10 Steps to Tax Preparation
By Glenn Curtis
There are still a couple of months left until the April 15
income tax filing deadline. But why wait until the last
minute to get your affairs in order? By preparing now,
you'll make your and your accountant's life a lot
easier come crunch time.
In this article, we'll give you 10 actions you can start
right now to make sure that you have the right documentation
and information necessary to file a timely and accurate tax
return.
1. Collect Your 1099s and W-2s
Employers typically send W-2 wage information to their
employees via regular mail by the end of January. About this
same time investment firms will send out 1099s as well,
detailing any stock or bond sales you've transacted over
the course of the past year.
Do yourself a favor: review these documents closely! Make
sure the withholding amounts are accurate. Also make certain
that the gross wages reported on the W-2 form match what
you've earned. If for some reason there is a discrepancy,
contact your human resources or payroll department as soon as
possible, and make sure they re-issue you a corrected
form.
Make sure to review each transaction on your 1099s carefully.
Check that the proceeds reported on the document match your
records. In addition, be sure to find out the cost basis of
the securities you've sold so that when it comes time to
file your return, you'll have all of the information
ready to go for when your tax returns are prepared.
Incidentally, if you've earned any income from an
international source be sure to save bank deposit slips
and/or other records that tally the income earned. Because
even though the employer is based outside of the United
States, those wages must be reported on both your federal and
state returns. In addition, income taxes may be due as well.
2. Collect Copies of Bank or Brokerage Statements
Suppose your accountant is reviewing your checkbook, and
notes that in June of last year you deposited $1,000. He or
she might make the assumption that the deposit was earned
income (as opposed to a gift you received from a relative).
But by having your monthly statements available you'll be
able to show the accountant that indeed the transaction was a
one-time gift, and shouldn't be taxed.
Brokerage statements come in handy because they often contain
data that may alert your accountant (or you) to any tax-loss
carry forwards you might have from last year, as well as
provide an idea about what types of gains and/or losses could
be realized in the current tax year.
3. Set Aside IRA Contribution Proofs
In 2016, taxpayers under 50 years of age are allowed to
contribute $5,500 per person to their IRAs. Those 50 and over may
contribute $6,500. With that in mind, taxpayers should set
aside proofs of this contribution (preferably in the form of
a cancelled check or brokerage statements). The purpose is to
provide proofs of the contribution to your accountant, and to
make certain that you are receiving the appropriate
deduction.
In 2016, single taxpayers earning up to $61,000 and married
taxpayers filing jointly earning up to $98,000 can deduct the
entire $5,500 contribution. Beyond that, partial deductions
are permitted for individuals earning between $61,000 and
$71,000, and married couples earning between $98,000 and
$118,000. But again, unless you have and can provide proofs
of the contribution you'll get nothing.
4. Find Social Security Information For New Additions
To Your Family
Be sure to provide your accountant with the social security
number of any children that you had or have adopted over the
past year. Why? Because if you earn under $75,000 as a single
taxpayer or under $110,000 as a married taxpayer (married
filing jointly), you are eligible for a $1,000 tax credit for
every dependent child that you support under the age of 17.
But again, unless you provide your accountant with that
information you won't receive the credit.
5. Gather Work Related Receipts
If you purchased an item (such as a uniform) that you need
for your job and your employer does not reimburse you for
that expense, then the item is deductible. In addition, if
you are self-employed, many items you use to conduct or
promote your business may be deductible as well.
Incidentally, deductible items for the self-employed
typically include:
In short, save all receipts regardless of whether you are an
employee or are a business owner; if there is a question
regarding the deductibility of a given item, ask a tax
professional. Again, documenting your purchases is key.
6. Save Pictures, Receipts or Records of Charitable
Donations
Both the federal government and the IRS encourage individuals
and corporations to make donations to charities by offering
deductions for donated goods. However, receipts detailing the
items donated must be saved and included with your tax
return. And while formal pictures are not required, they are
highly recommended because they will substantiate the
deduction if it is challenged by the IRS during an audit.
This means that all individuals need to obtain receipts or
proofs of donations for any items placed in Salvation Army
bins, church baskets or to any other certified charitable
organization. Incidentally, collecting these receipts well
ahead of the April 15 deadline makes a lot of sense because
if your proofs are insufficient, or if you've forgotten
to obtain a receipt for a particular donation, you'll
have plenty of time to contact the organization and obtain
the necessary documentation.
When it comes to monetary donations to charities, make sure
that you keep the relevant bank record relating to the
donation. According to the IRS, acceptable bank records
include canceled checks, bank or credit union statements, and
credit card statements. Other records of a cash donation
(such as personal notes) are no longer acceptable as suitable
proof.
7. Gather Mortgage Receipts
While your mortgage company will provide you with a 1098
detailing the interest you've paid on your loan
throughout the year (which is deductible), saving individual
mortgage receipts also makes sense. Why? They can be used to
reconcile the year-end 1098 (in other words to check its
accuracy) and provide your accountant with some sense of the
size of interest deductions that might be realized in the
coming year. This allows for better tax planning.
8. Gather Proofs Of Purchase For Energy Efficient
Goods
If you purchased a plug-in electric drive vehicle in 2016,
you may be eligible for a tax credit based on the cost of the
vehicle. You should gather the purchase documents and take to
your tax appointment.
If you've purchased certain energy efficient items for
your home in 2016, including insulation, hot water heaters,
furnaces, boilers or thermostats you may qualify for up to
another $300 in tax credits. Again, set aside your proofs of
purchase and be prepared to present them to your accountant
come tax time.
In addition, in 2016 there will be a tax credit for energy
systems purchased such as solar, wind and geothermal heat
pumps. The credits are based on 30% of the cost of the system
with no maximum limit. These will not count towards the $500
home improvement tax credit maximum.
9. Tally Co-Pays
Most employees have the cost of medical insurance deducted
from their paychecks on a pre-tax basis. Therefore, these
amounts cannot be deducted again on your tax return. However,
any doctor or hospital bill that you co-paid throughout the
year is deductible and should be itemized on your return.
Save your receipts!
10. Locate Last Year's Tax Return – if you
are using a new accountant this year.
Before completing your taxes this year, be sure that both you
and your accountant review last year's tax return. Why?
The return will provide (both you and your tax advisor) with
a wealth of information that can be valuable to this
year's return, including:Tax loss carry forward information
Not surprisingly, most taxpayers neglect to go over last year's return. But it is worth the time because very often you'll find a carry forward or some other nugget of information that might be beneficial to this year's return.
The Bottom Line
Gather your W-2s, 1099s, deduction proofs and any
documentation you'll need to file your tax return as soon
as possible. Your thorough preparation will save you some
headaches come April 15.
by Glenn Curtis