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Lessons From 2021 Tax Season

Well that is *almost* a wrap on the 2021 tax season. As always, there are a few extensions, but the massive bulk of work is done - and dang it feels good!


I love tax work, but I don’t love the general busy-ness of the tax season, and the looming deadline that is always getting closer and closer. But, that is just part of the beast that is tax.


As I reflect on the hundreds of taxpayers I talked to throughout the tax season, there were some common issues along the way. And, I would say a lot of these issues can be prevented by


  1. Not procrastinating (I’m also guilty), and;

  2. Being proactive throughout the tax year.


When I say proactive, I mean staying organized, and understanding what is going on with your tax items throughout the year. That way, when you get a tax document from an employer, mortgage company, etc. there are less surprises and you don’t have to go back to them asking for corrected documents.


Your tax return is really just a reconciliation of everything that happened for you throughout the year - staying organized will make that reporting so much easier for yourself.


Here are a few of the most common issues that I ran into, and some ways to avoid this in 2022.


State withholding


Man, did I see this a lot! People are moving around a lot, living in multiple states, working in states other than where they live, etc.


I can’t tell you how many times I saw a W-2 with the wrong state information. And typically, when you go back to the employer who issued the W-2, many times they’ll just say “eh, doesn’t matter, report it differently on your return but we’re not going to correct that for you”.


That is actually kinda accurate.. But it doesn’t take away from the headache of filing extra state returns, doing calculations yourself, being confused about where you should be reporting income, etc.


My advice here is to control what you can. When you move to a new state (permanently), tell your employer immediately when you move, so that they can change the state withholding - then, review your next pay stub. Make sure your new state starts getting the withholding and your old state no longer gets it. Nip this in the bud so that you don’t have to get a corrected W-2 when it comes time to file.


Additionally, watch your pay stubs if you live and work in different states. The state in which you WORK gets priority to tax you. Unless, there is a reciprocity agreement between your work state and home state. If there is a reciprocity agreement, make sure the withholding is going to your home state, and the work state keeps their grubby hands off of your money.


If this is done incorrectly, you would ultimately correct it on your tax return (again), but it would cause an extra, unnecessary state filing to get your withholding back (from their grubby hands), and potentially have you under withheld in your home state, resulting in a large tax due in April (and potential interest on the underpayment).


Summary of this section: review your pay stubs and make sure your state withholding is accurate throughout the year.


Tax Items


YOU, as a taxpayer, are responsible for what is getting reported on your tax return. Sure, you can hire a tax pro, but they are not magic. They didn’t follow you throughout the year, and they can only rely on the information you give them.


If you gave them a W-2 and it was reported incorrectly, then they messed up and you can be mad at them. But, if they missed a tax document because you never told them about it, and then you get a notice from the IRS, that is not their fault. It is your responsibility to tell your tax preparer about that.


I had one client that worked with me - his entire tax return was completed, reviewed, and at the point where I was ready to transmit the returns. Then, he sends me a message: “How are you able to file an accurate return for me without my K-1? I just posted it.”


And I WANTED to say “why didn’t you tell me you were waiting on this document??” but I have to be *professional* so I said “oh my goodness, I can’t file an accurate return! I’ll get that corrected right away! :)))))”


Side note: I’m being facetious because this guy was not very nice through the whole process - if you forget a document, it is a pretty easy fix and I promise I’ll be nice about it.


This is all to say that you are responsible for knowing what to expect, and what needs to get reported on your return - do NOT have faith in the companies to send you what you need in a timely manner.


If your mortgage was sold a few times, keep a list of the companies you made payments to so that you know who will be sending you 1098s.

If you were on short-term disability, paid by a third party company, keep an eye out for a W-2 from them.


If you don’t receive most of your documents by 2/15, it is time to start making some calls to get an expected date so you’re not calling them on 4/15 and having to file an extension.


Self reported income / expenses


Similar to the above, there are many parts of the tax code that do not follow the need for a tax document with easy data entry into TurboTax.

Items such as charitable giving, self employment income and expenses, rental property income and expenses, etc. - these items are often needed to be tracked by you, and reported on your tax return.


You should have a system to track these items throughout the year. It is SO much easier to file your taxes when you’ve kept track of this all year, as opposed to going through 12 months of bank statements for the prior year, trying to find all your deductible expenses.


Additionally, keeping track of these items throughout the year can help with business planning and managing your taxes proactively.


Cryptocurrency


Sorry, I can’t let this go. This was one of the hardest parts of the 2021 tax filing for some clients. One client, after many back and forth, just said “report it all as income. I give up. I’ll pay the Feds if it means I don’t have to keep searching for what I need”. I worked with him and we got it figured out, but it delayed his filing by over 2 months due to the search for information.


Some clients were on wild goose chases, purchasing software and other items to get all their crypto trading organized in a way that produces the reportable information on their return.


Additionally, each year you report crypto items on your taxes, the complexity can build. If you’re reporting rewards income, interest income, etc. and that is getting reinvested into new coins, you’re responsible for tracking the reported income as basis in those positions. If you don’t, you’ll be paying double tax when you sell the positions.


Coinbase (or most other crypto custodians) is not tracking that for you. Tracking the correct basis will take manual adjustments, and depending on how much trading is done, can get super complicated.


You may think I’m saying all this to sell my service - “if you have complicated crypto, come see me as a tax expert to help you out!”. But honestly, I would likely have to turn away clients with this much complication, and I fear that is going to happen to many others looking for some help in fixing some of these messes.


Beyond just trading crypto, I also warn you before accepting Bitcoin as payment for services, because of the complexity it brings:

  1. Reporting ordinary income based on the value of Bitcoin when you first receive it.

  2. This sets the basis. If you hold the Bitcoin, you’ll have to manually track the basis going forward.

  3. If you have to sell some Bitcoin to cover the taxes (self-employment taxes and fed & state income taxes), this is another, separate taxable event.

This example causes the filing of Schedule C for self-employment, Schedule D for capital gains, and potentially added costs of a tax preparer if this starts to get outside your abilities.


The crypto mess I saw this year was largely due to day trading - if you’re buying and holding, it makes it less complicated, but still not un-complicated IMO.


I fully respect if you want to trade crypto in any way that brings you happiness - just know that can bring complications with your taxes, and proactivity can help to curb this.


Final Thoughts


I’m in a unique position where I do other people’s taxes, so I have a lot of organization when it comes to them. It is pretty easy for me to create a Google Folder for myself (as if I’m my own client) along with a Google Sheet, where I can drop notes on my taxes throughout the year.

But, why not keep one of these folders / note sheets for yourself? This folder can be available for any charitable receipts, P&L reports, or other items you are doing throughout the year, as well as a place to take notes if your mortgage gets sold to a new company or you switch student loan servicers. That way, when you start receiving tax documents in January / February, you have notes for what to expect.

And, taking a few moments to review pay stubs or an hour a month to keep your books updated can save hours at year-end.


Half of the battle of tax filing is organization - my advice is to take a little time to review how your 2021 tax season went, and make a plan on how you’re going to make 2022 easier and better.