Time’s running out to use certain tax breaks and to correct potentially costly mistakes, Slott says.
Dec 10, 2021
1. Follow up on IRA and 401(k) transactions like rollovers, Roth conversions and backdoor Roths.
Make sure the funds actually got to the correct destination. We are seeing lots of errors here, maybe due to shortages of staff at financial institutions, clicking the wrong account online, or sloppiness. This will probably get even worse in a week or so as more staff might be taking time off for the holidays. Many of these transactions are just not followed up on. If they don’t go to the right place it can be a real mess trying to fix up later after the year has ended and the tax reporting is already set in stone.
In a recent case, Roth 401(k) funds were erroneously deposited in a traditional IRA, which you cannot do, and you would never want to do anyway. These funds were already taxed! They were supposed to be rolled over to a Roth IRA but they went to the wrong IRA. The financial advisor never followed up. The client ended up requesting this expensive [private letter ruling] from IRS for relief. The PLR fee alone was $10,000, on what should have been a tax-free rollover.
2. Follow up on 60-day rollovers.
Were the funds deposited within 60 days? This includes Roth conversions.
Follow up on backdoor Roth transactions. The first step in the process is to make a contribution to a traditional non-deductible IRA and then convert those funds to a Roth IRA. Were the funds ever converted? Included in the recent tax proposals is a provision to eliminate both the backdoor Roth and the mega backdoor Roth after this year, so if your clients want this, they should get this completed before year end.
3. How much will that Roth conversion cost?
Help clients with accurate tax projections. Most of the 2021 income is known by now, so you’ll be able to get a better estimate of what the tax bill might be on a 2021 Roth conversion. It’s good to get the CPA or other tax preparer’s input on this. To qualify as a 2021 Roth conversion, the funds must leave the IRA before year-end.
Check the effect of a Roth conversion on Medicare IRMAA surcharges too. Remember there is a 2-year lookback on these.
Contact clients who lost a spouse this year. Next year the survivor will likely be filing single, increasing their tax bill. Consider a Roth conversion before year-end to get the income into the final joint tax return.
4. Don’t forget business income when planning Roth conversions.
When calculating income, make sure to include any business income (or losses) from clients with pass-through income from S-Corps, LLCs, partnerships and Schedule C income.
Check if the planned Roth conversion might affect eligibility for the 20% QBI (qualified business income) deduction. A Roth conversion could push income over the limits and knock out the deduction, or in some cases, where taxable income is low, a Roth conversion could increase the QBI deduction.
5. Take those RMDs!
They’re back. The CARES Act waived required minimum distributions, but only for 2020. Make sure your clients have taken their 2021 RMDs. We are still hearing from people who think this RMD waiver still applies. It doesn’t. Not only that, many clients’ 2021 RMDs may be higher since no funds had to be withdrawn last year, plus the market was up last year. Make sure they have enough tax paid in wither through estimates or withholding to cover the tax bill.
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