4 Common Tax Mistakes We See Clients Make - and Help Avoid

This article was originally written for and published on INSIDER

Strategizing around taxes is a huge part of financial planning. The impact of how much you pay (or don’t) in taxes has the potential to shift what’s possible in your overall plan.

When it comes to your taxes, making mistakes can mean losing money. Thankfully for our financial planning clients, we catch some common missteps before they are made—that's one of the benefits of working with a CFP!

But if you don’t have a professional money team assembled yet, you have to stay on your toes. Make sure you’re on the lookout for some of these tax time errors we see pop up each year that can cost you in real dollars.

1. Refusing to work with a professional

The number-one mistake we see clients make (and try to talk them out of) is to insist on doing their taxes themselves rather than using a qualified CPA or enrolled agent.

Using a tax planning software can be a great solution that saves money when your financial situation is very simple and straightforward.

But when you start adding financial complexity, the downsides of DIYing start piling up to the point that they don’t outweigh its sole benefit: not paying someone else to do the job for you.

Using a CPA can help you avoid mistakes that would cost far more than the fee you pay to retain them. It can also help you stay on top of the myriad tax law changes and regulations that happen every year, which means taking advantage of opportunities that benefit you and avoiding tax moves that could hurt your financial position.

2. Forgetting your tax-loss carryforward dollars

The IRS allows for realized investment losses that go unused in the current year to be carried forward into future years, but you have to actually use those losses to take advantage of them.?

If you don't include the carryforward on the next year's return, you may miss out on the benefit going forward. It's easy to forget if you don’t have a system in place or a way to record this for use 365 days or so from now.

Since 2022 was a big down year in the market, we expect to see a lot of tax losses available due to implementing a tax loss harvesting strategy.

That means that when 2023 tax time comes around, be keenly aware of these tax loss carryforwards from 2022.

3. Assuming your company will take care of everything tax-related for RSUs

If you earn equity compensation, this adds an additional layer of complexity into your tax planning.

Employees who receive restricted stock units, or RSUs, may assume they are off the hook when it comes to tax liability since taxes are withheld when those RSUs are granted.

You may be… or that withholding might not have been enough.

Many companies withhold taxes associated with RSUs at the statutory rate of 22 percent. What you actually owe will depend on your tax bracket, which is determined by your taxable income.

RSUs are a part of that income—and receiving high-value shares can push your income into the next tax bracket. That, in turn, means you may owe more than the 22 percent that was automatically withheld for taxes when your RSUs vested.

Understanding this and being able to run a mid-year tax projection will help you better plan for when you actually need to file, especially if you’ll owe more.

But you can’t rely on your company to tell you that—or even to provide fully accurate tax forms related to your RSUs that vested or sold during the year.

CPAs find errors on these forms all the time. You shouldn't assume your company got all the details right, so double-check to be sure (and note that all of this is another argument for working with a CPA, who can help catch these errors when they happen and help run mid-year tax projections to give you a better sense of what you might actually owe).

4. Overfunding your Roth IRA

The IRS puts limits on who can contribute to a Roth IRA, based on modified adjusted gross income. If you earn more than the limits but contribute anyway, it creates a complicated mess to untangle and you may also face penalties for those contributions.?

This mistake is very easy to make if you’re a good saver who made a habit of maxing out your Roth when you were well under the income limits. As your earnings increase over time, you could accidentally hit a contribution limit.

To avoid this, we typically recommend clients who are close to a cutoff point for Roth contributions to wait until they file their taxes and have an official MAGI number. Once you understand what your income was for the previous year, you know if you can contribute or not (and how much).?

The deadline to contribute to your Roth IRA is the tax filing deadline, so you don’t have to contribute in the same calendar year. Waiting and making one lump sum contribution ensures you’ll steer clear of accidentally overfunding your account.

If you’re ready to optimize your financial life and enjoy the confidence that comes with knowing you’re making all the right moves to grow wealth and increase your assets,?start here .