Tax strategies, pitfalls and tips financial advisors should know this filing season

April 3, 2023 2:13 PM

Enjoy complimentary access to top ideas and insights — selected by our editors.

Avoiding common mistakes when filing returns for wealthy clients, keeping up-to-date on the impact of SECURE 2.0 on retirement and taking advantage of low stock prices for Roth IRA conversion are top of mind for advisors and accountants this tax season.

Read our roundup for more on these and other key tax moves and facts.

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How to get your clients’ tax return right first time

Wealthy individuals almost always use a tax-savvy financial advisor and an accountant to handle their annual returns.

But even with professional help, affluent taxpayers can run afoul of challenges, especially with charitable donations and gift taxes.

IRS audit rates have been declining for years; only 4.5 out of every 1,000 taxpayers with income between $200,000 and $1 million were audited in 2021, a rate of just 0.45%. Still it pays for advisors to keep abreast of the latest danger spots when dealing with the Internal Revenue Service.

Read more:

5 tax pitfalls for wealthy clients this filing season

IRS Delays U.S. Tax Deadline To May 17 After Disruptive Year

Samuel Corum/Bloomberg

Early filing season confusion ends with IRS decision not to tax rebates

The standard recommendation from the IRS to "file early" was turned upside down in early February when the agency told millions of taxpayers in states including California to hold off submitting a return until it decided if federal tax was owedate rebates and refunds received last year.

The news left many accountants and advisors frustrated, and in limbo. But just one week later, the IRS said it would not "challenge the taxability of payments related to general welfare and disaster relief."

The agency's quick resolution of its own uncertainty put an end to the temporary confusion, paving the way for a flood of returns.

Read more:

IRS, in flip-flop, tells 75 million taxpayers to go ahead and file

My RMD (Required Minimum Distributions) IRA, SIMPLE IRA, SEP IRA written in a notebook.

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SECURE 2.0 gives retirement provisions a boost

A raft of close to 100 new provisions covering retirement in the Tax Code came into effect at the end of 2022 with the passing of SECURE 2.0, three years after the original SECURE Act.

While some provisions will be phased in during the next five years, accountants and advisors will need to pay attention to a number of important provisions that went into force this year.

Mark Luscombe, a principal federal tax analyst at Wolters Kluwer Tax & Accounting, takes a look at some of these key provisions.

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Tax Strategy: Retirement change from SECURE 2.0

529 owners no longer need to leave money on the table

New provisions that came into effect with the passing of SECURE 2.0 at the end of last year could be just what individuals with dollars languishing in 529 college savings plans are looking for.

529 owners, generally parents or grandparents, who originally set up a plan to pay for a child's college education can now roll over up to $35,000 of leftover money into a Roth individual retirement account, and take advantage of the tax-free growth and withdrawals offered by the IRA.

"Having the option to roll the funds into a Roth IRA will be a significant benefit that can also give a leg up to the beneficiaries in saving for retirement," said Kristen Carlisle, the general manager of Betterment at Work.

Read more:

College savings plan money left over? Hello, tax-free Roth

Tax season brings new tax strategies to the fore

A difficult year marked by high inflation, uncertainty regarding Fed monetary policy and the fallout from Russia's invasion of Ukraine means preparations for tax season this year are all the more critical.

From Roth IRA conversions to tax loss harvesting, there are numerous ways advisors can work with their clients to help manage their taxable income.

Michael Prinzo, managing principal of tax at top 10 firm CliftonLarsonAllen, discusses some potential new strategies as well as tried-and-tested options.

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Tax strategies to usher in 2023

Diminishing odds leave audit fears unfounded

The prospect of being audited fills taxpayers with dread, but the chances of this happening are actually quite slim and in fact getting slimmer.

For the 2021 tax year, 0.41% of all income tax returns filed were audited, which dropped to 0.38% for 2022, according to Transactional Records Access Clearinghouse data published by Syracuse University. That means 4.1 and 3.8 individuals out of every 1,000 fell under the microscope.

A regular audit is also becoming less likely, as approximately 85% of audits are now "correspondence audits" that take place by letter courtesy of the United States Postal Service.

Read more:

IRS audit rates declined further in 2022