Can You Use ChatGPT for Financial Analysis?

Have you tried chatGPT? This is the Artificial Intelligence (AI) that everyone on the web has been talking about recently. I tried to use chatGPT to answer complex finance questions and here’s what happened.

I’m amazed at how coherent chatGPT’s responses are. And I’m also disappointed that chatGPT does not provide sources for the facts that it spews. I found chatGPT to frequently respond with what seem like authoritative answers, but when I ask for sources, chatGPT cannot back up statements with sources.

Here is an example conversation that I had with chatGPT that turned out well.

Example Conversation: When Do I Owe Taxes When Building a Roth IRA Ladder?

Prompt Question:
Let’s assume that I retire early at age 43 and no longer have W-2 income. At that time I then begin to build a Roth Conversion ladder by taking money in Traditional IRA and converting it into Roth. When I do that, I will have a tax bill in that year to pay for the conversion. If I do this conversion every year as one lump around November or December, what are the implications to my taxes when they are due in April the following year? I know that if I’m “short” on withholdings and owe too much money that the IRS will penalize me. Do I need to withhold and pay estimated taxes in November and December for the conversion, or will I be okay and not be penalized because of the timing of the conversion?

ChatGPT Response
I am not a tax advisor, but I can provide you with some general information on the topic. It’s always recommended to consult with a tax professional for personalized advice based on your specific situation.

When you convert money from a Traditional IRA to a Roth IRA, it is considered a taxable event. The amount converted is added to your taxable income for the year, which means you may owe additional taxes on the converted amount. The tax liability resulting from the conversion is generally due in the year in which the conversion takes place.

If you do not have sufficient withholding or estimated tax payments to cover the additional tax liability from the Roth conversions, you may be subject to underpayment penalties and interest. The IRS requires taxpayers to pay their taxes throughout the year either through withholding or estimated tax payments.

The penalties can be avoided or minimized by meeting one of the safe harbor provisions:

• Paying at least 90% of the current year’s tax liability.
• Paying 100% of the previous year’s tax liability (110% if your adjusted gross income is above a certain threshold).
• Owning less than $1,000 in additional tax liability when filing your return.

If you anticipate a significant tax liability from your Roth conversions, it’s generally a good idea to make estimated tax payments throughout the year to avoid underpayment penalties. You can make these payments quarterly or adjust your withholding from other sources of income, if applicable, to cover the taxes owed.

To ensure accurate and appropriate tax planning, it’s strongly recommended that you consult with a tax professional or accountant who can consider your specific circumstances and provide personalized advice based on the most up-to-date tax laws and regulations.

Follow Up Question: How often are estimated tax payments due?

ChatGPT Response:

Estimated tax payments are typically due on a quarterly basis. The due dates for estimated tax payments in the United States are as follows:

1. April 15: For income earned from January 1 to March 31.
2. June 15: For income earned from April 1 to May 31.
3. September 15: For income earned from June 1 to August 31.
4. January 15 (of the following year): For income earned from September 1 to December 31.

It’s important to note that if the due date falls on a weekend or a holiday, the deadline is typically extended to the next business day.

These dates may vary slightly depending on weekends, holidays, and specific circumstances. It’s advisable to consult the IRS or a tax professional to confirm the precise due dates for your estimated tax payments.

That’s a good conversation! The end results can be verified on the IRS Web site.

HOWEVER, I have had several conversations with chatGPT that turned out not so amazing.

Verdict: Use chatGPT with a Big Grain of Salt

I’m both impressed and disappointed in chatGPT. I expect chatGPT to be able to do basic math, especially when it shows the formulas correctly. Yes, it’s a language model, but from a practical perspective if the model has the correct formulae then it should be able to execute simple math when doing those calculations. That is not something that chatGPT should get wrong! It’s so frustrating that the formulas are right there and correct! It’s simple calculation and yet I have to double check chatGPT’s work. The worse thing of all is that chatGPT cannot provide references or sources. When chatGPT states a fact and I ask it for link to the source, for example, the IRS documentation, chatGPT is unable to provide.

All in all, you certainly can use chatGPT for financial questions, but always double check and verify it’s outputs for yourself.

This blog post was not written with the help of chatGPT, apart from the actual conversation in color, and you can likely tell by the quality of the writing.