How to Review Your Income Tax Return

We are continually reviewing tax returns for prospective clients (and even for doc’s who occasionally reach out to me from the forum). Whether you are preparing your own tax return or using an outside preparer, it never hurts to have a second set of eyes take a look at it. But, since you may not have the luxury of having a family member who is a CPA, I’ve come up with a list of 10 easily-missed areas you should check on your own tax return:

  1. Backdoor Roth reporting: Whether you did step one, step two, or both steps of the backdoor Roth, be sure you filed a Form 8606. If not, go back and make sure you didn’t omit them for prior year filings. See Understanding Backdoor Roth IRAs for an explanation of the “steps” and how to report them. Each step can be filed in separate years.
  1. Backdoor Roth taxation: Unless you made a taxable Roth conversion, took a retirement distribution, or had a few dollars of growth on your TIRA before converting, line 4b on your 1040 page 2 should be zero. We found an incorrect reporting just this week on a return filed by a CPA firm.
  1. Capital Loss (CL) carryovers: Taxpayers, whether single or married, can deduct only $3k of “net capital losses” on an annual basis, such as from selling investments at a loss. IF YOU HAVE CHANGED TAX PREPARERS OR TAX SOFTWARE this year, you or the new tax preparer will have to manually enter this amount. To be sure these items were added, check your Schedule D, line 6 for Short Term CL carryovers (STCL) and Schedule D, line 14 for Long Term CL carryovers (LTCL).
  1. PAL (Passive Activity Loss) carryovers: In the early years of owning a rental property, you will typically have a PAL. PALs are deductible only against Passive Activity Income, typically from the same rental. If you sell the property, the PAL you have been building up for several years can be deducted against the profit. IF YOU HAVE CHANGED TAX PREPARERS OR TAX SOFTWARE this year, you or the new tax preparer will have to manually enter the PAL amount. The carryover from 2017 is entered on Form 8582, line 1c or 3c. These can also apply to your K-1s for real estate investments.
  1. Professional fees: Expenses used for the production of income and mitigation of taxes are partially deductible under the new tax law. If you have IC income and pay fees to an outside tax preparer, I would expect to see some part of those fees from prior year tax preparation to show up on your Schedule C, line 17. Even the minimal fees for personal tax software can be partially or fully deducted here. (For example, if the only reason you paid a professional to prepare your return instead of doing it yourself was that you couldn’t figure out Schedule C, I’d argue for deducting 75% or so of the prep fees on your Schedule C).
  1. Schedule E rental income expenses: Same here for professional fees – check line 10 to see if any fees were allocated. Another frequently-missed deduction is travel to and from the property to check up on it, fix something, meet with the property manager, etc. Business mileage is deductible at $.58/mile for 2019. It adds up pretty fast and is reported on line 6.
  1. UPE: Unreimbursed Partner Expenses, saved from the tax deduction chopping block under TCJA. This is a potential biggie that is relatively unknown and highly relevant to physicians working in a partnership arrangement. The way it works is that, if your partnership agreement stipulates that a partner must pay certain partnership expenses out of his or her own funds, then he or she can deduct such expenses on his or her individual tax return. These expenses are labeled “UPE” and are deducted as an offset to partnership income on page 2 of Schedule E, line 28.
  1. Applied income tax refund: Again, if you changed preparers or tax software this year, make sure any prior year overpayments that you applied forward are entered in your new software or picked up by your new tax preparer.

Two more and I’d have a top 10! If you have any suggestions or questions about other areas of your return to double-check, leave your comment here or email me. I’d love to round out my list!

 

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