Tax Season and Poor Decisions
Nothing is certain in life except for two things: Death and Taxes. With tax season approaching, the overwhelming number of tax tips and tricks are soon to follow. Tik Tok has great advice for investing in Dogecoin and Gamestop, but how can you avoid disaster when it comes to filing your taxes?
In this article, we will go over the biggest mistakes you can make during tax season. From opening the wrong type of IRA to leaving write offs on the table, the IRS has left plenty of pitfalls for consumers.
It’s in your best interest to hire a tax professional to handle your yearly filings, but knowledge is power. Here are the 5 Biggest Mistakes that people make during tax time.
Gold and Precious Metal IRAs
Saving money on taxes means taking all the deductions you can find. Tax deferred retirement accounts are the perfect choice to save for long term goals. They also help save money at tax time. IRAs come in many forms, and can hold a variety of investments within them.
Gold is one of the most obvious stores of wealth in the world. Historically, it has been the best store of value over time. It has real world manufacturing utility, and there is a finite amount in existence.
Normally, gold and other precious metals are taxed as collectibles. The IRS taxes collectibles’ long term capital gains at 28%. According to the IRS “Collectibles include works of art, rugs, antiques, metals (such as gold, silver, platinum and palladium bullion), gems, stamps, coins, alcoholic beverages and certain other tangible properties.”
Gold and Silver ETFs are also taxed at the collectibles rate. Due to their similarity to stocks, investors often make the mistake of expecting a capital gains rate between 0% and 20%. Even when held within an ETF the capital gains rate for gold and precious metals is 28%.
With such high tax rates, a tax deferred retirement account seems like the obvious choice for holding these investments. It isn’t always so simple though.
Gold IRAs can hedge against inflation, but concentrates the investment into a single asset class with no cash flow potential. Other precious metal IRAs function in the same way. Silver, Platinum, Palladium and Gold IRAs are available from banks, brokerages and other investment companies.
While the positives seem obvious, the negatives have proven to be burdensome for many investors. The relative unpopularity of these funds cause higher fees. These precious metal IRAs are also just harder to come by. Investing into a Vanguard IRA is as easy as downloading an app. Precious metals need a trustee or “custodian” to handle funds and exchange it for gold.
With plenty of other hedging and tax deferred options, a Gold IRA is more of a tax headache than a tax haven.
Holding Onto Losing Investments
With the rise of $0 commission day-trading came the rise of the HODL. For those who aren’t up on the trends, HODL is the idea that when you buy a security, you are buying it for the ups and downs. A true HODLer never sells. There is always the chance for a turnaround; stocks only go up!
Until they go down.
They say that you only lose money when you sell. Any good tax attorney will tell you, you only make money when you sell.
Realizing a major loss in the stock market can actually save you on your tax bill. For every dollar of loss realized in a stock portfolio, one dollar is deducted from taxable income.
Let’s look at an example:
John made $50,000 in 2020, putting him in the imaginary 18% tax bracket. Early on in the year, John invested $2,000 into $BROK, his favorite brick and mortar retail game store. Sadly for John, the online retailer $AWSM started selling video game downloads for half-off. John’s $BROK position goes from $2,000 to $1,000.
Now John has to make a decision, HODL and hope that the price goes back up, or sell and take his losses.
First, if John holds he has the chance for the stock to go back up, recouping his losses. There is also the chance that the stock continues to decline further, causing further losses in John’s portfolio.
If John sells, things are a bit more concrete. After selling his shares of $BROK, John gets his W2 from work, and begins filing taxes. First he calculates his tax bill for his $50,000 income. Uncle Sam wants a Whopping $9,000.
Then he remembers he can write off his losses. His $50,000 income becomes $49,000, and his tax bill is reduced by $180, an 18% return on his remaining $1,000.
They say that a bird in the hand is worth two in the bush. So how much is an 18% gain in the hand worth?
Missing New Private Mortgage Insurance Laws
Those that have decided to buy a house in recent years have probably taken advantage of an FHA (Federal Housing Authority) loan. These loans for first time home buyers require very little down payment. To protect lenders, Private Mortgage Insurance must be taken out by the buyer.
The IRS was planning to only make these payments tax deductible through 2017. With some luck though, the IRS has decided to extend the deductions through to the end of 2020.
This deduction is exclusive to home owners with an income below $109,000 and can be limited for those with incomes above $100,000. Even so, these deductions can save some of the most vulnerable homeowners thousands over the course of their mortgage.
Don’t make the mistake of missing out on these deductions. You could save even more on that new home!
Forgetting Childcare Tax Credits
Raising a kid is expensive. That’s why the government wants to help out. No, really.
We just learned about a tax deduction in John’s situation and with PMI. His $1,000 deduction saved him $180 on his taxes. Tax deductions are great, and should be utilized whenever possible, but Tax Credits are just… *Chefs Kiss*
According to the IRS website, parents can claim a child care tax credit up to $3,000 each year. Unlike tax deductions, tax credits are a dollar for dollar reduction to your tax bill. That means parents everywhere have the opportunity to pay up to $3,000 less on their taxes every single year.
Losses on the stock market save you money by counting against your total income. Child care tax credits are just the government's way of subsidizing child care. This completely legal and encouraged claim can put thousands of dollars back into the pockets of parents who need it most.
Child care costs can vary widely by state, with estimates putting the most expensive plans at over $20,000 per year. With expenses so high, it’s foolish not to take some free money from the government.
Tax Refund Advances
I pray that I don’t have to tell you this. If there is a single part of this article that you remember, please, let it be this.
Stay away from Tax Advance Scams.
These short-term loans are just as scammy, scummy and detrimental to your financial well-being as PayDay lenders. These scams have sky-high interest rates, hidden fees and a complete lack of business ethics. Tax Refund Advances are the one service you need to stay away from during tax time.
I encourage you to look these up right now. Right on the front page it will say, “No Fees,” and “0% Interest,” and things like, “No, Really. Pay nothing.”
Bullet point three in the fine print reads, “Fees may apply.”
These people are preying on the financially uneducated. These are the people who make sure finances aren’t taught in schools. These are the people that taught the banks to charge overdraft fees on people with no money.
Do Not, and I can’t stress this enough, do not get a short term refund advance.
Financial education and literacy are trending topics these days, but people still lose out every year at tax time. Agents here at Strong Family are dedicated to improving our clients financial situation. Whether it be through our insurance products, financial advising or helping reduce your tax bill, we are here to help.
If you have any questions about your financial situation, please call today and let one of our licensed agents help you.