January is the perfect time to make sure that you’re on track for the new tax year. While we can’t always predict what Congress and the Internal Revenue Service might do in the coming year, there are steps you can take now to ensure there are no unnecessary surprises. Here are five tax resolutions to consider for taxpayers and tax professionals alike.
1. Do a withholding check-up. One of the easiest ways to ensure that you’re on track for the tax year is to take another look at your tax withholding. This is especially true if you were impacted by the Tax Cuts and Jobs Act (TCJA) or if you expect a significant life change (like getting married, having a baby or buying a house) in the new year. A withholding check-up can help you determine if you’re withholding too much or too little in tax: knowing this information in advance can alert you to changes that you might need to make on the newly designed Form W-4, Employee’s Withholding Certificate. The easiest way to do a check-up is to use the IRS’ Tax Withholding Estimator (just click over to the IRS website).
2. Take a look at beneficiary designations. When you start a new job or create a wealth planning strategy, you’re very focused on beneficiary designations for retirement accounts, life insurance, and other non-probate assets. But after that … not so much. It’s easy to tuck those applications away and forget about them. However, recent changes in the law, including the SECURE Act under the Further Consolidated Appropriations Act of 2020, may impact how taxpayers and their beneficiaries contribute to and benefit from retirement and other accounts. With those changes now on the books, it makes sense to give beneficiary designations another look.
3. Review estate planning documents. Well-designed estate planning documents are generally intended to work in tandem with beneficiary designations and other non-probate assets. Even if taxpayers were not directly impacted by the increased federal estate tax exemption amounts under the TCJA, estate planning documents might require review. Marital and family trusts may no longer be applicable—or may now require more flexibility—while trusts crafted to coincide with stretch IRA provisions may need to be tweaked. Additionally, taxpayers who have experienced significant life changes, including modifications that were the result of income tax planning moves (like converting a second home to a business), should confirm that those strategies remain in line with their overall estate and tax planning goals.
4. Establish and use good data security habits. Not every money-related move has to be tax legislation-heavy. The security of financial and tax data should be a priority for taxpayers and tax professionals throughout the year. But as you update software and operating systems, change internet providers, or fire up the new laptop that you purchased at year-end, it’s even more crucial to review security procedures. The IRS recently reminded tax professionals that federal law requires them to create and follow a written information security plan to protect client data. But taxpayers and professionals should also make data security a priority to protect themselves from identity theft and identity theft-related tax fraud: that includes creating strong passwords, avoiding public wi-fi connections when transmitting or accessing sensitive financial data, and using care when discussing financial and tax accounts.
5. Ask the right questions, including those focused on cryptocurrency and offshore accounts. The IRS has made no secret of the fact that cryptocurrency compliance is a priority in the coming year. In 2019, the IRS announced that it began mailing letters to taxpayers who may have reported transactions involving virtual currency incorrectly or not at all. The agency also introduced a checkbox on Schedule 1 of Form 1040, which now asks taxpayers to confirm any financial interests in virtual currency. The box is similar to questions about offshore accounts found on Schedule B (the IRS has confirmed that offshore compliance remains a compliance target for taxpayers). Failure to answer those questions, or answering them incorrectly, can have serious consequences, including crushing civil and criminal penalties. Since these questions are important—and often overlooked—tax professionals and taxpayers should be having discussions about cryptocurrency and offshore accounts (and the steps needed to become and remain compliant) early in the tax year.
While tax filing season happens once a year, tax planning and compliance should be a year-round objective. Taking a few steps early in the year to get organized and compliant means no surprises at tax time—and that’s welcome news for both taxpayers and tax professionals.
This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.