Are You Forgetting to Pay Less Tax?

I think, therefore, I am. I remember, therefore, I skinny down on taxes. While we ponder these (50%) philosophical statements, let’s focus on the latter.  Specifically, if we don’t include a memory component in our taxes, we’ll likely pay more to Uncle Sam.

A Tax Timeline

It’s easy to feel as though filing taxes is throwing a bunch of numbers into a black box that somewhat randomly spits out other numbers. The tax code is quite complicated, but it’s not complex. One of the key concepts lurking off to the side is that many components of our tax bill have continuity from year to year. They carry over.

Whether you prepare your own tax return or enlist a professional, your tax return is GIGO—garbage in, garbage out. If you do not provide all the necessary information to the software or the MK-1 human, you will not receive an accurate tax due/refund number. Both humans and software try to squeeze all the data from you, but the system is imperfect at best. Thus, many tax returns I see leave a tip for, or (no tears shed) stiff the tax man.

Some tax factors carry over indefinitely, while others only carry over for a period of years. If you aren’t checking six on last year’s returns (or the returns of the past several years), you may miss the opportunity to put your tax bill on calorie restriction.

Top Tax Timelines

Not every taxpayer will have carry forward components on their return, and not every year. But here are the four most common tax time machines and why they matter:

1. Charitable Giving: If you give more than you’re allowed to based on the rules for a given year, that excess giving can be used for up to 5 years. Let’s say you’re an early retiree and your AGI is $100K. You have a lot of appreciated stock and like to give generously, so you give away $50K.

The annual limit of appreciated capital gain property is 30% of AGI, so unless you track the extra $20K for the next few years, you may miss out on a tax tailwind.

2. Capital Losses: If you buy a digital tulip bulb pushed by a celebrity and lose your kids’ college money, don’t despair (so much), you can claim that loss! Let’s say you buy PatsyCoin for $100K thinking surely, “number go up!” Instead, number go down, and you jink out of your sunk-cost fallacy to sell at $1K to the next mark who doesn’t understand how digital assets are valued.

You can now offset any other capital gains on your return to the tune of $99K. If you exhaust all the gains, you can offset $3K of ordinary income. If this leaves you with $96K… you might get to carry this forward to your next 32 tax returns if you don’t lose track.  (It probably won’t take that long…)

3. Real Estate Losses: If your AGI is too high and you’re not a Real Estate Professional, you may have (at least) paper losses each year as you build towards Slumlord Millionaire status with a slew of doors adjacent to military installations. Those losses carry forward until you can use them to offset other passive gains, your AGI is low enough, or you dispose of the property.

If you aren’t diligently tracking all of the tax-related data, including carry-forward losses on your real estate, you’ve got a high  pK opportunity to line Uncle Sam’s pockets.

4. Small Business Costs: Certain small business costs (startup costs, R&D, etc.) can’t be fully deducted in the current year. You must amortize them over time and take the deduction on future tax returns. If you forget to carry them forward… You guessed it, tip for the taxman!

Cleared to Rejoin

The more you earn through business, investing, and real estate activity, and the more you give away to charity, the more work you must take on to signature-manage your tax bill.  At the same time, if you’re engaged in these activities, you can probably afford a wingman to help check six. If you are a do-it-yourselfer (I’m guilty too), make sure you flight follow these tax timelines each year to keep your money where it belongs—(mostly) in your own pocket!

Fight’s On!

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