As far as taxes go, January is the calm before the storm. Before you know it, your mailbox will be filled with tax forms, you will be gathering charity receipts, and you may be dreading taking the trip to your accountant or starting up your Turbo Tax software.
For most of us, gathering information to prepare our tax returns is simple. However, there are two tax documents you will never receive, but that you may need to be mindful of as tax time approaches.
Tax Mistakes You Might Be Making with Your 529 Plan
The first document you won’t receive relates to those who are making contributions each year to their state-sponsored 529 plan where the plan allows for state income tax deductions (e.g., Maryland). In Maryland, savers can deduct contributions of up to $2,500 per beneficiary per year to both the Maryland College Investment Plan and Maryland Prepaid College Trust. While going into the details of each of these 529 plans would require another article entirely, the important point to remember here is that you will not formally receive a tax form from the investment firm. Nor will you receive any documentation from the state. In other words, it is up to you to remember to tell your tax preparer or include the amount of the contribution or the deductible amount, whichever is less, on your returns.
So, is this a big deal? For each $2,500 income deduction, assuming a combined 7.6% state and local tax rate, a married couple could save an estimated $190. Therefore, if you invested $10,000 (four $2,500 deductions) into the aforementioned 529 plans, that could equate to $760 in tax savings per year! Taking it one step further, if you reinvested that $760 per year for the next ten years and earned a hypothetical 6% return, you would have an estimated $10,000 more saved for college costs. The tax savings can add up in many ways.
Tax Mistakes You Might Be Making with Your Qualified Charitable Distributions
The second tax document you won’t receive relates to qualified charitable distributions (QCDs). If you’re not familiar, a QCD is a direct transfer from an IRA of an account holder over the age of 70½ to a tax-exempt charity or organization (i.e., 501(c)(3)). While this type of distribution to a charity is not considered taxable income, if processed correctly, it can qualify as a required minimum distribution (RMD). Again, the important point, as it relates to tax mistakes, is that the taxpayer is responsible for tracking their QCDs. Just like the 529 plan, you will not receive a letter, correspondence, or tax documents that indicate a QCD has been made (unless you work with a firm focused on customer service).
Since a QCD is reported as a normal distribution on IRS Form 1099-R that you receive at the end of each year, if you forget you made a QCD and don’t mention this to your accountant or include it in your tax returns, you are going to pay more in taxes than necessary.
I will leave you with these famous words:
“You don't pay taxes—they take taxes.” -Chris Rock, comedian
Let the CERTIFIED FINANCIAL PLANNER™ professionals at Williams Asset Management help with your wealth management needs. Whether you need comprehensive and holistic financial planning or investment management, we can help! We are fee-based, independent financial advisors located in Columbia, the heart of Howard County, Maryland. Schedule your complimentary consultation today by calling (410) 740-0220!
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