Tax Gap

Four Tips to Avoid End-of-Year Tax Headaches

Tax Gap

The coronavirus pandemic reset this year's tax deadlines. For the next filing season, however, taxpayers are being asked to pivot and return to a traditional April 15th date for completing forms and supplying the Internal Revenue Service with supporting financial documentation. 

Considering that cutoffs to file 2019's tax forms were pushed to July of this year, it's probably natural for some filers to feel anxious about such a relatively short turnaround time. To help ease any sense of apprehension and make this year's filing process smoother, below are four overarching tips being recommended now by John Dahlin, head of IFA Taxes, to his clients. 

1. Re-Evaluate Your Distributions and Roth Conversions

Since Dec. 31st is fast approaching and you probably now have a better picture of your personal financial situation, Dahlin is finding this an opportune time to re-examine strategies involving Required Minimum Distributions (RMDs). These are generally required now for anyone age 72 or older, which is different from past years when these distributions were mandatory at age 70 1/2. "The Covid-19 crisis has impacted our lives in ways we couldn't have expected," says Dahlin, who is a certified public accountant with more than a decade worth of public accounting experience. 

Part of the CARES Act, which was passed by Congress to provide financial relief to taxpayers in 2020, allows for individuals to waive paying RMDs in the current calendar year. "A lot of people have already decided they won't take this type of a distribution from their accounts," Dahlin says. "But I'm cautioning taxpayers to not make a quick assessment without consulting a tax professional. Right now, you still have time to take a second look before the deadline."

Not taking RMDs could negatively impact a person's future tax liabilities, he adds. "That's in theory -- in all likelihood, not taking your RMD in 2020 isn't going to have a big impact unless you're in the upper tax bracket," Dahlin says. "The real issue is how RMDs fit into your overall tax planning picture in coming years." 

An opportunity he sees right now is double-checking whether a Roth conversion makes sense. "If you're making less income this year or expect to be in a higher tax bracket in the future, considering paying taxes on moving some of your assets from a traditional IRA to a Roth can be a wise planning tool," Dahlin says. 

Also, if you're considering contributing to an Individual Retirement Account in 2020, it's worthwhile to assess sooner rather than later how much to allocate between a traditional IRA and Roth IRA. In fact, you might want to consider using only a Roth. That's because in a Roth IRA, contributions aren't tax-deductible but withdrawals are tax-free.

To find out more on this subject, you can read the article "Saving on Taxes: Traditional or Roth IRA?" Another free resource is simply contacting IFA directly. Our wealth advisors don't charge for initial financial planning consultations. In terms of specific tax-related issues, Dahlin of IFA Taxes doesn't either. 

Combining a review of your current holistic financial plan – which IFA's advisors also offer as a complimentary service – is critical these days in terms of developing a comprehensive tax strategy, according to Dahlin. He notes that Congress has passed four major tax bills since late 2019. "I'm finding that in many cases, new clients are coming to us with their tax withholdings from paychecks or estimated tax payments set up based on pre-pandemic expectations," Dahlin says. "For those taxpayers, I'm advising them to go back and re-evaluate those calculations."

2. Double-Check Your Withholding Choices and Estimated Tax Payments

For a lot of working people, their financial situations have changed in the past year as a result of living through a pandemic. Even those whose jobs haven't been directly impacted by the coronavirus should use this time left in 2020 to review how much they're withholding from their paychecks to pay taxes, Dahlin says. 

A person who had an employer take out too much to cover this year's tax obligations, for example, is likely to wind up with a smaller 2020 tax bill from the IRS. At the same time, this taxpayer is probably going to have less to use as disposable income, Dahlin notes. "Even under-withholding can wind up being a problem since you basically are going to owe more than you probably originally thought in 2020 income taxes," he adds. 

Given how much change has taken place in the economy, Dahlin is urging taxpayers to "get back to the basics" in their tax planning strategies. "That means making sure all of the little things that you might take for granted are re-checked to maximize your tax savings and lower your tax bill," he says. "It also means using this time wisely to go over with a tax professional all estimates that go into understanding how much in total you should be expecting to pay in federal and state taxes."

3. Review Your Gifting Plans 

Instead of donating cash this year to charitable organizations, taxpayers might want to consider putting their appreciated assets into a Donor Advised Fund (DAF). "People get to donate to a DAF -- at an asset's fair-market value -- without incurring a taxable gain on their personal returns," Dahlin says.

Another tax benefit that can result from such a philanthropic strategy: Assets put into a DAF are allowed by IRS guidelines to grow without being taxed each year. "It's also important to remember that you're going to be able to invest those assets in a diversified portfolio of stocks and bonds, not just in one organization," Dahlin says. 

When you want to actually make a donation, you simply notify the DAF and it will cut a check to that charity. "Again, you're not going to be taxed on it because these Donor Advised Funds are set up as charitable organizations," Dahlin says. "So it's a win-win -- the donor can make a tax-deductible contribution and the charity itself is able to take advantage of a larger donation because the original amount has grown tax-free all of these years."

But it's important for any use of DAFs to be part of an overall investment and tax management plan, he notes. As a result, Dahlin in general advises clients aged 70 1/2 and older to take into account IRAs as part of their charitable givings strategy. "Many people aren't aware that some real tax benefits can become available to those who are able to use IRA assets when gifting to nonprofits and similar organizations," Dahlin says. 

4. Take Time to Analyze Your Company's Tax Credits

For business owners, Dahlin is advising that they keep a watchful eye on payroll and salary-related tax situations. This year under the CARES Act an owner of a company who has been impacted by the pandemic but managed to keep employing workers might be eligible for certain employee retention tax credits. 

Also, if an owner made any upgrades to a company's real estate holdings, those could meet the definition of so-called qualified improvement property. "As part of a new tax provision enacted this year, you could be allowed to retroactively deduct the cost of the property right away," Dahlin says. "I'm also discussing with business owners with property improvements several benefits related to filing amended returns for 2018 and 2019, and then planning to claim the deduction for 2020." 

If you've rehired or increased your employee headcount in the last quarter of 2020, it's probably a good idea to check with your state's latest tax provisions. For example, the state of California has just enacted a new hiring credit that can equate to $1,000 per full-time equivalent employee. "But you must apply between December 1, 2020, and January 15, 2021," Dahlin says.

Different local tax jurisdictions can put forward a range of varying rules and deadlines for business owners, he observes."So, it's very important for anyone who owns a business to start planning ahead and begin the process of checking into any potentially valuable tax credits," Dahlin says. "And since we work with taxpayers across the country, we've got the resources to help make sure you can take advantage of changing tax codes on both the state and federal levels." 

These are just some of his tips to keep in mind heading into year's end, however. As part of his group's support to existing clients, Dahlin has developed a few additional questions that taxpayers should consider when starting a conversation with a CPA. (IFA Taxes, which is a division of Index Fund Advisors, works with IFA's clients nationwide as well as those outside of the firm.) 

Individuals might want to ask themselves the following to make sure all of their bases are covered from a tax perspective:

  • Did you collect unemployment? If so, it's going to be counted as taxable income.
  • Did your family situation change this year or your income drop? In the event of a new baby, marriage or divorce, you might be entitled to an increased economic impact payment. 
  • Did you compute your withholding prior to June this year? You definitely need to re-evaluate if you had any changes in your income. These can result from, among other instances: a layoff; cut in pay; paid sick or family leave; bonuses and a distribution from an employer-sponsored 401(k) plan. 
  • Do you have health insurance? Beginning in 2020, some states are making significant changes. For example, California has mandated a so-called shared responsibility penalty for not having health insurance. Also, there is a premium credit for low- and-middle income taxpayers in that state, which can create a refund or a balance due. In Massachusetts, similar mandates regarding healthcare coverage have already been mandated. 
  • Are you planning to move out of state? You need to plan ahead to make an exit as tax-efficient as possible. 

Business planning opportunities that need addressing before year's end listed by Dahlin include:

  • Did you take a Paycheck Protection Program loan? If so, he says it's "crucial" to start the process of determining your loan forgiveness. 
  • Did you reduce payroll taxes to offset certain payroll costs or postpone payment of payroll taxes? Getting a handle on these types of expenses are necessary to make sure you don't run into a "bad surprise" when everything is finalized, notes Dahlin. 
  • Do you expect a business profit this year? The 199A business deduction is still good for this year. "You need to make sure to maximize this deduction in case it might disappear next year," says Dahlin. 
  • Did you have a net operating loss in 2018 or 2019? If so, you can carry that loss back for five years and get a refund of taxes paid in those years. There is a December 31, 2020, deadline for a quick refund, however. As a result, Dahlin emphasizes that it's important to start planning right away whether it's better to carry back or carry forward any losses for tax purposes. 
  • Do you have net operating losses you plan to use this year? If so, in some states you might not be allowed to count such a loss in certain situations. For instance, in California that's the case if your net business income is over $1 million. As a result, it's important to check your individual state authorities for specific rules on reporting net losses. "We're working with some of our clients in other states to see if they can push at least a portion of that income into 2021," Dahlin says, "and enable the use of those net operating losses." 

With so many changes taking place in tax planning strategies, Dahlin says he's concerned that too many taxpayers won't be as prepared as they should be heading into year's end. "I'm trying to warn all of our clients not to wait too long to start a conversation with us," he adds. "This year, we think any additional preparation time taxpayers can give us will really prove beneficial in terms of reducing their tax bills and avoid paying penalties for missing filing deadlines."

At IFA Taxes, Dahlin is set up to provide initital consultations for those who aren't a client of the firm with tax-related question for free. That can save you money compared to calling most CPAs, who are likely to bill you by the hour to answer questions. Also, IFA Taxes is offering to do your initial year's worth of filing on a complimenatary basis. You can contact Dahlin directly by email at [email protected] or call him at (888) 302-0765.


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There are no guarantees investment strategies will be successful.  Investing involves risks, including possible loss of principal. This is intended to be informational in nature and should not be construed as tax advice. IFA Taxes is a division of Index Fund Advisors, Inc.

Certified Public Accountant (CPA) is a license to provide accounting services to the public awarded by states upon passing their respective course work requirements and the Uniform Certified Public Accounting Examination.