By Joseph Bonadies, The Tatlan Group
With the beginning of the new calendar year, tax season is upon us. This promises a flurry of activity for those of us working into the financial sector. And for advisors like me, there is still time to minimize the burden on our clients while helping them meet their financial goals.
While we typically focus on investment management and financial planning, I think it’s common for clients to view their advisor as an all-in-one resource. This is true, since we as advisors can also offer some valuable tips for how to make tax season work better for our clients. However, it is also a good idea to run any ideas past your tax accountant just to be sure they are the best idea for your specific situation.
That being said, here are five tips for making this tax season work better for you.
It’s not too late to contribute to some 2024 tax-deferred accounts
While investments in tax-deferred plans (such as IRA) are traditionally made incrementally over the course of the year, if you haven’t filed your 2024 taxes or hit your contribution limit, then it isn’t too late to make an additional contribution to some qualified plans.
This knowledge can come in handy if, when starting to file your taxes, you discover that your modified AGI will push you into a higher tax bracket. This applies particularly for clients in special situations; for example, self-employed or business owners with SEP-IRAs, or couples where one is covered by employer sponsored 401k plan and the other is not, which could phase out deductibility of spousal IRA contributions depending on modified AGI. By making a last-minute contribution to your tax-deferred account, this can give you the benefit of the tax break.
You have some choices in how you can pay your taxes on IRA distributions
If you’re drawing from a qualified account like an IRA, you have some options in how you pay tax on those distributions. Individuals can choose to have taxes withheld from each distribution or pay quarterly estimated taxes to the IRS. While most people choose the former, since it’s familiar like withholdings from a paycheck, it is also possible to have a single lump sum distribution withheld directly from a qualified account toward the end of the calendar year. Once you and your accountant determine the amount of tax owed, initiate distribution of that amount from the IRA, and have 100% of the distribution withheld for tax purposes.
This could be a good option for people adverse to withholding funds or paying quarterly estimated taxes, especially if they work with an accountant who can tell them exactly how much to pay.
Not always the best season for early birds
Custodians of your investments are required to send out a 1099 form every year to document any realized gains and income you earned on those investments. While it’s rarely a good idea to wait until the last minute to file your taxes, it is not uncommon to receive corrected 1099s closer to Tax Day. And if this happens after you’ve already filed your taxes with the IRS, you might have some extra paperwork this year to correct the mistake.
1099-R forms, which detail distributions from IRAs, must be sent to the IRS and account holders no later than January 31. Although, it is possible to receive a corrected 1099-R form after this date. 1099s consolidated for non-retirement investment accounts usually arrive mid-to-late February and are often corrected through March and April. These are the ones to be especially mindful of, because of the changes they might bring to your tax filing.
I always encourage my clients to wait until a little closer to Tax Day to file, just in case.
Don’t forget your RMDs and QCDs
Required minimum distributions (RMDs) are the minimum amounts that individuals 73 and older (with some exceptions) must withdraw from their retirement accounts each year. Completing these RMDs on time and in full is critical, since the account owner is subject to a 25% excise tax on the amount not withdrawn by December 31. There is a reduced penalty of 10% if the individual corrects the mistake within two years, but it’s always better to avoid any penalty at all.
Another item to consider is qualified charitable distributions (QCDs), which allow IRA owners age 70½ or above to transfer a limited amount of funds (indexed up each year, and greater for married filing jointly if both spouses have IRAs for 2025) directly from their qualified accounts to a qualified charity, tax free. This is a great option for someone looking to donate to a worthy cause while also lowering their taxable income. And for those required to take RMDs, these QCDs can count toward the IRA owner’s required minimum distribution for the year. Remember to request both proof of tax-exempt status and a receipt of funds from the charity in case you need to prove the validity of the QCD.
And if QCDs sound like an interesting idea, but you don’t have a particular charity in mind or you don’t meet the age requirement, you can also move your money into a donor-advised fund. This allows you tax benefits similar to a QCD in the current year, and you can decide to which charitable organization your donation will go at a later date. Unlike QCDs, there is no age requirement for contributing to donor advised funds at this time. Donations to a donor-advised fund must be completed before the end of the calendar year.
A few final thoughts on RMDs
It’s always best to be prepared for the future. If an individual nearing the RMD age of 73 finds themselves with an IRA that has a particularly large balance, it may make sense to start depleting their accounts before they hit 73. Doing so could lower the amounts of each RMD initially because the amount is based on a factor of age vs account value. Yes, Roth distributions under tax law wouldn’t be taxable to you that year. But if you’re going to be forced into RMDs, it could make sense to deplete the account value a bit so you’re not forced into a higher tax bracket in the future. Always confirm with your tax preparer or accountant if exploring this strategy.
I have many clients set up to automatically take their RMDs every year. They can take recurring distributions from their IRA accounts throughout the year to finance their lifestyles, and if these distributions don’t meet their RMD limit for the year, the remaining amount is automatically transferred into their checking account, non-retirement investment account, or any other acceptable account. Others may automatically receive a scheduled lump sum distribution for the RMD amount in full near calendar year end, again to their preferred destination account. By setting up automatic distributions, these clients have almost zero chance of missing the RMD deadline and getting penalized.
Finally, while it’s a simple point, it might not be obvious that even though you’re required to take the RMD from your IRA, you are not required to spend it. You can transfer the assets in-kind, without selling them, to a non-retirement investment account. You’ll pay taxes on the value of that transfer, satisfying the requirement if that value meets or exceeds the RMD amount. If you don’t need the money to maintain your current lifestyle, it can be a good strategy to leave it invested for the future.
Joseph Bonadies is Vice President at the Tatlan Group (Holland, MI). The Tatlan Group specializes in high dividend income producing investments that help people achieve financial independence and continue their ideal lifestyle into retirement.
For more information how you can be best prepared to continue your lifestyle, contact us.
