Top 4 Tax Planning Mistakes to Help Your Clients Avoid in 2024: Insights from Our First Year
Since the inception of Vivify, we’ve witnessed firsthand how hard financial advisors work to guide clients through tax planning. During the 2023 tax season, we also witnessed a handful of recurring tax planning missteps by our clients. Luckily, we’re confident many of these mistakes can be prevented with proactive collaboration between clients and advisors. Here are four common tax planning mistakes we encountered last year and suggestions on how you, as an advisor, can help your clients avoid them in 2024.
1. Inaccurate Retirement or HSA Contributions When Clients Switch Jobs
We noticed many clients running into issues with their retirement and Health Savings Account (HSA) contributions after switching jobs. Some contributed too much across multiple employers, while others fell short of the allowable annual limit.
Why It Matters: Over-contributing can lead to penalties and the need for corrective distributions, while under-contributing means missing out on valuable tax-advantaged savings.
How You Can Help:
Request Pay Stubs: Encourage your clients to provide recent pay stubs from both their previous and current employers. This will help in reviewing year-to-date contributions to retirement accounts and HSAs.
Track Total Contributions: Verify total contributions against IRS limits to ensure they aren't over- or under-contributing. Also, communicate to clients that these limits change year-to-year.
Make Adjustments: If any discrepancies are found, guide your clients in adjusting contributions with their employer or correcting over-contributions.
2. Backdoor Roth IRA Errors
Many clients struggle with the Backdoor Roth IRA process, either by missing steps, failing to report it correctly (especially when DIYing taxes), or not being sure what records they need to provide their CPA. This strategy can be valuable for high-income earners and it requires careful attention to detail.
Why It Matters: Missteps with Backdoor Roth IRAs can result in double taxation and other avoidable tax liabilities.
How You Can Help:
Document the Process: Walk through the steps of the Backdoor Roth IRA with your clients to ensure every action is properly documented.
Review Tax Forms: Make sure your clients have the necessary tax forms, like Form 5498 (IRA contributions) and Form 8606 (non-deductible contributions), to avoid reporting errors. If applicable, let them know certain December 31 balances may be needed for the tax calculation.
Work with a CPA: If the process feels overwhelming, collaborating with a CPA can help ensure everything is correctly documented before tax season. Proactively sharing with the client’s CPA that a Backdoor Roth IRA process was completed will help tax season go more smoothly for all parties.
3. Missing Certain Tax Deductions and Credits
In 2023, we saw several clients miss or almost miss out on tax deductions and credits they were eligible for, such as 529 plan contribution deduction or energy-efficient home improvement credits. This was often due to the client not being aware of these opportunities, or they didn’t have adequate records of qualifying transactions.
Why It Matters: Missing these tax benefits means clients may pay more in taxes than necessary.
How You Can Help:
Create a Tax Checklist: If you are aware of potential deductions and credits that your clients may qualify for, like those for energy-efficient home upgrades or contributions to state-specific 529 plans, proactively share this information with their CPA!
Ask About Major Purchases: Encourage your clients to discuss any planned significant purchases, such as electric vehicles or home renovations, to identify potential tax savings. Having conversations about tax deductions and credits throughout the year, instead of just during tax season, is the best way to ensure the client doesn’t miss out on potential tax savings.
Track Eligible Expenses: Advise your clients to keep records and receipts of eligible expenses so they can claim the maximum benefits on their returns.
4. Underutilizing Charitable Giving Strategies
Some of our clients didn’t fully capitalize on their charitable donations, instead missing out on opportunities to use Donor-Advised Funds (DAFs), qualify for additional tax credits, and lower their overall tax burden.
Why It Matters: Strategic charitable giving not only fulfills philanthropic goals but also maximizes tax savings when done effectively.
How You Can Help:
Review Charitable Goals: Discuss your clients' charitable intentions and how they can benefit from using a DAF to manage donations. Are they open to the idea of donating appreciated stock instead of cash?
Look for State-Specific Credits: Keep an eye out for state-specific tax credits tied to charitable giving, such as donations to Scholarship Granting Organizations in Ohio.
Plan the Timing of Donations: Help your clients bundle charitable contributions into one year to maximize the tax benefits and qualify for itemized deductions. If your clients are nearing their seventies, discuss Qualified Charitable Distributions (”QCD”s) from IRAs and if there is a tax benefit in waiting to donate a large sum of money when they’re eligible for QCDs.
Conclusion
As a financial advisor, you play a critical role in ensuring your clients make sound tax planning decisions. By keeping these common mistakes in mind and working closely with a CPA, you can help your clients optimize their tax strategies not only in 2024, but for years to come. Our team is always here to provide insights and collaborate to ensure your clients are positioned for success.
Through thoughtful planning and collaboration, you’ll help your clients feel more confident about their financial futures.
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