Little Tax

Josh Robb:

All right, number six, withholding too little tax along the way.

Austin Wilson:

Okay, so withholding, let's just take a break. Withholding is - now you set this up. Generally when you start a new job or you get a raise, you get a paycheck or you have a life change or whatever. But this is you setting up how much the government is going to get out of each paycheck as you're paid, really with the anticipation that your tax bill should be pretty much covered and you'd have the right amount already paid to the government for your income tax. So that is withholding. We're withholding every check a little bit to cover your taxes, to send to the government. That's what withholding this. So withholding too little.

Josh Robb:

Yes. Like you said, you usually set that up with your employer, especially when you're W2, you tell them how much to withhold. The idea here is you can elect say, hey, I have four kids that are all dependents. So you can adjust your withholding because you're saying, you know what? I'm going to be in a different tax bracket. I'm going to get these credits, blah, blah, blah. The idea is if you do too much of that and you withhold too little, in other words, you have too little taken out when your tax bill comes, and if you weren't planning for that and putting money aside, it could be a big burden for you.

Austin Wilson:

Yeah, exactly.

[12:13] - Mistake #7: Withholding Too Much Tax 

Josh Robb:

So too little is a problem. Then number seven on the other -

Austin Wilson:

Flip side.

Josh Robb:

... withholding too much.

Austin Wilson:

Yeah. This is an interesting thing that so many people, it's a cultural thing, and actually companies know about this.

Josh Robb:

Oh, for sure.

Austin Wilson:

So they know that when people start getting tax returns, their businesses are going to boom. But this is really an impact of people being dumb with their withholding. They're withholding too much money. So you're giving an interest free loan to the government throughout the year because you're withholding too much of your check so that you get a nice big check in April or May or whatever.

Josh Robb:

So example is every month I have $1000 of my paycheck withheld. So through the year, $12,000 is sent to the government. Then I do my taxes. The government says, oh, by the way, now that we've finished your taxes, you actually only owed us $8,000.

Austin Wilson:

So, you get $4,000 back.

Josh Robb:

I'm like, look at this. I just got $4,000 of new money.

Austin Wilson:

But no, I could have used that $4,000 throughout the year.

Josh Robb:

My money, I could have invested it.

Austin Wilson:

Could have invested it, or I could have used it, had a good vacation, could have done all kinds of things for this. Don't do that.

[13:16] - Mistake #8: Not Trying to Reduce, Eliminate, or Offset Taxes 

Josh Robb:

Yep. It's finding the in between of those is really where it is. We'll talk about that coming up, and what that means. But before we do, number eight, and this is one where I don't want to get into the nitty-gritty of this because there's a lot of nuances, but there's different types of taxes. There's income tax, this is mainly what we've been talking about. There are also capital gains taxes. Capital gains are the result of buying something and is growing in value for when you sell it. So, an example, if I buy a stock for $5 and it grows to $8, I just earned $3 for that investment, that's capital gains. When I sell it for $8, I pay tax only on the $3, not the first amount because I've already been taxed on that money. So, I don't pay tax on $8, just $3, but that $3 is gains, it's new money for me.

It's not taxes income, it's tax in a separate way. We're not going to get into the nuances. There's breakdown, there's 0, 15, 20, blah, blah, blah. But the point here is understanding when you're going to have those types of taxes in trying to reduce, eliminate, or offset them in that year if possible because losses and gains offset each other. So, if I sell one stock for $8 and I have $3 gain, let's say I bought another stock for $5 and then I sold it for $2, that one didn't do well, I lost $3, those two equal each other out. So now I owe zero taxes because the $3 gain and a $3 loss cancel each other out.

Austin Wilson:

Absolutely.

Josh Robb:

There are some people, and we've talked about this in some of our other podcasts, do what's called tax loss harvesting, where at the end of the year they say, I still like this investment, but I'm going to sell it because it's a loss to just reduce my tax pool amount this year of gains, and then I'm going to wait 31 days and I'm going to buy it back because I still like it, I just don't think it's done very well recently. So, the common mistake here is ignoring or not thinking through in a year, you may have a lot of gains trying to offset or reduce that.

Austin Wilson:

Don't forget that there are different categories of gains too. Short term and long term are different depending on how long you held the asset, and they're taxed differently. Then there's the whole wild card, which is up for debate in government all the time, of whether it's going to go crazy how much-

Josh Robb:

Yeah, we're not going to touch on whether you're going to tax unrealized gains.

Austin Wilson:

Or if unrealized gains are going to get taxed. Yeah, we're not going to get into that. But just know it's very important to understand that that it's different than income.

Josh Robb:

It's one that you can actually control more than your income. If you earn`= income, it shows up, whereas in this case you can actually before the end of the year offset or reduce it. The other's true, this is again, going into tax planning, there are some years you may just want to sell things because your actual tax rate for those is zero. So, you're going to have tax-free gains based on where you sit in income. So just some planning to think through. A common mistake is just not realizing that.

Austin Wilson:

This is where it's really important to have, A, a financial advisor, which we talk about all the time, but B, a CPA and those people-

Josh Robb:

Working together.

Austin Wilson:

... can work together so that they can say, hey, here's how much more income we can realize based on your tax bracket without jumping into the next one or whatever, and here's how many losses I can give you. They just work together. It's a beautiful thing.

[16:30] - Mistake #9: Underestimating Tax Payments & Triggering Penalties 

Josh Robb:

Yep. All right, number nine. This is coming back to, we talked about withholding too much or too little. Number nine is avoiding tax penalties. A tax penalty happens when the amount of tax owed in a year is above a certain amount. I think it's $1000. As well as it's more than what you put aside. They have all those rules. They have what they call safe harboring. Again, talk to your tax professional about what makes sense for you. But the idea there is you can avoid penalties just by paying enough into your taxes along that year to cover at least last year's 100% or 110%, depending on your income. But the idea there is you can at least cover the penalty because the last thing you want to do is pay additional tax just because you didn't put enough aside.

So avoid the penalty. It's an easy thing to do. If you're aware of what's going on. The safe harbor is probably the easiest way of doing it. You can pay tax estimates along the way as well, which is just every quarter you pay a certain amount, you spread it out over the year. So that by the end of the year you've paid in what you owe.

Austin Wilson:

This is another thing where your CPA will pay dividends because they can look at your last year's tax return and say, well, here's your rate so we know what your income's tracking to be this year and we can estimate each quarter and they'll send it all, do it all for you. It's great.

[18:00] - Mistake #10: Neglecting to Get Help from CPAs or Tax Professionals 

Josh Robb:

Yep. Again, if you're covering 100% or 110% of the prior year, depending on how much you make, that alone safe harbors you. So you're at a good spot then to really be in a good place.

So number 10, and this we've already mentioned a couple of times, super important. Seek help if you're concerned or wondering or you have a year that's just different than normal. Go get a professional. There's a reason why there are accountants and CPAs out there. There is a lot of nuances to the tax code. The tax code is very complex. So seeking help is a great thing, especially there may be things you don't even know you don't know to help you either reduce your tax blanket or plan for future tax issues.

Austin Wilson:

Well, that's where CPAs and just like financial advisors, it's not a free service, but oftentimes, and in most instances, if it's a good professional, they will save you more in taxes than they cost you.

Josh Robb:

Right.

Austin Wilson:

Or help you along the way enough that they definitely earn their payment, for sure.

Josh Robb:

Yes.

Austin Wilson:

So Josh, yeah. Final thoughts, taxes.

Josh Robb:

Yep. It's something you got to do every year.

Austin Wilson:

Every year.

Josh Robb:

In the end, there are good uses for taxes. Our government does a lot for us to help keep this country being the best place in the world to live. So taxes have a purpose and there's a reason why. But in the end, you don't want to overpay. You want to pay what's owed of you and make sure you're doing the right job along the way so that January through April, you're not stressing about where you're going to be.

Austin Wilson:

Yeah.

Josh Robb:

That's the end result.

Austin Wilson:

Yeah. I guess my final thoughts are we have a very, very complicated tax code and I would argue one of the most complicated tax codes in the world.

Josh Robb:

Probably.

Austin Wilson:

It's also different between... There's multiple layers. So you have federal tax, you have state tax, and you have local tax. So you have all of these different tax codes that are very different depending on where you live. It just is important to get it right.

Josh Robb:

Yes.

Austin Wilson:

Honestly, it's just very hard to know everything. So that's where professionals are super key and just keeping tabs on it is good. So when it comes to whether you're getting a refund or not, if you're within $500 or $1000, one way or another, you probably did pretty good at estimating where that should be. You may not need to change those withholding allowances. If you didn't, then you probably should. At the end of the day, it's going to take some time to figure it out, or talk to a professional.

Josh Robb:

Or if you have a life event change, new kid, those type of things, that may adjust your taxes.

Austin Wilson:

Absolutely.

Josh Robb:

All right. Well, thank you, Austin. Hopefully everybody appreciate that. If you had somebody talking about taxes, because that's a normal conversation around the lunch table, make sure you share this episode with them. If you have any ideas, email us at hello@theinvesteddads.com.

Austin Wilson:

All right. Until next time, have a good one.

Josh Robb:

All right, talk to you later.

Austin Wilson:

Bye.

Thank you for listening to the Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn't have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today's show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don't miss the next episode.

Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.