RTS #025 Level up your 1099 letter for 2023

Tax planning only counts if it’s reported to the IRS correctly. If you are assuming that a client’s tax preparer has that part covered, you are missing a HUGE opportunity to deliver massive value to your clients. This is not an indictment of all tax preparers; the industry is hardly perfect, but there are many instances where the default reporting around tax planning is not sufficient to make sure a tax preparer (or even your client) is going to get it right on their own.

While there are plenty of instances where things can go wrong between execution and reporting, any activity that creates a 1099-R is especially prone to issues. Even common planning activities like qualified charitable distributions, backdoor Roth contributions, Roth conversions, and even 401(k) rollovers can be misleading if all a tax preparer has to rely on is the reporting from the custodian. This is in large part due to box 2b on the 1099-R, which lets a custodian say “taxable amount not determined” but doesn’t provide any place for notes or context (how easy would it be to have a code that says “this may have been a QCD but you need to verify it was done correctly”).

Instead of waiting and hoping the tax industry can correct this for you, be proactive for your clients and provide a year end tax recap to help your clients know what should be reported on their tax return. The first step is tracking this in your CRM so you can pull the information together at the end of the year. The next is having a repeatable process that you can delegate to your team to make sure everything gets done. The most effective version of this is something we adopted from our friends at The Perfect RIA called the “1099 Letter”. Typically just one to two pages, this annual reminder can be a game changer for clients, helping them actually get the tax savings you are recommending, and is also a great way to implement the dishwasher rule and remind your clients of the great work you did together during the year.

If you’re new to using a 1099 letter, start small and build every year. Ideally, this letter goes out in January (after you know for sure which 1099s your clients should expect), so there is still time to make this happen for 2023, but you need to get going. We have done episodes on the RTS podcast, and The Perfect RIA podcast has covered the topic as well; both great ways to dive deeper, but here are some friendly reminders:

• Write the letter assuming/encouraging clients to share it with their tax preparer (don’t lead with “your tax preparer will probably mess this up”).
• Include all accounts you are involved in, even if there was no tax activity during the year. The information they receive on a particular account can change from year to year; take the guesswork out of it.
• Be specific, what form should they expect (1099-R, 1099-B, etc.); for brokerage accounts, it’s helpful to use the name of the report that is specific to the custodian (i.e., Year End Tax Report).
• Offer to be a resource. Make sure your clients (and their tax preparers) know that you are ready and willing to share any information that will help the process.

What can you do about it?

Have your system in place (or updated) before the calendar turns over to 2024 so January can be all about execution. This needs to include a full test (using team members is a great way to do this and go beyond theory) to make sure you are ready. If you’ve done 1099 Letters in the past, take the time to ask, “How am I going to improve the deliverable this year”? One example would be adding the date of a Roth conversion to help reduce the chances of underpayment penalties on conversions that happened near year-end.

Happy Tax Planning!