Ed Slott: How You Can Turn Tax-Time Pain Into a Win

Key Takeaways

• Planning ahead and proper organization can prevent missed opportunities during tax season.
• Deductions should be taken when rates are high, and income should be taken when rates are low.
• If you think about the bigger picture, you can make strategic decisions to lower lifetime taxes.
• You can fill the bracket you’re in to control tax rates.
• You can use Roth IRA contributions as a way of finding gaps in your tax return.

Christine Benz: Hi, I am Christine Benz for Morningstar. Tax and retirement expert Ed Slott says that many people have regrets around tax season. They wish that they had planned better or done a better job of being organized. He’s here today to share some strategies to improve tax time in the years ahead. Ed, thank you so much for being here.

Ed Slott: Great to be back with you. Thanks, Christine.

Taxpayer Blind Spots

Benz: It’s great to have you here. You say that taxpayers often have a long list of woulda, coulda, shoulda’s at tax season. What do you see as the main missed opportunities or blind spots that you’ve run into with taxpayers?

Slott: Well, basically, not preparing. And this goes back to my early years as a young CPA, I’d say in my late 20s or early 30s, when I first started having my own clients and having them come in to do their taxes. And I realized every year they came in, I would be sitting here at this desk, believe it or not still, I’d say, “Oh, you know what you could have done. Oh, you should have done this. Oh, you missed that.” I was just the bearer of bad news each year, and it hit me that stopped after a few years, that who wants to hear what I coulda, woulda, shoulda done? And I realized, which is the case today for lots of tax preparers and CPAs, most people are tax preparers, even professional ones, are really just history teachers. They tell you what already happened. You can’t go back unless you have a time machine.

So I realized I was looking backward, reactive, and that’s when everything changed for me. I said, “Wouldn’t it be more valuable if I did tax planning instead of tax preparation?” And that opened up the whole world of adding value tax planning, looking ahead. So, the same thing happens. It happens on interviews. At tax time, I do lots of interviews, like on CNBC, they have me up there. It’s always the same thing the day before tax day, “Ed, what are three things people can do right now to save on their taxes?” And I said, “Oh, I only have one thing, but it’s a big one. Nothing, because the year already happened.” That’s the problem. So, I quickly turned around, and yes, I recognize the shortfalls, and I still do today. I don’t really do that much tax preparation anymore. But there are things that I noticed that how come you didn’t do that?

Here’s an easy one. People will come in, “Oh, I see rates are down. I hear you talking about Roth conversions. I’d like to do one this year, for last year.” No. Roth conversions, and I understand the confusion, because Roth IRA contributions, which are different than conversions, you do have up until the filing date April 15 to create or fund a Roth IRA contribution or IRA contribution for last year. But not so with Roth conversions. If you wanted a Roth conversion, so for last year it had to be done by last year. But people come in and say, “Oh, I have some room in the bracket. Look at all these business losses I have. Why don’t we do a Roth conversion?” No, it’s too late for that. So those are the kinds of things that people do, and there’s a bunch of them.

Another one is QCDs, qualified charitable distributions. You tell people about them, and they say, “Yes, I’d like to do that.” Not for last year, that year ended. When we’ve discovered these things or uncover these things, we try and let people know. “Let’s look ahead. All right, last year is last year, there’s nothing more you can do with that. But let’s look ahead, especially in the area of QCDs, qualified charitable distributions.” Not for everyone, that’s only for IRA owners who are 70 and a half years old or older who want to make contributions and get a tax benefit. Most people don’t get a tax benefit because they take the standard deduction. But that’s one you should do early in the year rather than late last year. If you also have RMDs, required minimum distributions because the timing matters. If you do the QCD first, that amount can offset a part or all of your RMD.

So, there are some things you can do now. Things you can do now: IRA contributions, Roth IRA contributions. Spousal IRA contributions are also missed quite a bit. Most people don’t think of that. They say this is where one spouse is working, and one spouse doesn’t have earnings, but you can do what’s called a spousal IRA. Actually, there’s an actual name, I think it’s the Kay Bailey Hutchison IRA or some long name like that. But we call it the spousal IRA, where you can put in for a spouse who didn’t have their own earnings as long as you have enough earnings to cover both. That can still be done for last year, and that’s a pretty good move. And it can be done for Roth IRA contributions as well.

The other problem I see, and this is from years of being a tax advisor a tax preparer: Most people are just not prepared. They want to get prepared; all year, they think about getting prepared, but something in them, it’s just they don’t want to talk about it. It’s like yesterday’s breakfast. “When I see Ed, I’ll come in and he’ll tell me everything.” And then I’ll realize they don’t have all the information. They miss out on lots of deductions. So again, woulda, coulda, shoulda. What I send them back with, I still use this, and it’s a very good formula, a very good system, I should say, I give them, and I save these, I still use them, I say, “Don’t worry.” Especially small business people, most people don’t have to save a lot for deductions because most people are taking a standard deduction. But you have a small-business person, maybe Schedule C or self-employed, and he has lots of deductions, or she has lots of deductions. They can’t keep track of this stuff. They’re busy running their business.

So what I do is I always gave them, I’ve been using these, I mean I didn’t invent them, but they’re called folders. But they’re special kinds of folders where the ends don’t fall out, nothing can fall out. I don’t know what they call them, but some name for it. So, I give them this folder. I’ll write down, if I was doing it now in ’25, it’d say 2025 tax info. “Just put everything in here. Don’t worry about anything.”

“But what if it’s not deductible?”

“I don’t care. Put it in there, we’ll sort it out later. If you have a business meeting at a diner or something with a client, put it in there, put it in there. It doesn’t even matter; put everything in there, and we’ll sort it out at tax time.” And they were amazed at the difference at tax time.

And for super people who have bigger receipts, I have bigger versions of it. We used to use these, again, with ends. You have to make it easy. Nobody wants to prepare for taxes. So, that was a simple thing that anybody could really do. I’m not the only one that can go online and get these folders or go to Staples or something. But just throw everything in there. If you have a tax preparer, let them deal with it. Many people don’t like to deal with it until they get in to see the tax preparer. Or they’re doing it on their own, and they’re digging around for everything. But the better records you have, the better you always do on taxes. I believe most people cheat themselves on the taxes.

Everybody thinks it’s the other way; everybody’s cheating the IRS. No, most people can’t keep track, again with small-business people, because a lot of these other miscellaneous itemized deductions aren’t even allowed anymore. But, “How much did you drive?” “Well, I don’t know. I drive a lot.” And they usually underestimate. What about car insurance? What about gas, tolls, parking, meeting with clients? Simple expenses that can add up to lots of tax savings. Again, this is more for small-business people, but there’s a lot of freelancers working out of their home that file Schedule Cs and probably overpaying their taxes because they just don’t have good records.

Multiyear Tax-Planning Process

Benz: Ed, that’s a great overview, and I want to follow up on a couple of points that you’ve made. But it seems that one theme I hear in talking to you and other tax-planning experts is that it’s a mistake to make these tax decisions on a year-by-year basis, that the name of the game isn’t lowering taxes in a year, it’s taking a longer-term view. Can you talk about that multiyear planning process? You shared an example of when a conversion might make sense or a series of conversions from traditional to Roth IRAs. But can you share some other examples of that multiyear planning process to get people thinking along those lines?

Slott: Yes, tax saving should be a lifelong slog. I hate to use the word, but that’s what it is: saving bigger taxes. But it goes both ways. Yes, I believe when people say, “How can I save taxes now?” Again, you had to do the things last year. But assuming you did, I like to differentiate between real deductions and fake deductions. Real deductions, yes, take deductions. You have high medical, if they were high enough to itemize, fine. Charitable contributions high enough to itemize, home mortgage interest, fine, those are all real deductions. You keep them, you never have to give them back. But when I read stories in the news, like at the end of the year, you see all these stories, “Oh, make sure to fund your 401(k) and get that deduction.” That’s not a real deduction.

I don’t even know why people call a 401(k) contribution to deduction. Yes, it reduces your W-2 income. So, it’s “a deduction.” But whenever you take a deduction for a 401(k) contribution, you’re generally thinking short-term. All that is, is actually a loan you are taking from the government to be paid back at the worst possible time in retirement when your rates could be higher. Tax rates, in general, could be higher, and you’re taking a deduction when rates are relatively low, even the high tax rates are low. We have historically low tax rates. Deductions should be taken when rates are high, and income should be taken when rates are low.

Same thing with an IRA contribution. Why are people scurrying around? And that you can still do now up until April 15, and you’re going to see all the ads, “Oh, get your IRA contribution, and you’ll get that deduction. It might even be enough to pay what you owe.” And all of this stuff. Oh, not pay what you owe, they say, “Take the deduction and then use the refund to fund the IRA before April 15.” That’s fine, but what are you doing? You’re taking a deduction that’s effectively worthless that you will pay back. So you have to look long term. You’re better off most people when rates are low with Roth IRAs or Roth 401(k)s. So, don’t focus on what I can save this year unless they’re real deductions you actually get to keep and bank forever. You never have to give them back.

Tools for Lowering Lifetime Taxes

Benz: I know you’ve long been bullish on Roth contributions and conversions for that reason. It seems to me some taxpayers seem to have a sense of fatalism when it comes to their taxes. You’ve been talking about strategies to potentially lower lifetime tax bills. But some people just assume that their tax bills are what they are, and there aren’t too many ways to meaningfully lower them. I’m wondering, is that a misperception, and if so, what are the main tools that we taxpayers have in our toolkits to help lower our lifetime taxes?

Slott: The options have gone down quite a bit since pretty much the itemized deductions have been scaled back. And most people benefit. I think the last IRS statistics show 90% of the people take the standard deduction. So there’s not a lot of play, other than maybe you have a small business, freelancers, and there’s a lot of people like that, that can deduct a lot of work-related expenses like I talked about before, and make a difference. Again, that comes down to good record-keeping and substantiation. But other than that, unless you maybe bunched in ... and you have to be diligent about it. With the standard deduction, it’s usually higher than most people’s itemized deductions. But you could have years where your itemized deductions are higher if maybe you do them once every two or three years, and you bunch certain expenses if you can. You see a lot of articles on bunching deductions, but sometimes it’s just not practical. “Oh, I’ll go to a hundred doctors this year just to get the medical up, even if I don’t need it.” Things like that. So it’s not as practical.

But you can do it with things like contributions. You could front-load contributions, that’s more under your control. So, there are things like that you can do. But again, I wouldn’t do the things like the 401(k) deduction, to me, that could help a little, but if you forgo it and go with Roth 401(k)s long term, I think you’ll be way better off, especially young people. And this is the thing I don’t understand with young people, remember, the greatest money-making asset any individual can possess is time. And young people have more time to capitalize. Imagine if people like you and I at our age could have had from dollar one a tax-free retirement account without having to convert. That’s what young people have as an opportunity when they enter the workforce. And the first thing they do is they sign up for a 401(k) to get the deduction and all of that, which is almost worthless when they’re in their lower-income years. Again, thinking big picture, there are things you can do if you think farther down the road.

Strategies for ‘Filling Up’ Tax Brackets

Benz: Earlier, you referenced this idea of filling up brackets. I think people have heard about that. And that’s not to be confused with filling out our brackets for March Madness.

Slott: That’s right.

Benz: Can you talk about what that means, why it’s beneficial, if indeed you think it is, and what are the key strategies that taxpayers should consider in this context?

Slott: Well, it goes against the grain. It’s almost counterintuitive. “Why would I add income? I’m coming to my tax adviser to knock that income down.” My old-time clients—might be an old-time phrase because I’m older and they were older than me—they would come in here, and they’d go, “Ed, before we start, sharpen your pencil.” That meant, “Get me some deductions, lower the income.” And maybe you’d go the other way. But that’s when rates were high. During some of those years, rates were 70%. So rates are so much lower now. If anything, you want to accelerate income because I’m worried, again, thinking long term, that I have to believe in math. I mean, I look at the math, the debt limits, at some point, the bill’s going to come due, and I think tax rates will go much higher. And even if you don’t think that, I don’t think tax rates will ever go lower. We’re at, I think, rock-bottom now.

So, think of ways to accelerate income, put more income. And the best thing to do, again, if you can do it, is a Roth conversion because you can control your tax rates. You can say, “Look at the rates. Look at the brackets.” The 12%, 22%, 24%, historically low brackets, any unused portion of that bracket will be lost forever. Let me see, I have the brackets, I believe, yeah, in front of me, here, married filing joint, it’s amazing how much income you can put in. Now, this is for 2025; you can’t fix 2024 anymore. But just for 2025, the 24% bracket for a married couple filing jointly goes up to $394,600 of taxable income. That’s after deductions. So you could have a couple that maybe makes $450,000, and after a bunch of deductions, they’re still in the 24% bracket. And look at the range of that bracket. It goes from $206,000 to $394,000. If you are just a little over the $206,000, look how much of an opportunity you wasted to get that money out at low brackets you may never see again.

How to Organize Tax Materials

Benz: I want to go back to organization. You showed us the folder, just saving things that look like they might be relevant. Any other advice to impart on staying organized and keeping our tax materials organized?

Slott: Again, that was for people who absolutely can’t organize. Because most of the other things, like I have a relative, I don’t want to say who he is, he’s the most disorganized, but yet even he can find his 1099s. So, most of that stuff is sent in the mail around tax time. So I say throw it in there. There are a lot of people, it’s so bad they don’t want to touch it, they throw it in the folder. They don’t even open it. When you get a 1099, “Oh, how much interest did I make this year? Oh, how much is this 1099 R for? How much is taxable?” They don’t even want to look at it. So, you have two camps of people, just throw it in there. But if you want to be more organized, you can do what I do for myself. I have different folders for different types of income. But I wouldn’t go that far.

But there are things you can do if you’re filing your taxes online or you do it yourself or even with an accountant. Here’s one little tip. It saved people some money years ago, and I always mention it. When you do a Roth IRA contribution, which you can still do for last year, and a spousal one if you qualify under the income limits and the income limits are high, enter the Roth contribution. When you do your tax software, you enter it. Now, even my CPA colleagues always used to question, “Why would I enter it? It doesn’t go anywhere on the tax return.” They’re right. A Roth IRA contribution shows up nowhere on the tax return. But most tax programs, from low-end to high-end, keep data in them, and they have diagnostics to help you.

So, when you enter a Roth IRA contribution, a few benefits, number one, and I’ve caught this a few times, your diagnostics will, not light up, but they give you a diagnostic report. And it says, “You entered a Roth contribution, but you make too much money for that. You can’t have a Roth contribution.” It would be nice to know that before you did it and had a big mess. We saw this a lot of times with younger couples where they were single doing Roth contributions each year. Then they get married, and they have a joint income. Now, they can’t have a Roth contribution. Maybe they can do a backdoor Roth. But just entering it, the program would’ve signaled you don’t qualify. Also, the program, believe it or not, most programs keep track of the basis in your Roth, how much of contributions you’ve made historically, and it keeps track if you use the same program each year. I guess if you switch, you have to switch over to another program.

But from the TV commercials that you see, you see those people on TV, now look at that: I just tapped my phone, and all my data went from this company to that company. I did nothing. So, if that’s true, it will carry over. Why do you need to know that? Because sometimes, people have to access their Roth IRAs, and they don’t know what was their contributions, what were their conversions, what are the earnings? Will there be tax? Roth IRA contributions always come out. Your original contributions, not conversions or earnings, always come out tax- and penalty-free, and they’re the first dollars deemed out. So, if you’re taking money, say 10 years later, and you’ve been making contributions, the report from the tax program will show how much you can take of contributions without triggering a tax or penalty or going into the conversion layer or the earnings layer.

Also, this happened to me a few times with clients. I was doing the client’s return, and he was a high-income guy, he had all this money and everything. And as usual, he said, “Can you do my daughter’s return? She just got her first job. She’s on her own.” “Yeah, I’ll do the return.” So, I entered a Roth contribution into the program. It doesn’t go anywhere on the return, but what it kicked out because she had just entered the job market, she had low income. Because I entered the Roth contribution, even though it doesn’t go anywhere on the return, she qualified for a $1,000 retirement savers credit.

He was more happy about that than maybe on the tens of thousands I may have saved him on taxes. He couldn’t wait to go home and tell his story, “Look at that, a thousand dollars.” Now, that wouldn’t have come out if you didn’t put it on the tax return. So that’s just a little trick. People I know CPA say, “Oh, don’t bother with a Roth contribution. Put it in the input.” Put everything in there. These tax programs have a million diagnostic and tax-planning items that they print out for you. You’d be amazed how much you can find on your own tax program.

Benz: Well, Ed, you are a fountain of wisdom on these topics. Thank you so much for being with us to talk about how to do better next year with respect to our taxes. Thank you so much.

Slott: Thanks, Christine.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.

Watch Ed Slott: Will Congress Extend the Tax Cuts? for more from Christine Benz.