How do you check your tax return? Bill P comes through

I came across an interesting tax return the other day while volunteering at a local AARP TaxAide center. This is my 7^th year doing free tax returns and I’m still learning. In this case, I didn’t prepare the return; I was the quality reviewer and did the outtake with the client. The client was a retired single woman in her mid-70s. Her income was modest and she didn’t have any fancy or complicated investments. What made her case interesting was her near obsession with making sure that she paid zero tax for the year, and the steps she was willing to take to make sure she accomplished her goal.

Here are the facts of her case.

• Interest = $121
• Dividends (all qualified) = $620
• IRA Distribution (all taxable) = $6,312
• Pension (all taxable) = $9,847
• Social Security (SS) benefit = $18,116

Her gross income, excluding SS, was $16,900. Her standard deduction is $16,500. This left her with $400 of taxable income. But this also put her just over the $25,000 limit when calculating if any of her SS benefits were taxable. Her “provisional income,” equal to her gross income plus half her SS benefit, was $25,958.  Half of the $958 excess, or $479, was taxable. This resulted in $879 of taxable income. At a 10% marginal tax rate, you would expect a tax bill of $88.

But recall that $620 of her income was from qualified dividends. This income is eligible for the long-term capital gains (LTCG) rate. Since she is in the lowest marginal income tax bracket, that rate is 0%. This sheltered $620 of her $879 of taxable income from any tax. This made her tax bill approximately $25.

The client had anticipated that she was close to owing some income tax, so she made a preemptive sale of a stock to harvest a long-term capital loss. She sold an airline stock for a loss of about $2,100. This dropped her gross income below the standard deduction, and her combined income below the level at which any of her SS benefit would be taxable. Thus, she had no taxable income and no tax bill for the year. Additionally, she has a $1,700 loss carryover that she can use next year.

She was pleased with this result, but had a number of questions to make sure we had only used the taxable portion of her pension, and we had used any loss carryover from previous years. I was able to show her that we had met her expectations. She then wanted to know how she could plan ahead to make sure she had enough of a loss to ensure she had no tax bill in future years. I thought about how I could best help her understand the complex interactions of the tax code, and a comment by Bill Perry on one of my previous Forum posts came to mind.

Bill commented that he used the AARP Tax Calculator to provide a check on his calculations. I had never use it, but I brought it up, and in just a few minutes I was able to generate a simple estimate of her 2024 tax return that very closely matched the official one I had prepared for her. I explained to the client how they could use the calculator later in the year to guide her in her financial transactions to achieve her tax goal.

Later that day, I used the calculator to do a quality check on our Turbo Tax prepared federal tax return. It matched closely. It also was a good check against my spreadsheet that I use to track our tax bill during the year. All three provided basically the same answer, and I feel confident filing our return. Many thanks to Bill for a great suggestion.