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Trends to Watch in the Current Tax Season

Tax season is upon us, and as the team at Nelson Financial Planning begins to examine tax returns, we’re noticing a few trends, including lighter amounts owed, lower refunds for families, and the proliferation of tax forms.

Lighter Amounts Owed

The first trend is that the amounts people owe are lighter than in the past, mainly due to a bad market year. When the market underperforms, dividends, capital gains, and other sources of income are not as high. This means people have fewer taxes, a silver lining in a difficult financial year. We are seeing this trend most prominently on the retiree side of things, where people draw more of their income from investment distributions.

Lower Refunds for Families

The second trend we’re seeing is that refunds are generally not as good this year. This is especially true for families who benefited from COVID-era tax credits, including stimulus checks, expanded child tax credits, and dependent care credits, none of which extended into 2022. As a result, families who received these credits in recent years are now experiencing smaller refunds.

The Proliferation of Tax Forms

Another trend that taxpayers need to be aware of is that more and more transactions are being reported on tax forms. For example, the 1099-K is a reporting of any proceeds from selling items on platforms like Ticketmaster, Etsy, or eBay. The requirements for issuing these forms have shifted, and the transaction threshold has lowered substantially. This means we’re seeing a higher level of proliferation of such documents, which has left some taxpayers scratching their heads as to what to do with them.

Additionally, real estate transactions, legal settlements, and other things that previously didn’t require tax documentation are now more likely to generate these forms. This underscores the importance of ensuring that the tax forms you receive accurately reflect your transactions. Remember, anytime you get a tax form, the IRS also receives a copy, and they expect full disclosure of every detail on your tax return.

However, not every entity issuing 1099-Ks and other forms understands the tax nuances involved, which can lead to complications for the taxpayer. Ask questions and make sure the entity generating your tax form does so correctly, particularly if they also send a tax document to the IRS. Ultimately, it’s up to you to make sure you report your taxable transactions correctly.

Case Study: 1099-S for Property Sales

Take this example where a client served as a trustee for a trust that sold a property. The proceeds were distributed to four beneficiaries, but the 1099-S form only showed the gross proceeds for the entire transaction, with no indication that the money went to four different people. This created a messy situation when reporting to the IRS, highlighting the importance of understanding and questioning the accuracy of all tax forms you receive.

Case Study: Legal Settlement and 1099-NEC

In another case, a client received a settlement from the public school system. The entire amount was reported as non-employee compensation on a 1099-NEC form. However, the gross amount did not account for the fact that lawyers took 40 percent of the settlement, which was misreported as wage money. This forced the client to pay an additional 15.3 percent FICA tax in addition to income taxes.

Get Tax Mitigation Assistance from Nelson Financial Planning

This tax season, be aware of the impact market conditions can have on the amounts owed, changes in tax credits affecting family refunds, and the increasing prevalence of tax forms for various transactions. It’s crucial to understand the tax forms you receive and verify their accuracy before it’s too late to act. Never hesitate to ask questions and seek professional tax advice to avoid potential complications when reporting to the IRS.

At Nelson Financial Planning, we’re here to help you navigate tax changes and ensure your tax return is accurate and compliant. If you have any concerns about your tax situation or need assistance, turn to our team of experienced Certified Financial Planners. We can help you change your life with a successful financial plan that provides peace of mind for the future.

To learn more, please contact us online or call our Winter Park, FL, office at 407-629-6477.