10 Tax Surprises to Watch Out For, Ep #163

You might have noticed some unexpected surprises when you filed your tax return this year. Since tax planning and preparation is an important part of how we help clients at Financial Symmetry, we wanted to share 10 tax surprises that we spotted in the last few years.

10 Tax season surprises

In preparing or reviewing your tax return, you may have noticed the changes that occurred in the 2020 and 2021 tax years. We’ve summarized 10 of these common tax season surprises below so that next year you can be more prepared when tax time comes.

  1. Owing taxes on an inheritance. Owing taxes on funds that you inherited may come as a surprise to you. Whether you inherited an annuity, an IRA, or a cash life insurance policy, it is important to remember that inheritances often come with tax consequences. If you inherited an IRA you may need to take a required minimum distribution (RMD). If you sold any inherited stocks, remember to ensure that you received a step-up in basis. Double-check that you did before you send in your taxes since those capital gains could be vastly different.
  2. Credit card reward points can carry taxable income. This is so uncommon that we didn’t even know this. However, if you received more than $600 of cashback rewards you may receive a 1099 from your credit card company. Have you ever heard of someone receiving a 1099 from their credit card company?
  3. The advanced child tax credit changed. Many people had a lower income in 2020 so they qualified for the increased child tax credits in 2021. These tax credits were paid out monthly, however, many people no longer qualified for them and ended up having to repay the tax credit. There was an option to opt-out, yet many weren’t aware they could do so.
  4. Trading cryptocurrencies and NFTs count as taxable income. Capital gains from these trades must be counted as income. However, you could report any losses to offset the gains. Another area that many crypto enthusiasts may not consider is that if you are mining crypto this could be considered a business.
  5. You may have received a 1099K. If you use Venmo or another cash app to buy or sell online you could receive a 1099K. If you received more than $600 then it is counted as taxable income.
  6. Underwitholding on a W4 means that you may not have enough withheld. A lot of people owed money for the first time this year. This is due to the fact that the W4 withholding tables are too low. Even though this can be frustrating, the good news is that if you owe money in taxes that means that you made money last year. If you are worried about this happening, reach out to us so that we can help you.
  7. It got lost in the mail. This can happen or you may not realize that you should expect mortgage statements from more than one financial institution. Don’t worry if you receive a statement that something was omitted–there is a reconciling process and you can amend your return once you receive the statements.
  8. Double taxation on a backdoor Roth. If you have a backdoor Roth and receive a 1009R your taxable amount should be at or near zero. You don’t want to pay taxes twice on these funds!
  9. Understanding safe harbor rules and how much tax you have had withheld. Estimate your tax payments and pay your estimates throughout the year. If you owe a large tax bill you may also owe an underpayment penalty. If you have had a large income year avoid this penalty by paying the 110% of your taxes from the previous tax year.
  10. Your K1 hasn’t arrived. These forms are typically delayed. So if you need a K1, expect to file an extension. Remember: an extension to file is not an extension to pay.

Let us help you avoid these surprises

Although Allison and I are not CPAs we do have CPAs on staff. As comprehensive financial advisors, we understand the importance of focusing on tax strategy, especially in retirement. If you were surprised by any of these events reach out to us to see how we can help. While it is important to pay the taxman, we can help ensure that you don’t leave him a tip.

Outline of This Episode

  • [2:58] Inheritances
  • [6:55] Credit card reward points
  • [7:56] Advanced child tax credit
  • [10:30] Cryptocurrencies and NFTs
  • [13:20] 1099K through Venmo or other cash apps
  • [14:58] Underwithholding on W4s
  • [16:39] It got lost in the mail
  • [18:38] Double taxation on backdoor Roth
  • [22:18] What to do if you receive a K1

Resources & People Mentioned

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