You did it! You weren’t one of those people that waited until the last minute. You took your receipts and paystubs to your accountant months ago and now your taxes are safely nestled in the protective bosom of the IRS.
Seriously, it can be a relief to get your taxes done because it can be stressful to try to remember everything that happened in the previous year and accurately report it. There are lots of documents to collect, lots of facts to remember, and a lot of questions to answer. I usually recommend having a professional prepare your taxes for you, preferably someone that takes the time to understand your situation and does more than just data entry and letting a software spit out numbers. This way you can be confident that you got every single credit and deduction you should have gotten and you know that your taxes were filed in the most logical way.
But what about after filing your taxes?
It’s tempting to wash your hands of taxes after your preparer sends everything off to the IRS and to wait another year. But there’s more to tax follow up than waiting on the refund or making sure to write that check the IRS expects. I want you to check 3 areas before you close your mind about taxes until your next quarterly payment is due. Don’t worry, you don’t need to be a CPA or EA to check these areas, but they’re important nonetheless and will help to ensure that you don’t have any amendments or bigger problems later.
Confirm Personal Data
This is such low hanging fruit, but is unfortunately easily overlooked. Pick up your filed return and check to make sure your name, address, and social security number are right. Do the same for your spouse and your kids (if they’re still dependents). Make sure if you have more kids than are allowed on Form 1040 that there’s a reference to “seeing the additional statement” and that all the dependents are listed there. Once you’ve confirmed all of this information you can pat yourself on the back. You’ve just confirmed the most important information on your return.
Give Your Income The Eye Test
The entirety of the bottom half of Form 1040 is the summary of your income, adjustments to income, and deductions from your income. Give it a look. Check that your wages look accurate. It should match the total of your W-2s. Interest and dividends are reported on 1099s from your investment custodians usually, so make sure they look accurate. Did you take any money out of IRAs? It is reported here as well. If you employed a Roth conversion strategy you’ll want to make sure it’s reported here correctly. There will be an amount showing in 4a if you did indeed convert. If there are capital gains reported on your return then it’s good to check Schedule D to see if they were all long-term. These gains can come from lots of places, but usually they are from a non-qualified brokerage/investment account that has been traded. Capital gains can be avoided if you don’t take money out of the account, so it’s important to know what your strategy is with them. All too often an investment manager will realize capital gains for a client at a poor time (not taking their entire tax situation into account) and cause the taxes to be much higher. It is often possible to achieve a 0% capital gains tax rate if done right. If there are any short-term capital gains on Schedule D then you need a good explanation for it. Those add to ordinary income and are almost always taxed at a higher rate than long-term capital gains.
Standard Deduction or Itemized?
You can find this on line 12a of your Form 1040. If you’re married filing joint in 2021 then the standard deduction was 25,100. If it’s a different amount you probably itemized. If it’s lower than 25,100 then you need to look at why you didn’t take the standard deduction. For some reason a lot of people spend a lot of time trying to itemize when the standard deduction is usually larger (especially now thanks to the Tax Cuts and Jobs Act of 2017). I have seen some returns where the filer has chosen to itemize for less than what the standard deduction would have been. That’s not a good plan. To verify your itemized deductions, check Schedule A. If you don’t have a schedule A it’s probably because you took the standard deduction.
Knowing whether you took the standard or itemized in the last year is helpful for looking forward to the next year. You can reevaluate your charitable giving strategies, medical spending projections, and more to see if you’ll be able to itemize in the upcoming year. If that’s the case you’ll need to plan on keeping good records and make sure you get receipts from all of the necessary deductible institutions you give money to (colleges, charities, churches, doctors, hospital, etc.). If you are pretty sure there’s no way you’ll be itemizing you can go about life with no changes!
But Wait, There’s More
There’s obviously a lot more that can be reviewed on your tax return than just these 3 areas. That’s why I do detailed tax reviews for my clients and make a plan for the upcoming year. A good financial planner knows taxes are a huge part of the value they can add, so why avoid them? Send a copy of your tax return to me for your review.