Taxes: 3 Errors & 1 Improvement to Save You Significant Money

By Adam Cmejla, CFP®

June 14, 2023

One of the biggest benefits of owning your own practice is the ability to have significantly more control over when and which line income and expenses show up on your tax return. You may think that once you file your taxes for the previous year that you can close the books on that return and focus on proactively planning for the current tax year. However, as Reagan’s famous phrase suggests, you should “Trust, but verify” by performing a post-filing review of the previous year’s filed return.

In an ideal situation, the forthcoming suggestions would be reviewed on a draft of your return BEFORE you file your final return.

While it may not be possible to review your returns before they are filed, it’s always good to perform a quality control check of your return post-filing to ensure that your return doesn’t contain any errors or omissions that result in you paying more in taxes than you should.

Our firm has reviewed hundreds of personal and business practice owner tax returns over the years. Here are just a few of the top tax oversights and mistakes that we see on returns, where to find them on your tax return and what you should do if you find them.

Error #1: Backdoor Roth Contribution & Conversion Taxed Twice
If you’ve been executing the backdoor Roth IRA strategy because your income is too high to make contributions directly to a Roth IRA, you will receive a 1099-R in the spring of the year following your conversion. The 1099 is the tax document that tracks distributions from IRA accounts. This 1099 is “clear as mud” as it correctly says that a distribution occurred (the conversion FROM your Traditional IRA TO your Roth IRA), but it has a box checked saying that “exception applies.”

Where to find the error
To determine whether your backdoor Roth was accounted for correctly on your return, look at page 1 of your 1040 and look at Line 4a and 4b. Assuming the amount of the conversion was the same as the contribution to your Traditional IRA, if it was done correctly you’ll see the amount of the conversion show up on Line 4a ONLY. If it was done incorrectly, you’ll see it on Line 4a AND 4b.

The only way for this to happen correctly is to also ensure that Form 8606 was also completed correctly. This is the form that’s used to reconcile basis and the taxable amount (if any) of IRAs to Roth IRAs. If your return does not contain Form 8606 for each taxpayer that completed a backdoor Roth IRA, this confirms the error. In the absence of having this form, you are essentially paying taxes on those IRA contributions twice!

How to fix it
You’ll need to amend your tax return and complete Form 8606 for each taxpayer that completed backdoor Roth contributions and conversions. This means that if both taxpayer and spouse performed this strategy, there should be two 8606s—one for each.

Error #2: Health Insurance Deduction Not Taken if Self-Employed
This one admittedly has a few nuances to it, but it’s the loss of a valuable deduction if it’s occurred, so it’s worth mentioning.

For self-employed individuals, you can deduct 100 percent of your health insurance expenses that you incur. If you are the shareholder of an S-corporation, this is likely (and correctly) being accounted for on your 1120S (practice tax return), so this error is less likely to occur if you’re a practice owner sponsoring group coverage with multiple team members.

However, if you have either set up an S-corp or file a Schedule C (Sole Proprietor tax return) because you are an independent contractor for a corporate-affiliated entity (Costco, Walmart, etc.) you may be obtaining health insurance on the personal side through the marketplace and thus not accounting/documenting it on your business tax return.

Where to find the error
If you’re self-employed via the latter example above, you’ll account for the deduction on Schedule 1 of your personal tax return. As an S-corp (or LLC that’s filing taxes as an S-corp), you’ll simply want to verify that health insurance is being accounted for within the expenses of your P/L. You’re CPA will adjust accordingly on your Schedule K-1.

How to fix it
You’ll need to amend your business and personal tax return if you’re filing as an S-corp or your personal return if you’re a sole proprietor.

Error #3: Paying 3.8% Medicare Surtax on Active Business Income
The Affordable Care Act (i.e. “Obamacare”) that was passed in 2011 implemented a variety of taxes. One such tax is a 3.8 percent NII (Net Investment Income). The key word is NET, because there are a variety of calculations and “if/then” decisions that ultimately net out the actual dollar amount that is subject to the tax.

One of the types of income that is reconciled on Form 8960 is K-1 income that is received from partnerships or other business ventures. Passive business income is assessed the 3.8 percent tax, but if you are active in the business, this is zeroed out on the form.

These numbers are taken from page 2 of your Schedule E within the 1040, so if you want to dive deep into why the numbers are showing up as they are, flip to your Schedule E.

Where to find the error
If you find that your practice K-1 income hasn’t been zeroed out on Form 8960, it was likely misappropriated on page 2 of your Schedule E. We’ve seen many tax returns where this number was recorded as passive K-1 income when it was in fact active income. Because it was marked passive, all of that income was subjected to another 3.8 percent in federal taxes. The most extreme case of this error had cost the taxpayer over $20,000 in taxes over the previous three years!

How to fix it
This will require an amendment to your personal return, specifically your Schedule E.

Potential Improvement: SALT Limitation Workaround
This one is admittedly confusing and not applicable to ODs in all states, but if (a) your state has passed legislation creating this workaround and (b) you live in a high income tax state, you’ll want to double check this strategy.

The Tax Cuts and Jobs Act (TCJA) that was passed by the Trump administration created a $10,000 limitation toward how much of your state and local tax (SALT) could be itemized on your Schedule A. This effectively increased the effective tax rate of those filers in high income tax states because they were no longer able to itemize their deductions, since previously their SALT was a big contributor that helped them itemize above and beyond the standard deduction.

State legislators decided to act and passed a variety of bills effectively trying to create workarounds to this limitation. While several of them were met with resistance in federal court, there are many states that have now created a variety of workarounds which effectively allow pass-through entities (S-corporations, partnerships, etc.) to pay state and local taxes on behalf of the owner, effectively allowing them to deduct SALTs on the business return.

Where to make the improvement
A conversation should be had with your team of advisors to determine if your state has passed such legislation and, if so, how to properly account for the strategy within the practice.

The only thing that’s constant in tax planning is change, and this year is no different. When it comes to paying the least amount in taxes as legally possible, a strong offense is always better than a good defense. I have yet to meet a practice owner who wouldn’t want to lower their tax bill. Performing a quick review and checking for these four common errors and oversights is one way to ensure that you’re paying the amount of taxes you’re legally obligated to pay…but you’re not leaving a tip.

Adam Cmejla, CFP® is a CERTIFIED FINANCIAL PLANNERTM Practitioner and Founder of Integrated Planning & Wealth Management, LLC, an independent financial planning & investment management firm focused on working with optometrists to help them reach their full potential and achieve clarity and confidence in all aspects of life. For a number of free resources, visit and check out the “20/20 Money Podcast” to get more tips on making educated and informed financial and business decisions.

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