Nobody is perfect.
Even with all the software and experienced tax preparers out there, mistakes are inevitable because U.S. tax law is so complicated. Who among us hasn’t done at least one over the years?
On a hunch, I asked certified financial planners who are married to each other to describe what they’ve been doing wrong over the past few years. They had stories.
In true Valentine’s Day spirit, there was no blame or shaming. And their mistakes were mostly logistical errors or omissions, none of which cost more than about $1,000.
Still, I’ve made some of the missteps you describe at least once. I’d rather not do it again. And you?
Too much division of labor
Divide and conquer makes sense up to a point.
In a family like that of Aaron and Anna Glosser — two children, an Edward Jones outpost in Colchester, Vt., that they run together — efficiency is essential. The person who is more knowledgeable about taxes – or who is simply more comfortable with the detailed work and organization required to file the 1040 – usually completes the task.
For years that was Aaron, and Anna was okay with it. “I have two children with him and I trust him with my children,” she said. “I would only sign the forms at the end.”
But with this tactic, the Glossers potentially set their family up for financial disaster. If Aaron were suddenly gone, Anna would be starting from scratch.
So they changed things. They describe their household financial management as a “delegate and educate” strategy. It’s exactly what it sounds like: Aaron previews tax season for Anna and updates her on the decisions he’s made along the way. Once they file their taxes, he debriefs them.
This has a triple positive effect. Firstly, it would be easier for Anna to step in and take over if necessary.
Second, the postseason conversation — about what to do with any refunds, whether retirement savings or charitable donations were felt to be sufficient this year — becomes all the more meaningful. “We are communicating more about the results of our taxes rather than just completing our taxes,” she said.
After all, when it comes to something as complicated as tax code, the more people involved, the better things tend to go.
“Collaboration is a superpower,” Anna said. “I want as many people as possible to pay attention to the things that need to be done – not just to limit attention, but also to maximize results.”
Doing the right thing a little wrong
When Natalie and Dan Slagle were trying to get Fyooz Financial Planning off the ground, they lived with Natalie’s mother in Rochester, Minnesota to save money. They earned $13,000 that year through part-time work – Dan worked at a running store and Natalie was busy selling groceries at a grocery store. It was just enough to cover $300 in rent and some money to spend on groceries, and she got a small discount on nonperishables at her job.
But Natalie also had $46,000 left in a regular individual retirement account left over from the corporate jobs she left behind. And one of some 68,762 rules in the playbook they had to memorize to pass their certified financial planner exams is: If your income is unusually low one year, convert IRAs to a Roth IRA
Here’s why: When you withdraw money from an IRA in retirement, you typically have to pay taxes. However, this is not the case with a Roth.
The more money you put into a Roth sooner — often by using money from your income after paying taxes on it — the longer it has to grow and then come out tax-free decades later.
However, if you convert an IRA to a Roth, you will generally have to pay taxes. The Slagles had to pay $6,000 in taxes. They didn’t want to use the remaining savings to pay these taxes, so they used money from the IRA directly for the taxes.
But this move comes with its own consequences: Using IRA funds before retirement resulted in a penalty, which in this case was $600. Natalie forgot this in her rush to do the right thing.
No problem, right? But it still upsets Natalie.
“I had tunnel vision: ‘Look at me, I’m a CFP, I’m doing the Roth conversion in a low-income year,'” she said. “At the time I didn’t say, ‘Good, the punishment is worth it.’ And it was worth it, but what bothers me is that I didn’t think it through.”
Just accept all deductions from the start
When Nicole C. Carson and her husband founded Tarif 2nd Story Wealth in Plymouth Meeting, Pennsylvania, they had a little more cushion than the Slagles. While Nicole was making things happen, Tarif was still working full-time.
During those months, however, she didn’t think particularly carefully about expenses—especially things that would have been deductible.
“When you’re running to talk to your mentor who’s 20 miles away, in your head you’re thinking, ‘Oh, this is going to be a really great conversation,'” Nicole said. “But no. I should have tracked my miles. This is a business meeting and I had to make sure I was aware of that.”
Finally, the current IRS standard rate for business use of a vehicle is 72.5 cents per mile.
Not taking yourself seriously as an entrepreneur at first can lead many people who are thinking about quitting a bar or starting a side business to think that expenses aren’t “real” expenses. Nicole encourages anyone who has even the slightest knowledge of entrepreneurship to keep track of all expenses from day one.
“It’s the smaller things of everyday life that seem like life, but if you’re not careful and don’t slow down, you can definitely miss them,” she said. “Even as a business owner who is a CFP, I admit.”