Mistake #1: The Case of the Missing Checkbox—QCD Edition

Let's talk about Qualified Charitable Distributions, or QCDs for those of us who love acronyms. If you're 70½ or older and charitably inclined, QCDs are one of the smartest moves in the tax playbook. You get to send money directly from your IRA to your favorite charity, satisfy your Required Minimum Distribution, and—here's the kicker—keep that distribution out of your taxable income entirely. It's like tax magic, except it's completely legal and the IRS actually encourages it.

Here's where things get interesting. Your IRA custodian sends you a Form 1099-R showing the full amount you distributed during the year. That form doesn't know whether you sent money to charity or bought yourself a boat. It just knows money left your IRA. Now comes the critical part—when you sit down to prepare your tax return, you need to report that full amount on Line 4a of your Form 1040, but then you subtract the QCD amount and report only the taxable portion on Line 4b. And here's the part everyone forgets: you absolutely must write "QCD" next to Line 4b. Remember to check that 4b box!

Why does this matter so much? Because without that little notation, the IRS computers see a discrepancy between what your 1099-R says and what your tax return shows, and they start sending you love letters. We've had clients come to us in a panic because they forgot this simple step and now the IRS thinks they owe thousands in taxes on money they donated to charity.

The process itself is straightforward, but it requires attention to detail. First, you contact your IRA custodian and request a QCD. They'll send the check directly to your chosen charity—and this part is crucial, the check must go straight from the IRA to the charity, not through your personal checking account. If that money touches your hands first, it doesn't qualify. Think of it like a relay race where you're not allowed to touch the baton. Once the charity receives the funds, they'll send you an acknowledgment letter. Keep that letter! It's your proof that the transaction happened.

When tax season rolls around, you'll receive your 1099-R showing the distribution. Many people see that number and immediately assume it's all taxable. That's where we come in to save the day. We make sure that QCD gets properly reported, that magical notation appears next to Line 4b, and you don't pay a single cent of tax on money you generously gave away. It's one of the most satisfying aspects of our job—watching clients realize they just made a significant charitable contribution without increasing their tax bill.

Mistake #2: The Mysterious Case of the Disappearing Basis

Roth conversions have become incredibly popular, and for good reason. You're essentially trading a tax bill today for tax-free growth forever. It's like paying admission to an amusement park where all the rides are free once you're inside. But here's where things get tricky—and where we see even sophisticated taxpayers make mistakes that can cost them thousands.

The issue revolves around something called "basis"—essentially, the after-tax money you've already contributed to your traditional IRA. If you've ever made nondeductible IRA contributions because your income was too high to deduct them, or if you've used the backdoor Roth strategy, you have basis. That basis is critically important because it's money you've already paid taxes on, which means you shouldn't pay taxes on it again when you convert to a Roth.

Enter Form 8606, the unsung hero of Roth conversions. This form is where you report your nondeductible contributions and track your basis over time. It's also where the wheels tend to fall off for many taxpayers. We've had countless clients come to us with years of Roth conversions, only to discover that nobody—not their previous preparer, not their tax software, not anyone—has been filing Form 8606. The result? They've been paying taxes on money that was already taxed. It's like paying for your meal, then paying again when you leave the restaurant.

The math behind basis calculations can get complicated quickly. Let's say you have one hundred thousand dollars in traditional IRAs, and twenty thousand of that is nondeductible contributions you made over the years. When you convert fifty thousand to a Roth, you don't get to cherry-pick which dollars you're converting. The IRS makes you calculate the taxable portion using the pro-rata rule. In this example, twenty percent of your conversion would be tax-free because twenty percent of your total IRA balance is basis. The remaining eighty percent is taxable. Miss this calculation, and you could be paying taxes on the full fifty thousand instead of just forty thousand.

Here's the part that keeps us up at night: basis tracking is cumulative. Every year you make a nondeductible contribution, every year you take a distribution, every year you do a conversion—all of these events affect your basis. If you skip Form 8606 one year, the error compounds. We've had to reconstruct basis for clients going back a decade or more, piecing together old tax returns, bank statements, and IRA contribution records like tax archaeologists.

The solution is surprisingly simple but requires discipline. Keep your own records of every nondeductible IRA contribution you make. Create a spreadsheet if you're tech-savvy, or just maintain a folder with copies of each year's Form 8606. When you work with a tax preparer, make sure they know about your basis and are tracking it properly. And please, for the love of all things holy, don't switch tax preparers without making sure your new preparer gets a complete copy of your basis history. We can't count how many times we've inherited a client only to discover their basis went missing somewhere between Preparer Number One and Preparer Number Two.

The good news is that if you discover you've been making this mistake, you can often fix it by filing amended returns. There's even a fifty-dollar penalty for not filing Form 8606, but that's infinitely better than paying taxes twice on the same money. We've helped clients recover thousands of dollars by properly documenting their basis and filing the necessary paperwork. It's immensely satisfying work, though we'd much rather help you avoid the mistake in the first place.

Mistake #3: The Two-Income Household Tax Surprise

Ah, the dual-income household—the American dream until tax season arrives. We've had more than a few couples sit across from us in April with expressions ranging from confusion to outright panic when they realize they owe several thousand dollars despite both of them having taxes withheld all year. How does this happen? Let's break it down.

The problem stems from how tax withholding works. Each employer's payroll system operates in its own little bubble. Your employer knows about your income but has no clue what your spouse makes. Your spouse's employer is equally clueless about your earnings. Both employers calculate withholding based on the tax brackets for your filing status, assuming that paycheck is your household's only income.

But here's the twist—tax brackets don't double when you're married. When both spouses work, especially if you're both earning decent incomes, you often find yourselves pushed into higher tax brackets than either employer anticipated. It's like both of you thinking you're ordering an appetizer when you're actually splitting a full meal, and then the bill arrives and surprise—it's more than you expected.

Here's what happens: Sarah and Michael both work professional jobs making about seventy-five thousand dollars each. That's a combined household income of one hundred fifty thousand, putting them firmly in the twenty-two percent marginal tax bracket when they file jointly. But when each of their employers calculates withholding, they're using tables that assume the household makes seventy-five thousand total, which would put them in the twelve percent bracket. See the problem? Both employers are withholding at a lower rate than the couple actually owes.

Fast forward to April, and Sarah and Michael owe four thousand dollars. They're shocked—they both had taxes taken out of every single paycheck! How could they possibly owe money? The answer is that while both had withholding, neither had enough withholding when you consider their combined income.

The solution requires coordination between spouses. When you're both filling out W-4 forms, you need to account for your combined household income. The form gives you three options for doing this. Option one is using the IRS withholding estimator tool online, which walks you through the calculation step by step. Option two is completing the Multiple Jobs Worksheet on page three of the W-4. Option three, if you both work one job each and earn similar amounts, is simply checking Box 2c on both W-4 forms. That little checkbox tells your employers to withhold at a higher rate.

Many couples choose the "extra withholding" route, where one or both spouses requests additional money be taken from each paycheck. It's not elegant, but it works. You enter an extra amount in Step 4c of your W-4, and boom—problem solved. Think of it as a forced savings plan that ensures you don't get hit with a surprise bill.

The timing matters too. Newlyweds are particularly vulnerable to this mistake because they often forget to update their W-4 forms after getting married. You can't blame them—between planning the wedding, dealing with name changes, and figuring out where to put all those new kitchen gadgets; updating payroll forms isn't exactly top of mind. But the IRS doesn't care about your honeymoon glow. They expect accurate withholding based on your current status. This can impact folks getting healthcare through the ACA, too.

We recommend reviewing your W-4 whenever you have a job or income change. Got married? Update your W-4. Had a baby? Update your W-4. One spouse got a significant raise? You guessed it—update your W-4. Took on a side hustle? W-4 time again. These forms are not set-it-and-forget-it documents. They're frustrating little gremlins that have stayed out too late but also reflections of your financial situation, and they need to be eliminated maintained.

The truly frustrating part is that underpayment can trigger penalties. If you don't have at least ninety percent of your current year's tax liability withheld or paid through estimated taxes, the IRS can charge you interest and penalties on the shortfall. The safe harbor rules help—if you withhold at least one hundred percent of last year's tax liability, you generally avoid penalties—but that requires more work. Better to have a tax preparer and let them know when anything new or different happens in your financial situation.

—-

If you're reading this and thinking "Uh oh, I might have made one of these mistakes," don't panic. Most tax errors can be corrected through amended returns or by implementing proper tracking going forward. Give us a call, and we'll help you figure out where you stand and what steps you need to take.

And if you haven't made any of these mistakes? Congratulations! You're doing better than most. But keep this guide handy as a reminder of the pitfalls to avoid. After all, the best tax strategy is the one that doesn't require us to fix anything in April.

Ready to make sure your taxes are done right? Contact us today. We specialize in helping individuals and families in Virginia navigate complex tax situations with effective planning and professional preparation. Because life's too short for tax mistakes.