Nobody’s perfect.
Even with all of the software and experienced tax preparers out there, errors are inevitable because the U.S. tax code is so complicated. Who among us hasn’t made at least one over the years?
On a hunch, I asked certified financial planners who are married to each other to describe what they had gotten wrong in recent years. They had stories.
In the spirit of Valentine’s Day, there was no blaming or shaming. And their mistakes were mostly errors of logistics or omission, none costing more than $1,000 or so.
Still, I’ve made some of the missteps that they describe at least once. I’d rather not do it again. How about you?
Too much division of labor
Dividing and conquering makes sense to a point.
In a family like Aaron and Anna Glosser’s — two children, an Edward Jones outpost in Colchester, Vt., that they run together — efficiency is necessary. The person who knows more about taxes — or who is just better at the detail work and organization that filing the 1040 requires — usually handles the task.
For years that was Aaron, and Anna was fine with it. “I have two kids with him, and I trust him with my kids,” she said. “I would just sign the forms at the end.”
But the Glossers were potentially setting their family up for financial disaster by using this tactic. If Aaron was suddenly gone, Anna would be starting from scratch.
So they changed things up. They describe their household financial management as the “delegate and educate” strategy. It is just what it sounds like: Aaron does a tax-season preview session for Anna and updates her about decisions he’s made along the way; then, once they’ve filed their returns, he does a debriefing with her.
This has a triply positive effect. First, Anna could step in more easily to take over if she needed to.
Second, the postseason conversation — about what to do with any refunds, whether that year’s retirement savings or charitable contributions felt like enough — becomes that much more meaningful. “We’re communicating more about the results of our taxes rather than just getting our taxes completed,” she said.
Finally, when you’re talking about something as complicated as the tax code, the more people who participate, the better things tend to go.
“There is a superpower to collaborating,” Anna said. “I want as many people as possible looking at the things to do — dotting the i’s and crossing the t’s. Not just to limit exposure, but also to maximize results.”
Doing the right thing a little bit wrong
When Natalie and Dan Slagle were trying to get Fyooz Financial Planning off the ground, they were living with Natalie’s mother in Rochester, Minn., to save money. They earned $13,000 that year working part time — Dan at a running shop and Natalie stocking produce at a grocery store. It was just enough to pay $300 in rent and put some money toward food, and she got a bit of a discount on nonperishables at her job.
But Natalie also had $46,000 in a run-of-the-mill individual retirement account left over from the corporate jobs she had left behind. And one of about 68,762 rules in the playbook that they had to memorize to pass their certified financial planner exams is this: If you’ve got a year when income is unusually low, convert I.R.A.s to a Roth I.R.A.
Here’s why: When you withdraw money from an I.R.A. in retirement, you generally have to pay taxes. With a Roth, however, you don’t.
The more money you get into a Roth sooner — often by using money from your income after you’ve paid taxes on it — the longer it has to grow and then come out tax-free decades later.
When you convert an I.R.A. to a Roth, however, you generally have to pay taxes. The Slagles had to pay $6,000 in taxes. They didn’t want to tap remaining savings to pay those taxes, so they used money directly from the I.R.A. for the taxes.
But that move has its own consequences: Using I.R.A. money before retirement resulted in a penalty, which was $600 in this case. Natalie forgot about that in the rush to do the right thing.
No biggie, right? But it still rankles Natalie.
“I had tunnel vision, ‘Look at me, I’m a C.F.P., I’m doing the Roth conversion in a low-income year,’” she said. “At the time, I didn’t say, ‘Fine, the penalty is worth it.’ And it was worth it, but what bothers me is that I didn’t think it through.”
Just take all the deductions from the get-go
When Nicole C. Carson and her husband, Tarif, started 2nd Story Wealth in Plymouth Meeting, Pa., they had a bit more cushion than the Slagles did. Tarif was still working a day job while Nicole got things up and running.
During those months, however, she didn’t think that carefully about expenses — particularly things that could have been deductible ones.
“When you’re running to talk to your mentor who is 20 miles away, in your mind you’re thinking, ‘Oh, this will be a really great conversation,’” Nicole said. “But no. I should have been tracking my miles. That’s a business meeting, and I needed to be making sure that I was cognizant of that.”
After all, the current I.R.S. standard rate for business use of a vehicle is 72.5 cents per mile.
For many people thinking about hanging a shingle or starting a side business, not taking yourself that seriously as a businessperson at first can lead you to think that expenses aren’t “real” ones. Nicole encourages anyone with even an inkling toward entrepreneurship to track every bit of spending from Day 1.
“It’s those smaller things that are day to day that seem like just life, but if you’re not being careful and you don’t slow down, you can definitely miss them,” she said. “Even as a business owner that is a C.F.P., I will admit.”
Ron Lieber has been the Your Money columnist since 2008 and has written five books, most recently “The Price You Pay for College.”
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